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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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(Mark One)

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



For the quarterly period ended March 31, 2005



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)                       |  | (Zip Code)                          



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 April 25, 2005 was 31,046,538.



The
following trademarks used herein are owned by IDX: Flowcast, Groupcast, Carecast, Imagecast, IDX, LastWord, IDXtend and Web Framework. All other trademarks referred to 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, 2005



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 |  | 23  
|ITEM 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 42  
|ITEM 4.                       |  | Controls and Procedures                                                               |  | 43  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|ITEM 1.                       |  | Legal Proceedings                                                                     |  | 45  
|ITEM 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 46  
|ITEM 3.                       |  | Defaults Upon Senior Securities                                                       |  | 46  
|ITEM 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 46  
|ITEM 5.                       |  | Other Information                                                                     |  | 46  
|ITEM 6.                       |  | Exhibits                                                                              |  | 46  
|                              | 
|SIGNATURES                    |  | 47                                                                                   
|EXHIBIT INDEX                 |  | 48                                                                                   



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 31,2005 |         | December 31,2004
|ASSETS                                        |  |               |         |                  |   |        
|Cash and cash equivalents                     |  | $             | 44,965  |                  | $ | 67,346 
|Marketable securities                         |  |               | 164,423 |                  |   | 94,283 
|Accounts receivable, net                      |  |               | 122,298 |                  |   | 116,659
|Unbilled receivables                          |  |               | 4,702   |                  |   | 5,822  
|Deferred contract costs                       |  |               | 28,985  |                  |   | 24,209 
|Refundable income taxes                       |  |               | 3,212   |                  |   | 7,514  
|Prepaid and other current assets              |  |               | 9,986   |                  |   | 8,199  
|                                              |  |               |         |                  |   |        
|Total current assets                          |  |               | 378,571 |                  |   | 324,032
|                                              |  |              
|Property and equipment, net                   |  |               | 97,840  |                  |   | 94,291 
|Deferred contract costs, less current portion |  |               | 47,041  |                  |   | 42,295 
|Capitalized software costs, net               |  |               | 5,824   |                  |   | 5,596  
|Goodwill, net                                 |  |               | 7,163   |                  |   | 7,163  
|Other intangible assets, net                  |  |               | 2,514   |                  |   | 2,514  
|Other assets                                  |  |               | 10,669  |                  |   | 10,063 
|Deferred tax asset                            |  |               | 8,533   |                  |   | 10,961 
|                                              |  |               |         |                  |   |        
|Total assets                                  |  | $             | 558,155 |                  | $ | 496,915
|                                              |  |               |         |                  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |               |         |                  |   |        
|Accounts payable and accrued expenses         |  | $             | 76,895  |                  | $ | 84,388 
|Deferred revenue                              |  |               | 61,186  |                  |   | 62,278 
|Deferred tax liability                        |  |               | 25,877  |                  |   | 6,579  
|                                              |  |               |         |                  |   |        
|Total current liabilities                     |  |               | 163,958 |                  |   | 153,245
|                                              |  |              
|Deferred revenue, less current portion        |  |               | 13,187  |                  |   | 11,365 
|                                              |  |               |         |                  |   |        
|Total liabilities                             |  |               | 177,145 |                  |   | 164,610
|                                              |  |              
|Commitments and contingencies                 |  |               |        |                  |   |       
|                                              |  |              
|Stockholders equity                          |  |               | 381,010 |                  |   | 332,305
|                                              |  |               |         |                  |   |        
|Total liabilities and stockholders equity    |  | $             | 558,155 |                  | $ | 496,915
|                                              |  |               |         |                  |   |        



See Notes to the
Condensed Consolidated Financial Statements (unaudited)



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 EndedMarch 31, |        
|                                            |  | 2005                        |         |   | 2004 |  
|Revenues                                    |  |                             |         |   |      |   |         |  
|System sales                                |  | $                           | 38,454  |   |      | $ | 33,559  |  
|Maintenance and service fees                |  |                             | 104,605 |   |      |   | 68,991  |  
|                                            |  |                             |         |   |      |   |         |  
|Total revenues                              |  |                             | 143,059 |   |      |   | 102,550 |  
|                                            |  |                            
|Operating expenses                          |  |                             |         |   |      |   |         |  
|Cost of system sales                        |  |                             | 13,970  |   |      |   | 11,969  |  
|Cost of maintenance and services            |  |                             | 72,339  |   |      |   | 45,839  |  
|Selling, general and administrative         |  |                             | 30,679  |   |      |   | 28,427  |  
|Software development costs                  |  |                             | 13,694  |   |      |   | 13,887  |  
|                                            |  |                             |         |   |      |   |         |  
|Total operating expenses                    |  |                             | 130,682 |   |      |   | 100,122 |  
|                                            |  |                             |         |   |      |   |         |  
|Operating income                            |  |                             | 12,377  |   |      |   | 2,428   |  
|                                            |  |                            
|Other income (expense)                      |  |                             |         |   |      |   |         |  
|Interest income                             |  |                             | 1,111   |   |      |   | 456     |  
|Interest expense                            |  |                             | (79     | ) |      |   | (151    | )
|Foreign currency exchange losses, net       |  |                             | (215    | ) |      |   | (189    | )
|Gain on sale of investments                 |  |                             | 500     |   |      |   |        |  
|                                            |  |                             |         |   |      |   |         |  
|Other income                                |  |                             | 1,317   |   |      |   | 116     |  
|                                            |  |                             |         |   |      |   |         |  
|Income before income taxes                  |  |                             | 13,694  |   |      |   | 2,544   |  
|                                            |  |                            
|Income tax provision                        |  |                             | (5,083  | ) |      |   | (967    | )
|                                            |  |                             |         |   |      |   |         |  
|Net income                                  |  | $                           | 8,611   |   |      | $ | 1,577   |  
|                                            |  |                             |         |   |      |   |         |  
|Basic earnings per share                    |  | $                           | 0.28    |   |      | $ | 0.05    |  
|                                            |  |                             |         |   |      |   |         |  
|Basic weighted average shares outstanding   |  |                             | 30,938  |   |      |   | 29,880  |  
|                                            |  |                             |         |   |      |   |         |  
|Diluted earnings per share                  |  | $                           | 0.27    |   |      | $ | 0.05    |  
|                                            |  |                             |         |   |      |   |         |  
|Diluted weighted average shares outstanding |  |                             | 32,252  |   |      |   | 31,434  |  
|                                            |  |                             |         |   |      |   |         |  



See Notes to the
Condensed Consolidated Financial Statements (unaudited)



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IDX Systems Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                  |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Three Months EndedMarch 31, |        
|                                                                                  |  | 2005                        |         |   | 2004 |  
|Operating Activities:                                                             |  |                             |         |   |      |   |         |  
|Net income                                                                        |  | $                           | 8,611   |   |      | $ | 1,577   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation                                                                      |  |                             | 4,572   |   |      |   | 4,031   |  
|Amortization                                                                      |  |                             | 820     |   |      |   | 458     |  
|Deferred taxes                                                                    |  |                             | (815    | ) |      |   | (2,340  | )
|Increase in allowance for doubtful accounts                                       |  |                             | 114     |   |      |   | 544     |  
|Tax benefit related to exercise of non-qualified stock options                    |  |                             | 979     |   |      |   | 2,673   |  
|Foreign currency exchange losses, net                                             |  |                             | 215     |   |      |   | 189     |  
|Gain on sale of investments                                                       |  |                             | (500    | ) |      |   |        |  
|Loss on disposition of equipment                                                  |  |                             |        |   |      |   | 29      |  
|Other                                                                             |  |                             |        |   |      |   | 52      |  
|Changes in operating assets and liabilities:                                      |  |                             |         |   |      |   |         |  
|Accounts and unbilled receivables                                                 |  |                             | (4,971  | ) |      |   | (24,454 | )
|Deferred contract costs                                                           |  |                             | (9,522  | ) |      |   | (10,411 | )
|Prepaid expenses and other assets                                                 |  |                             | (2,377  | ) |      |   | 320     |  
|Accounts payable and accrued expenses                                             |  |                             | (5,161  | ) |      |   | 5,462   |  
|Federal and state income taxes                                                    |  |                             | 2,222   |   |      |   | 285     |  
|Deferred revenue                                                                  |  |                             | 730     |   |      |   | 21,890  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                               |  |                             | (5,083  | ) |      |   | 305     |  
|                                                                                  |  |                            
|Investing Activities:                                                             |  |                             |         |   |      |   |         |  
|Purchase of property and equipment, net                                           |  |                             | (8,192  | ) |      |   | (3,785  | )
|Purchase of marketable securities                                                 |  |                             | (38,519 | ) |      |   | (60,831 | )
|Proceeds from sale of marketable securities                                       |  |                             | 28,525  |   |      |   | 53,466  |  
|Other assets                                                                      |  |                             | (1,106  | ) |      |   | (1,636  | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                             |  |                             | (19,292 | ) |      |   | (12,786 | )
|                                                                                  |  |                            
|Financing Activities:                                                             |  |                             |         |   |      |   |         |  
|Proceeds from sale of common stock                                                |  |                             | 2,052   |   |      |   | 5,788   |  
|Other                                                                             |  |                             | 21      |   |      |   |        |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                         |  |                             | 2,073   |   |      |   | 5,788   |  
|                                                                                  |  |                            
|Effect of exchange rate fluctuations on cash and cash equivalents                 |  |                             | (79     | ) |      |   | (23     | )
|                                                                                  |  |                             |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |                             | (22,381 | ) |      |   | (6,716  | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 67,346  |   |      |   | 25,536  |  
|                                                                                  |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                           | 44,965  |   |      | $ | 18,820  |  
|                                                                                  |  |                             |         |   |      |   |         |  



See Notes to
Condensed Consolidated Financial Statements (unaudited)



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Notes to Condensed Consolidated Financial Statements (unaudited)



Note 1  Significant Accounting Policies



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.



The interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the SEC)
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, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes included in the Companys latest Annual Report on Form 10-K for the year ended December 31, 2004 filed with
the SEC on March 15, 2005.



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



Principles of
Consolidation



The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.



Significant Estimates and Assumptions



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates and assumptions by management affect the Companys revenue recognition, allowance for doubtful accounts, deferred tax assets, certain accrued expenses, amortization periods, capitalized software, intangible and long-lived
assets and restructuring charges.



Although the Company regularly assesses
these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it
believes to be reasonable under the circumstances. Actual results could differ from managements estimates if past experience or other assumptions do not turn out to be substantially accurate.



Revenue Recognition



IDX enters into contracts to license software and sell hardware and related ancillary products to customers through its direct sales force.
The majority of the Companys system sales attributable to software license revenue are earned from software that does not require significant customization or modification. The Company recognizes revenue for the licensing of software in
accordance with American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition(SOP 97-2), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions, and clarified by Staff Accounting Bulletin (SAB) No. 101 (SAB No. 101), Revenue Recognition in Financial Statements, and SAB No. 104, Revenue Recognition(SAB No.104), and Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21) and, accordingly, the Company recognizes 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 for perpetual licenses, and for term base licenses the later of FOB shipping point or the commencement of the term, is complete for
the software (either physically or electronically), hardware and related ancillary products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Judgment is required in assessing the probability of collection and the current creditworthiness of each customer. For example, if the financial condition of the Companys customers were to deteriorate, it could
affect the timing and the amount of revenue the Company recognizes 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.



The Company uses 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, the Company defers revenue recognition of the fair value of the undelivered elements and allocates the remaining portion of the arrangement fee to the delivered
elements and recognizes it as revenue, assuming all other conditions for revenue recognition have been satisfied. The Company recognizes substantially all of its product revenue in this manner. If the Company cannot determine the fair value of any
undelivered element included in an arrangement, the Company 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, the Company typically sells 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 the Company makes 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.



The Company recognizes 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. The allocated fair value of revenues pertaining to contractual maintenance obligations are classified as a current liability, since they are typically for the twelve-month
period subsequent to the balance sheet date.



The Company recognizes 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.



The Companys 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 is completed. The
product is deemed accepted unless the customer notifies the Company otherwise. Generally, the Company determines 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 (SFAS) No. 5,Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service
level requirements. Certain of our system specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. Historically, the Company has not incurred substantial
costs relating to this guarantee and the Company currently accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as actual experience and other information becomes available; and should they become more
substantial, the Company would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on its license arrangements. The Company has not accrued any costs related to these warranties in the
accompanying consolidated financial statements.



At the time the Company enters
into an arrangement, the Company assesses the probability of collection of the fee and the terms granted to the customer. The Companys typical payment terms include a deposit and subsequent



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payments based on specific milestone events and dates. If the Company considers the payment terms for the arrangement to be extended or if the arrangement
includes a substantive acceptance provision, the Company defers revenue not meeting the criterion for recognition under SOP 97-2 and classifies this revenue as deferred revenue, including deferred product revenue. The Companys payment terms
are generally fewer than 90 days and payments from customers are typically due within 30 days of invoice date. The Company recognizes 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, the Company enters into certain arrangements for the sale of software that require significant customization. In these
instances, the Company accounts for the contract in accordance with Accounting Research Bulletin No. 45, Long-term Construction-Type Contracts and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type
Contracts(SOP 81-1). The Company generally recognizes 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, which could be material, are recorded to income in the period in which the facts that give rise to the revision become known.



The Company recognizes losses, if any, on fixed price contracts when the amount of the loss
is determined. The complexity of the estimation process and the assumptions inherent in the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in the Companys
consolidated financial statements. The Company records revenues earned in excess of billings on uncompleted contracts as an asset with unbilled receivables and records billings in excess of revenue earned on uncompleted contracts as deferred
revenues until revenue recognition criteria are met. Deferred contract costs represent costs incurred for the acquisition of goods or services associated with contracts, including contracts accounted for under the percentage-of-completion method of
accounting, and certain pre-contract costs for which revenue has not yet been earned.



The Company also enters into arrangements that involve the delivery or performance of multiple products and services that include the development and customization of software, implementation services, and licensed software and support
services. For these contracts, the Company applies the consensus of EITF 00-21 to determine whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes.
Accordingly, if the elements qualify as separate units of accounting, and fair value exists for the elements of the contract that are unrelated to the customization services, these elements are accounted for separately, and the related revenue is
recognized as the products are delivered or the services are rendered. The Company has concluded that the following qualify for separate units of accounting under EITF 00-21: software licenses, including certain integrated third party software
products and customization services; implementation and training services, some of which are provided by third parties; and software support and maintenance services, some of which are provided by third parties.



The Company also enters into arrangements under which the Company provides a hosted software
application. The Company recognizes revenue for these arrangements based on the provisions of EITF Issue No. 00-3, Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware
(EITF 00-3), and the provisions of SAB No. 101, as amended by SAB No. 104, when there is persuasive evidence of an arrangement, collection of the resulting receivable is probable, the fee is fixed or determinable and acceptance has
occurred. The Companys revenues related to these arrangements consist of system implementation service fees and software subscription fees. The Company has determined that the system implementation services represent set-up services that do
not qualify as separate units of accounting from the software subscriptions as the customer would not purchase these services without the purchase of the software subscription. As a result, the Company recognizes system implementation fees ratably
over a period of time from when the system implementation services are completed and accepted by the customer over the remaining customer relationship life, which the Company has determined is the contractual life of the customers subscription
agreement. The Company recognizes software subscription fees, which commence upon completion of the related system implementation, ratably over the applicable subscription period. Amounts billed prior to satisfying the Companys revenue
recognition policy are reflected as deferred revenue.



As of March 31, 2005,
the Company had deferred revenue totaling $6.8 million related to system implementation and subscription fees. Prior to the year ended December 31, 2004, the revenues and deferred revenues associated with system implementation services were not
material.



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The application of SOP 97-2 and EITF 00-21 requires judgment, including whether a software arrangement includes multiple
elements, and if so, whether fair value exists for those elements. Typically the Companys contracts contain multiple elements, and while the majority of the Companys contracts contain standard terms and conditions, there are instances
where our contracts contain non-standard terms and conditions. As a result, contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should
be treated as separate units of accounting for revenue recognition purposes in accordance with SOP 97-2 or EITF 00-21, and if so, the relative fair value that should be allocated to each of the elements and when to recognize revenue for each
element. Interpretations would not affect the amount of revenue recognized but could impact the timing of recognition.



The Company records reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and services in accordance with EITF
Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred (EITF 01-14). EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as
revenue in the income statement. For the three months ended March 31, 2005 and 2004 reimbursable out-of-pocket expenses were $1.8 million and $1.9 million, respectively.



In accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees, the Company classifies the reimbursement by
customers of shipping and handling costs as revenue and the associated cost as cost of revenue.



Software Development Costs



The Company
accounts for the development cost of software intended for sale in accordance with SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (SFAS 86). Costs incurred in the research, design and
development of software for sale to others are charged to expense until technological feasibility is established. Software development costs incurred after the establishment of technological feasibility and until the product is available for general
release are capitalized, provided recoverability is reasonably assured. Technological feasibility is established upon the completion of a working model. Software development costs, when material, are stated at the lower of amortized cost or net
realizable value. Net realizable value for each software product is assessed based on anticipated profitability applicable to revenues of the related product in future periods. Amortization of capitalized software costs begins when the related
product is available for general release to customers and is provided for using the straight-line method over twelve to eighteen months or the products estimated economic life, if shorter. IDX has also capitalized software acquired in
connection with certain acquisitions. Approximately $1.0 and $1.6 million of software development costs were capitalized during the three months ended March 31, 2005 and 2004, respectively. Amortization of software development costs was
approximately $812,000 and $406,000 during the three months ended March 31, 2005 and 2004, respectively.



Deferred Contract Costs



Deferred
contract costs represent costs incurred for the acquisition of goods and services associated with contracts, including contracts accounted for under the percentage-of-completion method of accounting, and certain pre-contract costs for which revenue
has not yet been earned. Deferred contract costs consist primarily of third-party networking and licensing costs, IDX labor costs and third party labor costs. Certain of the Companys contracts provide for fixed, date-driven payments that,
during the software customization phase of the arrangement, are payable to the Company after the associated services are performed. For these contracts, the Company deems this schedule of payments to constitute extended payment terms, and
accordingly limits the revenue to be recognized to the amount of payments that are due. The associated revenue will be recognized in the future period that payment becomes due.



The Company defers direct and incremental system implementation related hosted software arrangements in accordance with SFAS No. 91,Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans Initial Direct Costs of Leases. The costs deferred consist of employee compensation and benefits for those employees directly involved with performing
system implementation, as well as other direct and incremental costs. The costs are amortized to costs of revenues ratably over a period of time from when the system implementation is completed and accepted by the customer over the remaining
customer relationship life, which the Company has determined is the contractual life of the customers subscription agreement. All costs incurred in excess of the related revenues are expensed as incurred. The Company accrues costs in excess of
contractual amounts when the loss is probable and estimable. As of March 31, 2005, there are no amounts accrued for anticipated losses under contractual arrangements.



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Accounting for Stock Based Compensation



The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees(APB No. 25), 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.



SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
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 granted to employees and directors and for employee stock purchases under
the ESPP under SFAS 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 123.



|                                                                                                      |  |                                          |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                      |  | Three Months EndedMarch 31,              |       
|                                                                                                      |  | 2005                                     |        |   | 2004 |  
|                                                                                                      |  | (in thousands, except for per sharedata) |       
|Net income as reported                                                                                |  | $                                        | 8,611  |   |      | $ | 1,577  |  
|Add:                                                                                                  |  |                                          |        |   |      |   |        |  
|Stock-based employee compensation expense included in reported net income, net of related tax effects |  |                                          |       |   |      |   | 32     |  
|Deduct:                                                                                               |  |                                          |        |   |      |   |        |  
|Total stock-based compensation under fair value based methods, net of related tax effects             |  |                                          | (1,254 | ) |      |   | (1,621 | )
|                                                                                                      |  |                                          |        |   |      |   |        |  
|Pro forma net (loss) income  SFAS No. 123                                                            |  | $                                        | 7,357  |   |      | $ | (12    | )
|                                                                                                      |  |                                          |        |   |      |   |        |  
|Basic earnings per share:                                                                             |  |                                          |        |   |      |   |        |  
|As reported                                                                                           |  | $                                        | 0.28   |   |      | $ | 0.05   |  
|Pro forma  SFAS No. 123                                                                              |  | $                                        | 0.24   |   |      | $ |       |  
|                                                                                                      |  |                                         
|Diluted earnings per share                                                                            |  |                                          |        |   |      |   |        |  
|As reported                                                                                           |  | $                                        | 0.27   |   |      | $ | 0.05   |  
|Pro forma  SFAS No. 123                                                                              |  | $                                        | 0.23   |   |      | $ |       |  



The Company has entered into Executive
Retention Agreements with certain key executives that provide, that if certain conditions exist subsequent to a change in control of the Company, the executives will receive both acceleration of vesting and extension of the exercise period on their
stock-based awards. In accordance with APB No. 25, the Company has measured the intrinsic value of these individuals stock awards as of the modification date, which totaled approximately $37.0 million. If the acceleration of vesting and the
extension of the exercise period occurs pursuant to the Executive Retention Agreements, the intrinsic value of any outstanding awards as of the date of separation will be recorded as compensation expense in the Companys Consolidated Statements
of Income. If the award vests and is exercised prior to the separation, the intrinsic value as of the date of modification is not recognized.



Concentrations of Credit Risks



Financial instruments that potentially subject the Company to concentration of credit risks are principally cash and cash equivalents, marketable securities, investments,
accounts receivable and unbilled receivables. The Company invests its cash and cash equivalents with financial institutions with highly rated credit and monitors the amount of credit exposure to any one financial institution. The Company places its
marketable securities in a variety of financial instruments and, by policy, limits the amount of credit exposure through diversification and by restricting its investments to highly rated debt and equity securities. Substantially all of the
Companys end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom and Canada.



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The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Although the Company
is directly affected by the overall financial condition of the healthcare industry, management does not believe significant credit risk exists at March 31, 2005. The Company generally has not experienced any material losses related to receivables
from individual customers or groups of customers in any specific industry or geographic area. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience.
Actual losses when incurred are charged to the allowance. The Companys losses related to collection of trade accounts receivables have consistently been within managements expectations. Due to these factors, no additional credit risk
beyond amounts provided for collection losses, which the Company re-evaluates on a monthly basis based on specific review of receivable aging and the period that any receivables are beyond the standard payment terms, is believed by management to be
probable in the Companys accounts receivable.



For the three months ended
March 31, 2005, there was one customer who accounted for approximately 21.0% of consolidated revenues. This customer accounted for 24.2% and 14.5% of accounts receivable at March 31, 2005 and December 31, 2004, respectively. No other single customer
accounted for more than 10% of IDXs consolidated revenues for the three months ended March 31, 2004.



Foreign Currency Translation



The
financial statements of the Companys foreign subsidiary are translated in accordance with SFAS No. 52, Foreign Currency Translation.The reporting currency for the Company is the U.S. dollar (dollar). The functional currency of the
Companys subsidiary in the United Kingdom is the local currency of that country. Accordingly, the assets and liabilities are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense
accounts are generally translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive loss as a separate component of stockholders equity. Gains
and losses arising from transactions denominated in foreign currencies are primarily related to inter-company accounts that have been determined to be temporary in nature and cash, accounts receivable and accounts payable denominated in
non-functional currencies.



New Accounting Standards



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004) (Statement 123(R)), Share-Based Payment, which is a revision of SFAS No. 123. Statement 123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) is effective for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1,
2006.



Statement 123(R) permits public companies to adopt its requirements
using one of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company currently plans to adopt Statement 123(R) using the modified prospective method.



As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB No. 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a significant
impact on the Companys result of operations, although it will have no impact on the Companys overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of
share-based



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payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the
impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While
the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions
were $1.0 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively.



Note 2  Business Combinations and Divestitures



On November 22, 2004, the Company acquired all the outstanding common stock of PointDx, Inc. (PointDx), a developer of structured medical reporting technology located in Winston-Salem, North Carolina for
approximately $7.3 million, including acquisition costs. PointDx was subsequently merged into a subsidiary of the Company. The PointDx structured reporting technology will be directly integrated into the IDX Imagecast RIS and Imagecast
PACS, designed to achieve a standardized, efficient relationship between workflow and the imaging activities for radiology. The acquisition was financed with cash on hand with $3.3 million, including acquisition costs, paid at closing. The remaining
$4.0 million will be paid out in four equal installments of $1.0 million over the course of an earn-out process through 2005, subject to reductions as defined under the terms of the agreement. The Company made the quarterly payment of $1.0 million
during the three months ended March 31, 2005. Included in accrued expenses is $3.0 million at March 31, 2005 and $4.0 million at December 31, 2004 relating to the earn-out payments. The agreement also contains a provision for the payment of a
contingent consideration in the amount of an additional $1.0 million, subject to reductions as defined under the terms of the agreement, in the event that the Company sells a certain number of products incorporating PointDx technology prior to
November 1, 2006. Goodwill will be increased by the amount of the additional consideration, if any, when it becomes due and payable. This transaction was accounted for using the purchase method of accounting and, accordingly, results of operation
for PointDx are included in the Companys consolidated financial statements since the date of acquisition.



The following table, which is based upon an independent valuation and management estimates, summarizes the allocation of the minimum purchase price to the fair values of
assets acquired and liabilities assumed at the date of acquisition.



|                                  |  |                |       |  
|--------------------------------- |  | -------------- | ----- | -
|                                  |  | Fair Values    |      
|                                  |  | (in thousands) |      
|Assets:                           |  |                |       |  
|Current assets                    |  | $              | 697   |  
|Furniture and equipment           |  |                | 107   |  
|Intangible assets                 |  |                | 2,514 |  
|Goodwill                          |  |                | 4,655 |  
|                                  |  |                |       |  
|Total assets acquired             |  |                | 7,973 |  
|Total liabilities assumed         |  |                | (634  | )
|                                  |  |                |       |  
|Fair value of net assets acquired |  | $              | 7,339 |  
|                                  |  |                |       |  



The Company determined that the
acquisition of PointDx resulted in the recognition of goodwill primarily because of synergies unique to the Company and the strength of its acquired workforce. The intangible assets represent acquired technology, which will be amortized over its
expected useful life of seven years. The goodwill and the acquired technology are not deductible for tax purposes.



Included in liabilities assumed is a provision for lease abandonment costs of approximately $173,000 relating to the leased facilities of PointDx (See Note 3).



Note 3  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



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severance arrangements of approximately $5.6 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.



On June 1, 2004, the Company entered into an agreement to terminate its contractual
commitments under the remaining lease. Such termination was, in part, related to the restructuring. The Company paid $1.5 million to terminate the lease, which was approximately $387,000 higher than the amount accrued at the date of termination.



Lease abandonment charges



In 1999, the Company entered into a lease commitment for new office space in Seattle under a
lease that commenced in 2002. 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 consolidated its Seattle operations into the new office space and
abandoned its then existing 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 its Information Systems and Services business
segment in 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. The $1.9
million accrual remaining at March 31, 2005 will be paid during the remainder of 2005. While currently not anticipated, in the event that the Company is able to secure a sub-tenant to assume its prior lease in a future reporting period, the present
value of the future sub-lease income would be recorded as a reduction in expenses under the lease abandonment caption in the consolidated financial statements in the period in which the sub-lease agreement is signed.



In December 2004, the Company entered into a sublease agreement for a portion of its
facilities under lease in San Diego, which was formerly used principally for EDiX operations and was being utilized during 2004 for sales and support services from continuing operations. The sublease agreement is for a contractual period of three
years commencing January 1, 2005 with sublease rental income totaling $783,000 over the term of the sublease. The Companys lease term expires October 31, 2010. The Company vacated the subleased portion of the facilities in December 2004 and
recorded a lease abandonment charge of $479,000 related to lease payments of $1.8 million and other costs of approximately $75,000 primarily related to commissions incurred in connection with the sublease, offset with sublease rental income of $1.4
million. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company has assumed sublease rental income for the entire lease term in calculating the applicable lease abandonment charge. The
Company has assumed sublease rental income beyond the current contractual sublease term at the same rate as the contracted rate due to the fact that the Company believes that this represents the most probable sublease rate. In the event that the
Company is unable to secure a sub-lessee for the remaining three years of the lease term, the loss of sub-lease income would be recorded in the period in which the Company determines that sublease rentals could not be reasonably obtained. In the
event that the Company is unable to secure a sub-lessee during the time between the date the present sublease expires, and the date at which the Company determines sublease rental could not be reasonably obtained, the loss of sub-lease income would
be recorded in the period in which the property is not subleased.



In December
2004, the Company formulated a plan to abandon the leased facilities in Winston-Salem, North Carolina related to the PointDx acquisition (See Note 2). The Company anticipates exiting the facilities no later than May 31, 2005. The lease abandonment
liability represents lease payments of approximately $173,000 for the period April 1, 2005 through the end of the lease term in 2006. Upon finalization of the exit plan, goodwill will be increased or decreased by any changes to the liability, if
any.



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The following table sets forth the significant components and activity in lease abandonment charges (in thousands):



|            |  |                         |       |                         |   |                |  |              |   |  |                         |        |                |  |              |       |  |                      |   |  |   |      |   |  |   |      
|----------- |  | ----------------------- | ----- | ----------------------- | - | -------------- |  | ------------ | - |  | ----------------------- | ------ | -------------- |  | ------------ | ----- |  | -------------------- | - |  | - | ---- | - |  | - | -----
|            |  | BalanceDecember 31,2003 |       | LeaseAbandonmentCharges |   | Non-CashCharge |  | CashPayments |   |  | BalanceDecember 31,2004 |        | Non-CashCharge |  | CashPayments |       |  | BalanceMarch 31,2005
|Lease costs |  | $                       | 5,099 |                         | $ | 652            |  | $            |  |  | $                       | (2,534 | )              |  | $            | 3,217 |  | $                    |  |  | $ | (731 | ) |  | $ | 2,486



Of the $2.5 million accrual balance at
March 31, 2005, approximately $2.1million will be paid during the remainder of 2005 and $0.4 thereafter. Interest expense relating to lease abandonment charges for the three months ended March 31, 2005 and 2004 was $35,000 and $82,000, respectively.



Note 4  Investments



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 exchange for the Companys 87% ownership of ChannelHealth, the Company received approximately 7.5 million shares (with restrictions as to resale as discussed below) of Allscripts common stock, which represented approximately a 20% ownership
interest in Allscripts. 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 the time of sale, the Company accounted 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. At March 31, 2005, the Company owned approximately 18.25% of the outstanding shares of common stock of Allscripts. Due to the fact that the Companys equity interest in Allscripts has fallen below 20% and that the Company no longer
significantly influences the financial or operating policies of Allscripts, the equity method was discontinued during the third quarter of 2004. The Company accounts for its investment in Allscripts as available-for-sale securities in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities(SFAS 115). Under SFAS 115, available-for-sale investments, which have readily determinable fair values, are reported at fair value with
unrealized gains and losses, net of taxes, reported in Other Comprehensive Income as part of shareholders equity. The fair market value of this stock is affected by the Companys contractual restriction that it is allowed to sell only 25%
of its initial Allscripts shares in any one year. Restricted stock does not meet the readily determinable fair value criterion under SFAS 115; however, any portion of the security holding that can be reasonably expected to qualify for sale within
one year is not considered restricted.



At March 31, 2005, the estimated market
value of the Companys investment in 7,276,538 shares of Allscripts common stock was approximately $103.5 million, based on the last reported sales price per share on the NASDAQ National Market of $14.30 on that date. Of this amount, $79.6
million is reported in Marketable Securities, which represents the fair value at March 31, 2005 of 5,569,535 of Allscripts shares that can be sold within one year.



Certain information relative to the Companys marketable securities at March 31, 2005 and December 31, 2004 is as follows (in
thousands):



|                        |  |                |         |                  |   |       
|----------------------- |  | -------------- | ------- | ---------------- | - | ------
|                        |  | March 31, 2005 |         | December 31,2004
|Cost                    |  | $              | 84,771  |                  | $ | 74,279
|Gross unrealized gains  |  |                | 79,652  |                  |   | 20,004
|Gross unrealized losses |  |                |        |                  |   |      
|                        |  |                |         |                  |   |       
|Market value            |  | $              | 164,423 |                  | $ | 94,283
|                        |  |                |         |                  |   |       



Unrealized gains and losses on
marketable securities are recorded, net of any tax effect, as a separate component of stockholders equity. Gross realized gains of approximately $500,000 were recorded during the three months ended March 31, 2005 from investments based on the
specific identification method. There were no gross realized gains during the three months ended March 31, 2004. There were no gross realized losses from the sale of available-for-sale securities during the three months ended March 31, 2005 and
2004.



The Company also has certain other minority equity investments in
non-publicly traded securities. These investments are generally carried at cost, which is only adjusted if an other-than-temporary impairment exists, as the Company owns less than 20% of the voting equity and does not have the ability to exercise
significant influence over these companies. As of March 31, 2005 and December 31, 2004, the carrying value of these investments was approximately $9.3 million.



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Note 5  Derivative Financial Instruments and Hedging Agreements



From time to time, the Company enters into forward foreign exchange contracts to hedge, on a
net basis, the foreign currency exposure of a portion of the Companys assets and liabilities denominated in the British pound sterling, including inter-company accounts. Inter-company transactions are denominated in the functional currency of
our foreign subsidiary in order to centralize foreign exchange risk in the parent company in the United States. Increases or decreases in our foreign currency exposures are partially offset by gains and losses on the forward contracts, so as to
mitigate foreign currency transaction gains and losses. The terms of these forward contracts are generally for one to three months. The Company does not use forward contracts for trading or speculative purposes. The forward contracts are not
designated as cash flow or fair value hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, and do not represent effective hedges.
All outstanding forward contracts are marked to market at the end of the period and recorded on the balance sheet at fair value in other current assets and other current liabilities. The changes in fair value from these contracts and from the
underlying hedged exposures are generally offsetting and are recorded in other income, net in the accompanying Consolidated Statement of Income.



During the three months ended March 31, 2005 and 2004, the Company recorded net foreign currency exchange losses of $215,000 and $189,000, respectively.



At March 31, 2005, the Company had $15.0 million outstanding forward foreign exchange
contracts to exchange British pounds for US dollars. Forward foreign exchange contracts matured within 91 days and had a book value that approximated fair value.



Note 6  Goodwill and Intangible Assets



Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets(SFAS
142). Under SFAS 142, goodwill and other intangible assets with indefinite lives are not amortized. The statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be
performed at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with finite useful lives are amortized over their useful lives.



Consistent with prior years, the Company conducted its annual impairment test of goodwill
during the second quarter of fiscal 2004. The fair value of the reporting units was estimated using the expected present value of future cash flows. The Company used an independent valuation and managements estimates to determine goodwill
acquired in 2004. The valuation was based upon expected future discounted operating cash flows as well as an analysis of recent sales or offerings of similar companies. Based on the applicable valuations, it was determined that no impairment of
goodwill exists.



The changes in the carrying amount of goodwill for the three
months ended March 31, 2005 and for the year ended December 31, 2004 are as follows:



|                           |  |                |       |                  |   |      
|-------------------------- |  | -------------- | ----- | ---------------- | - | -----
|                           |  | March 31, 2005 |       | December 31,2004
|                           |  | (in thousands)
|Balance, beginning of year |  | $              | 7,163 |                  | $ | 2,508
|Goodwill acquired          |  |                |      |                  |   | 4,655
|                           |  |                |       |                  |   |      
|Balance, end of period     |  | $              | 7,163 |                  | $ | 7,163
|                           |  |                |       |                  |   |      



Acquired technology is amortized on a
straight-line basis over its estimated useful life of seven years. The carrying values of acquired technology are reviewed if the facts and circumstances suggest that they may be impaired. The acquired technology represents currently marketable
purchased software, which the Company currently intends to enhance and incorporate into the Companys existing product prior to general release, which is currently anticipated to occur in 2006. The Company will commence amortization of the
acquired technology upon general release of the product in which the acquired technology is incorporated.





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Estimated aggregate amortization expense for intangible assets is as follow:



|               |  |                |      
|-------------- |  | -------------- | -----
|Year           |  | Total         
|               |  | (in thousands)
|2005 remaining |  | $              |     
|2006           |  |                | 224  
|2007           |  |                | 359  
|2008           |  |                | 359  
|2009           |  |                | 359  
|Thereafter     |  |                | 1,213
|               |  |                |      
|               |  | $              | 2,514
|               |  |                |      



Note 7  Accounts Payable,
Accrued Expenses and Other Liabilities



Accounts payable, accrued expenses
and other liabilities consist of the following:



|                                      |  |                |        |                   |   |       
|------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                      |  | March 31,2005  |        | December 31, 2004
|                                      |  | (in thousands)
|Accounts payable                      |  | $              | 25,018 |                   | $ | 35,524
|Employee compensation and benefits    |  |                | 9,081  |                   |   | 9,522 
|Accrued expenses                      |  |                | 3,667  |                   |   | 5,783 
|Accrued cost of sales                 |  |                | 21,157 |                   |   | 13,860
|Payments due related to acquisitions  |  |                | 3,000  |                   |   | 4,000 
|Accrual for lease abandonment charges |  |                | 2,486  |                   |   | 3,217 
|Income taxes                          |  |                | 8,624  |                   |   | 8,376 
|Other                                 |  |                | 3,862  |                   |   | 4,106 
|                                      |  |                |        |                   |   |       
|                                      |  | $              | 76,895 |                   | $ | 84,388
|                                      |  |                |        |                   |   |       



Note 8  Deferred Revenues



Deferred revenues consists of the following:



|                                                               |  |                |        |                   |   |       
|-------------------------------------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                                               |  | March 31,2005  |        | December 31, 2004
|                                                               |  | (in thousands)
|Maintenance and services                                       |  | $              | 61,460 |                   | $ | 54,975
|Systems                                                        |  |                | 8,826  |                   |   | 8,771 
|Billings in excess of revenues earned on uncompleted contracts |  |                | 4,087  |                   |   | 9,897 
|                                                               |  |                |        |                   |   |       
|                                                               |  | $              | 74,373 |                   | $ | 73,643
|                                                               |  |                |        |                   |   |       
|                                                               |  |               
|                                                               |  | March 31,2005  |        | December 31, 2004
|                                                               |  | (in thousands)
|Short-term deferred revenues                                   |  | $              | 61,186 |                   | $ | 62,278
|Long-term deferred revenues                                    |  |                | 13,187 |                   |   | 11,365
|                                                               |  |                |        |                   |   |       
|                                                               |  | $              | 74,373 |                   | $ | 73,643
|                                                               |  |                |        |                   |   |       



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Note 9  Contracts in Process



The components of uncompleted contracts are as follows:



|                                        |  |                |         |   |                  |   |         |  
|--------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                        |  | March 31, 2005 |         |   | December 31,2004 |  
|                                        |  | (in thousands) |        
|Revenue earned on uncompleted contracts |  | $              | 126,156 |   |                  | $ | 97,895  |  
|Less billings to date                   |  |                | 129,581 |   |                  |   | 107,530 |  
|                                        |  |                |         |   |                  |   |         |  
|                                        |  | $              | (3,425  | ) |                  | $ | (9,635  | )
|                                        |  |                |         |   |                  |   |         |  



Revenue earned under the
percentage-of-completion method of accounting in excess of billings on uncompleted contracts is recorded as unbilled receivables. Billings on contracts in excess of related revenues recognized under the percentage-of-completion method of accounting
are recorded as deferred revenues. The components of uncompleted contracts are reflected in the balance sheet are as follows:



|                                                               |  |                |        |   |                  |   |        |  
|-------------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------ | -
|                                                               |  | March 31, 2005 |        |   | December 31,2004 |  
|                                                               |  | (in thousands) |       
|Revenue earned in excess of billings on uncompleted contracts  |  | $              | 662    |   |                  | $ | 262    |  
|Billings in excess of revenues earned on uncompleted contracts |  |                | (4,087 | ) |                  |   | (9,897 | )
|                                                               |  |                |        |   |                  |   |        |  
|                                                               |  | $              | (3,425 | ) |                  | $ | (9,635 | )
|                                                               |  |                |        |   |                  |   |        |  



Note 10  Financing
Arrangements



The Company had a revolving line of credit agreement (the
Line) allowing the Company to borrow up to $40.0 million, subject to certain restrictions, bearing interest at the banks base rate plus 0.25%. The Line was secured by deposit accounts, accounts receivable and other assets. On June
30, 2004, the Company provided notice to terminate the Line and the termination was effective as of July 30, 2004.



In December 2004, the Company entered into a $50.0 million Revolving Credit Facility with several banks. This agreement provides revolving credit for $50.0 million with
additional minimum increments of $25.0 million available up to a maximum of $150.0 million. Interest on outstanding borrowings is based upon one of two options, which the Company selects at the time of the borrowing. The first option is the highest
of the banks prime rate, the secondary market rate for three-month certificates of deposit plus 1.0%, and the federal funds effective rate plus 0.5%. The second option is the London Interbank Offered Rate (LIBOR) plus applicable
margins ranging from 75.0 to 175.0 basis points as defined in the agreement and is available only for borrowings in excess of $2.0 million. In addition, the Company may, subject to availability, request Letters of Credit in an aggregate amount not
to exceed $10.0 million. The Credit Agreement contains customary representations, warranties and covenants, including financial covenants. No amounts are pledged as collateral against the Revolving Credit Facility. The Revolving Credit Facility will
expire on December 22, 2009. At March 31, 2005, the banks prime rate, the secondary market rate for three-month certificates of deposit, the federal fund effective rate and the LIBOR rate were 5.75%, 3.12%, 2.96% and 2.85%, respectively. At
March 31, 2005 and December 31, 2004, no amounts were outstanding under the Revolving Credit Facility and the Company had no letters of credit outstanding.



Note 11  Income Taxes



The Companys first quarter 2005 and 2004 effective tax rates were 37.1% and 38.0%, respectively, which were lower than the Companys statutory rate of 40.0%.
For 2005, the lower effective rate was due to the utilization of state net operating losses and research and development credits to offset income taxes. The Companys effective income tax rate for 2004 was lower than the statutory rate
primarily due to our use of research and development credits to offset income taxes. The Company currently expects to realize recorded deferred tax assets as of March 31, 2005 of approximately $8.5 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. 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.



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##### Table of Contents

Note 12 Earnings Per Share



The following sets forth the computation of basic and diluted earnings per share:



|                                                   |  |                                       |        |      |   |       
|-------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------
|                                                   |  | Three Months EndedMarch 31,          
|                                                   |  | 2005                                  |        | 2004
|                                                   |  | (in thousands, except per share data)
|                                                   |  |                                      
|Numerator for basic and diluted earnings per share |  | $                                     | 8,611  |      | $ | 1,577 
|                                                   |  |                                       |        |      |   |       
|Denominator:                                       |  |                                       |        |      |   |       
|Basic weighted average shares outstanding          |  |                                       | 30,938 |      |   | 29,880
|Effect of employee stock options                   |  |                                       | 1,314  |      |   | 1,554 
|                                                   |  |                                       |        |      |   |       
|Denominator for diluted earnings per share         |  |                                       | 32,252 |      |   | 31,434
|                                                   |  |                                       |        |      |   |       
|Basic earnings per share                           |  | $                                     | 0.28   |      | $ | 0.05  
|                                                   |  |                                       |        |      |   |       
|Diluted earnings per share                         |  | $                                     | 0.27   |      | $ | 0.05  
|                                                   |  |                                       |        |      |   |       



Options to acquire 159,238 and 177,009
shares for the three months ended March 31, 2005 and 2004, respectively, were excluded from the calculation of diluted earnings per share, as the effect would not have been dilutive.



Note 13 - Comprehensive Income



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



|                                                                   |  |                              |         |   |      |   |       |  
|------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ----- | -
|                                                                   |  | Three Months Ended March 31, |        
|                                                                   |  | 2005                         |         |   | 2004 |  
|                                                                   |  | (in thousands)               |        
|Net Income                                                         |  | $                            | 8,611   |   |      | $ | 1,577 |  
|                                                                   |  |                              |         |   |      |   |       |  
|Other comprehensive income:                                        |  |                              |         |   |      |   |       |  
|Unrealized gains (losses):                                         |  |                              |         |   |      |   |       |  
|Unrealized holding gains (losses) arising during the period        |  |                              | 60,064  |   |      |   | 7     |  
|Less reclassification adjustments for gains included in net income |  |                              | (426    | ) |      |   |      |  
|Foreign currency translation adjustments                           |  |                              | (32     | ) |      |   | 32    |  
|Deferred income taxes                                              |  |                              | (22,543 | ) |      |   | (2    | )
|                                                                   |  |                              |         |   |      |   |       |  
|Other comprehensive income                                         |  |                              | 37,063  |   |      |   | 37    |  
|                                                                   |  |                              |         |   |      |   |       |  
|Comprehensive Income                                               |  | $                            | 45,674  |   |      | $ | 1,614 |  
|                                                                   |  |                              |         |   |      |   |       |  



Note 14  Commitments and
Contingencies



Leases:



At March 31, 2005, minimum lease payments for certain facilities and equipment under
noncancelable leases commitments and minimum sublease rental income to be received under noncancelable subleases were as follows:



|               |  |                |         |           |   |      |  
|-------------- |  | -------------- | ------- | --------- | - | ---- | -
|Year           |  | Leases         |         | Subleases |  
|               |  | (in thousands) |        
|2005 remaining |  | $              | 11,444  |           | $ | (218 | )
|2006           |  |                | 13,916  |           |   | (252 | )
|2007           |  |                | 14,176  |           |   | (294 | )
|2008           |  |                | 14,512  |           |   | (26  | )
|2009           |  |                | 13,911  |           |   |     |  
|Thereafter     |  |                | 66,289  |           |   |     |  
|               |  |                |         |           |   |      |  
|               |  | $              | 134,248 |           | $ | (790 | )
|               |  |                |         |           |   |      |  



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Of the $134.2 million in non-cancelable operating lease obligations, approximately $2.5 million is included in accrued
expenses at March 31, 2005 relating to a lease abandonment charge. See Notes 3 and 7.



Total rent expense amounted to $4.3 million and $3.8 million during the three months ended March 31, 2005 and 2004, respectively. Total rent expense for the three months ended March 31, 2005 for our lease in the UK with UCLH amounted to
$206,000.



The Company leases office space to Allscripts in Burlington,
Vermont. Total rent received from Allscripts was approximately $86,000 and $90,000 for the three month periods ended March 31, 2005 and 2004, 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 was 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 the October 16, 2003 deadline. However, IDX has deployed contingency plans to accept non-standard transactions. Because the entire healthcare system, including IDXs eCommerce Services clearinghouse business and the business of
IDXs 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 (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.



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Indemnification:



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.



Other Commitments:



Under the agreement and plan of merger with PointDx, Inc., the Company has a commitment to pay $4.0 million in 2005 through an earn-out
process, subject to reductions as defined under the terms of the agreement. In addition, the agreement contains a provision for the payment of a contingent consideration in the amount of $1.0 million, subject to reductions as defined under the terms
of the agreement in the event that the Company sells a certain number of products incorporating PointDx technology prior to November 1, 2006. See Note 2.



Note 15  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 SAGE Project). 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.



On March 31, 2004, IDX submitted certain information to NIST, which NIST requested in conjunction with a proposed amendment to the Cooperative Agreement. As a result of the amendment, payment on the award was
discontinued until IDX demonstrated regulatory compliance relating to certain aspects of its grant accounting and reporting procedures and relating to an in-kind contribution of software IDX made to the project. In issuing the amendment, NIST made
no finding of regulatory noncompliance by IDX in connection with the award. On March 25, 2005, NIST issued another amendment to the Cooperative Agreement that lifted the suspension on funding, permitted IDX to recover project costs incurred during
the period of the suspension and extended the project for another year.



From
June through November 2004, the U.S. Commerce Department, Office of Inspector General (OIG), conducted an audit of the SAGE Project. On March 11, 2005, OIG issued a final audit report recommending that NIST disallow certain costs and
subsequently, the Company submitted its response contesting certain findings. NIST will issue an audit resolution determination, which could reject some or all of the recommendations in the final audit. If the audit resolution determination adopts
the final audit reports recommendations, the Company intends to contest it vigorously through the administrative appeals process and/or through judicial review in federal court.



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. 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, in conjunction with the U.S. Commerce Department, OIG, is investigating whether the Company made false statements in connection with the application for the project award from NIST. The government has
informed the Company that it has essentially concluded its investigative work, and is determining whether to proceed with a False Claim Act lawsuit.



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 Federal False Claims Act. In addition,
among other causes of action, the employee alleged that the Company had 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



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##### Table of Contents

discrimination laws. The employee requested 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 submitted false statements to the government to obtain the grant and to
obtain reimbursement from the government for project costs.



On September 30,
2004, the U.S. District Court issued an order dismissing all of the employees claims. The dismissal was based on the Courts finding that the employee acted in bad faith in destroying evidence that he had a duty to preserve. The Court
also awarded the Company $65,000 as sanctions, reflecting the cost of investigating and litigating the destruction of evidence. As a result of the District Courts dismissal order, the Company has requested the District Court to tax costs
(e.g., litigation copying costs, deposition costs and the like) against the employee in the amount of $51,259. The Court has not yet ruled on this request for costs. The employee has appealed the dismissal. The employees appeal has been stayed
pending the District Courts ruling on the Companys request for costs, and, as discussed below, the Companys motion to enjoin the employee and the Department of Labor from further processing the employees complaint before that
agency.



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, compensation for any damages sustained by the employee as a result of the alleged discrimination, and attorneys fees. The Occupational Health and Safety Administration (OSHA) is investigating
the employees complaint on behalf of the U.S. Department of Labor, and the Company intends to cooperate in the investigation.



On October 14, 2004, the Company requested the U.S. District Court that dismissed the employees retaliation claims under the Federal False Claims Act, as noted
above, to enter an order enjoining the employee and OSHA from further processing the employees retaliation claim filed with the Department of Labor. OSHA has opposed the motion. The Court denied this motion to enjoin the employee and OSHA on
February 15, 2005 and the Company filed a motion for reconsideration, which was also denied. The Company has appealed this finding. If the appeal is denied, OSHA will likely issue the results of its investigation. If the finding is adverse to the
Company, the Company will contest such finding vigorously.



The Company intends
to continue to vigorously defend against all of the employees claims, which the Company continues to maintain are without merit. 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.



Note 16  Segment and Geographic Information



Segment 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 regarding 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.



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Geographic Information



Revenues are attributed to countries based on the location of the client. Information concerning revenues of principal geographic areas is as follows:



|               |  |                              |         |      |   |        
|-------------- |  | ---------------------------- | ------- | ---- | - | -------
|               |  | Three Months Ended March 31,
|               |  | 2005                         |         | 2004
|               |  | (in thousands)              
|United States  |  | $                            | 108,098 |      | $ | 98,813 
|United Kingdom |  |                              | 33,653  |      |   | 4,438  
|Other          |  |                              | 1,308   |      |   | 2,299  
|               |  |                              |         |      |   |        
|Total          |  | $                            | 143,059 |      | $ | 102,550
|               |  |                              |         |      |   |        



Information concerning long-lived
assets of principal geographic areas is as follows:



|                   |  |                |        |                   |   |       
|------------------ |  | -------------- | ------ | ----------------- | - | ------
|                   |  | March 31, 2005 |        | December 31, 2004
|                   |  | (in thousands)
|Long-lived assets: |  |                |        |                   |   |       
|United States      |  | $              | 91,810 |                   | $ | 88,384
|United Kingdom     |  |                | 6,030  |                   |   | 5,907 
|                   |  |                |        |                   |   |       
|                   |  | $              | 97,840 |                   | $ | 94,291
|                   |  |                |        |                   |   |       



During the three months ended March
31, 2005 there was one customer who accounted for approximately 21.0% of consolidated revenues. No single customer accounted for more than 10% of our consolidated revenues for the comparable period in 2004.



Note 17Related Party Transactions



As a result of the sale of Channelhealth to Allscripts, the Company currently owns
approximately 18.25% of the common stock of Allscripts at March 31, 2005. As part of a 10-year strategic alliance agreement beginning on January 9, 2001, Allscripts is obligated to pay IDX a percentage of Allscripts revenue related to the
Companys customers. The Company recorded revenues of approximately $528,000 and $413,000 during the three months ended March 31, 2005 and 2004, respectively. The Company also leases office space to Allscripts in Burlington, Vermont. Total rent
received from Allscripts was approximately $86,000 and $90,000 during the three months ended March 31, 2005 and 2004, respectively.



The Company currently owns 562,069 shares of Series D convertible preferred stock in Stentor, Inc. (Stentor), which constitutes approximately 4% ownership on
an as-converted basis. The Company currently has a Distribution and Development agreement with Stentor, Inc. that allows the Company and Stentor. to mutually distribute each others products to new and existing customers that may be merged into
the collective MIMS system. The Company and Stentor pay each other one-time up-front initiation royalties based on execution of new customer agreements and ongoing sustaining royalties on a quarterly basis over the life of the customer agreements
based on total new managed radiology studies for a given period. Royalty revenue included in system sales for the three months ended March 31, 2005 and 2004 was $740,000 and $604,000, respectively. Royalty expense included in cost of system sales
was $1.9 million and $1.0 million for the three months ended March 31, 2005 and 2004, respectively.



Commencing in April 2004, the Company began leasing office facilities in the UK from a customer, the University College of London Hospital (UCLH). The lease term is for ten years and provides for annual
base rent of £483,150 ($912,187 using the exchange rate of 1.888 at March 31, 2005), plus the Companys share of taxes and maintenance costs. The lease includes a provision for annual increases for maintenance, subject to a cap, in
accordance with the UK Retail Price Index. In addition, the lease contains a provision for an increase in the annual base rent in the fifth year of the term of the lease.



Note 18  Subsequent Event



On April 27, 2005 the Company entered into an agreement to acquire substantially all the assets of RealTimeImage, Ltd. (RTI), a privately held developer of
web-based medical specialty imaging solutions with offices in Tel Aviv, Israel and San Bruno, California for approximately $15.5 million. The acquisition is part of the Companys strategy to enhance its product and market competitiveness
through acquiring leading edge technology and expertise. The RTI acquired technology is integrated into IDXs Imagecastfor Cardiology solution. The acquisition is currently expected to close in the second quarter of 2005 and will be
financed with cash on hand. This transaction will be accounted for using the purchase method of accounting. The Company has not yet completed the allocation of the purchase price, as appraisals associated with the valuation are not yet complete.



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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 35, 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. 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, including our agreements in the UK, 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.



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 CarecastClinical Enterprise System, which require more configurations 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 maintenance and service fees consist of software maintenance fees, installation fees, development fees,
professional and technical service fees, consulting fees and other miscellaneous fees. Maintenance and service fees also include outsourcing services and our IDX eCommerce Services business, which offers web-based electronic data interchange
(EDI) claims, remittance and statement services. 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.



Overview



Total revenues increased 39.5% to $143.1 million during the three months ended March 31, 2005 from $102.6 million for the same period in
2004. System sales increased by 14.6% and maintenance and service fees increased



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by 51.6%, driven largely by revenues generated from our subcontract arrangement with British Telecommunications PLC (BT). Total operating
expenses increased 30.5% resulting in operating income of $12.4 million or an operating margin of 8.7% for the three months ended March 31, 2005 as compared to an operating margin of 2.4% for the same period in 2004. For the three months ended March
31, 2005, we reported income of $8.6 million, or $0.27 diluted earnings per share, and at March 31, 2005, cash and marketable securities totaled $209.4 million.



A more detailed discussion of our results is presented in RESULTS OF OPERATIONS below.



CRITICAL ACCOUNTING POLICIES



The discussion and analysis of our financial condition and results of operations are based upon our 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, 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 Annual Report on Form 10-K for the year ended December 31, 2004.



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, Software Revenue Recognition(SOP 97-2), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to
Certain Transactions, and clarified by Staff Accounting Bulletin (SAB) No. 101 (SAB No. 101), Revenue Recognition in Financial Statements, and SAB No. 104 Revenue Recognition(SAB No.104), and
Emerging Issues Task Force (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21) 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 for perpetual licenses, and for term base licenses the later of FOB shipping point or the commencement of the term, 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. For example, if the financial condition of our customers were to deteriorate, it could
affect the timing and the 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.



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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 is completed. The product is deemed accepted
unless the customer notifies us 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 (SFAS) No. 5, Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service level requirements. Certain of our system
specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. 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 and consider the
potential related effects of the timing of recording revenue on our license arrangements. We have not accrued any costs related to these warranties in our consolidated financial statements.



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. 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(SOP 81-1). 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, which could be material, are recorded to income in the period in which the facts that give rise to the revision become known.



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We recognize losses, if any, on fixed price contracts when the amount of the loss is determined. The complexity of the
estimation process and the assumptions inherent in the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. We record revenue earned in
excess of billings on uncompleted contracts as an asset with unbilled receivables. We record billings in excess of revenue earned on uncompleted contracts as deferred revenue until revenue recognition criteria are met. Deferred contract costs
represent costs incurred for the acquisition of goods or services associated with contracts, including contracts accounted for under the percentage-of-completion method of accounting, and certain pre-contract costs for which revenue has not yet been
earned.



We also enter into arrangements that involve the delivery or
performance of multiple products and services that include the development and customization of software, implementation services, and licensed software and support services. For these contracts, we apply the consensus of EITF 00-21 to determine
whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes. Accordingly, if the elements qualify as separate units of accounting, and fair value exists for
the elements of the contract that are unrelated to the customization services, these elements are accounted for separately, and the related revenue is recognized as the products are delivered or the services are rendered. We have concluded that the
following qualify for separate units of accounting under EITF 00-21: software licenses, including certain integrated third party software products and customization services; implementation and training services, some of which are provided by third
parties; and software support and maintenance services, some of which are provided by third parties.



We also enter into arrangements under which we provide hosted software applications. We recognize revenue for these arrangements based on the provisions of EITF No. 00-3, Application of AICPA SOP 97-2 to
Arrangements That Include the Right to Use Software Stored on Another Entitys Hardware(EITF 00-3), and the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104, when there is persuasive evidence of an arrangement, collection of the resulting receivable is probable, the fee is fixed or determinable and acceptance has occurred. Our revenues related to these arrangements consist of system
implementation service fees and software subscription fees. We have determined that the system implementation services represent set-up services that do not qualify as separate units of accounting from the software subscriptions as the customer
would not purchase these services without the purchase of the software subscription. As a result, we recognize system implementation fees ratably over a period of time from when the system implementation services are completed and accepted by the
customer over the remaining customer relationship life, which we have determined is the contractual life of the customers subscription agreement. We recognize software subscription fees, which commence upon completion of the related system
implementation, ratably over the applicable subscription period. Amounts billed prior to satisfying our revenue recognition policy are reflected as deferred revenue.



As of March 31, 2005, we had deferred revenue totaling $6.8 million related to system implementation and subscription fees. Prior to the
year ended December 31, 2004, the revenues associated with system implementation services were not material.



The application of SOP 97-2 and EITF 00-21 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether fair value exists for those elements. Software revenue recognition
rules are very complex and prone to subjective interpretations in practical application. Typically our contracts contain multiple elements, and while the majority of our contracts contain standard terms and conditions, there are instances where our
contracts contain non-standard terms and conditions. As a result, contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated
as separate units of accounting for revenue recognition purposes in accordance with SOP 97-2 or EITF 00-21, and if so, the relative fair value that should be allocated to each of the elements and when to recognize revenue for each element.
Interpretations would not affect the amount of revenue recognized but could impact the timing of recognition.



We record reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and services in accordance with EITF Issue No. 01-14, Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred(EITF 01-14). EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in the income statement.



We include shipping and handling fees billed to customers in revenues in accordance with EITF
Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping and handling costs are included in cost of sales.



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Allowance for Doubtful Accounts and Credits  We maintain an allowance for doubtful accounts to reflect
estimated losses resulting from the inability of customers to make required payments. Substantially all of the Companys end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom
and Canada. We perform ongoing credit evaluations of the financial condition of our customers and generally do not require collateral. Although we are directly affected by the overall financial condition of the healthcare industry, we do not believe
significant credit risk exists at March 31, 2005. We generally have not experienced any material losses related to receivables from individual customers or groups of customers in any specific industry or geographic area. We maintain an allowance for
doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. Our losses related to collection of trade accounts receivables have
consistently been within managements expectations. Due to these factors, no additional credit risk beyond amounts provided for collection losses, which we re-evaluate on a monthly basis based on specific review of age of our receivable and the
period that any receivables are beyond the standard payment terms, is believed by us to be probable.



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 12 to 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 and 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.



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. In assessing the realization of our deferred tax assets, we evaluated certain
relevant criteria, including future taxable income, and tax planning strategies designed to generate future taxable income. We currently believe that future earnings and current tax planning strategies will be sufficient to recover substantially all
of our recorded deferred tax assets. These strategies include estimates and involve judgments relating to certain unrealized gains in our marketable securities. To the extent that facts and circumstances change  for example, if there is a
decline in the fair value of the marketable securities  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.



The valuation allowance as of March 31, 2005 and December 31, 2004 relate primarily to state net operating losses and state research and
development and other tax credits generated in fiscal 1999 to 2004 through which we can only recognize a benefit through future taxable income.



The American Jobs Creation Act of 2004 (the Act) introduced a special one-time dividend received deduction on the repatriation of certain foreign earnings to
a U.S. taxpayer (repatriation provision), provided certain criteria are met. The President signed the Act into law on October 22, 2004. Even in light of the Act, the Company did not provide for U.S. income taxes on earnings of the Companys
subsidiaries outside of the U.S. The Companys current intention is to reinvest the total amount of the Companys approximately $2.3 million of unremitted earnings permanently or repatriate the earnings only when tax-effective to do so. It
is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.



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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 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 14 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, 2004 which contain accounting policies and other disclosures required by generally accepted accounting principles.



NEW ACCOUNTING STANDARDS



On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004) (Statement 123(R)),
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees(APB No.
25), and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



Statement 123(R) is effective for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which
financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1, 2006.



Statement 123(R) permits public companies to adopt its requirements using one of two methods:



| | 1. | A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We currently plan to adopt Statement 123(R) using the modified-prospective method.



As permitted by SFAS 123, we currently account for share-based payments to
employees using APB No. 25s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a significant impact on the
our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated
financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise
stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1.0 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively.



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RESULTS OF OPERATIONS



THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004



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:



|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|----------------------------------- |  | -------------------------------------------------------- | ------- | - | ---------- | ----- | -- | ----------------------------- | - | ------- | ------- |  | ----- | ---------------------------------------------------------------------------- |  | - | ------ | - |  | ------ | -
|                                    |  | ThreeMonthsEndedMarch 31,2005                            |         |   | % Sales    |       |    | ThreeMonthsEndedMarch 31,2004 |   |         | % Sales |  |       | Change Three MonthsEnded March 31, 2005 OverThree Months EndedMarch 31, 2004 | 
|                                    |  |                                                          |         |   | $ Variance |       |    | % Variance                    |  
|                                    |  | (in thousands, except percentages and per share amounts) |        
|System sales                        |  | $                                                        | 38,454  |   |            | 26.9  | %  |                               | $ | 33,559  |         |  | 32.7  | %                                                                            |  | $ | 4,895  |   |  | 14.6   | %
|Maintenance and service fees        |  |                                                          | 104,605 |   |            | 73.1  | %  |                               |   | 68,991  |         |  | 67.3  | %                                                                            |  |   | 35,614 |   |  | 51.6   | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|Total revenues                      |  |                                                          | 143,059 |   |            | 100.0 | %  |                               |   | 102,550 |         |  | 100.0 | %                                                                            |  |   | 40,509 |   |  | 39.5   | %
|                                    |  |                                                          |         |   |            |      
|Cost of system sales                |  |                                                          | 13,970  |   |            | 9.8   | %  |                               |   | 11,969  |         |  | 11.7  | %                                                                            |  |   | 2,001  |   |  | 16.7   | %
|Cost of maintenance and services    |  |                                                          | 72,339  |   |            | 50.6  | %  |                               |   | 45,839  |         |  | 44.7  | %                                                                            |  |   | 26,500 |   |  | 57.8   | %
|Selling, general and administrative |  |                                                          | 30,679  |   |            | 21.4  | %  |                               |   | 28,427  |         |  | 27.7  | %                                                                            |  |   | 2,252  |   |  | 7.9    | %
|Software development costs          |  |                                                          | 13,694  |   |            | 9.6   | %  |                               |   | 13,887  |         |  | 13.5  | %                                                                            |  |   | (193   | ) |  | -1.4   | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|Total operating expenses            |  |                                                          | 130,682 |   |            | 91.3  | %+ |                               |   | 100,122 |         |  | 97.6  | %                                                                            |  |   | 30,560 |   |  | 30.5   | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|Operating income                    |  |                                                          | 12,377  |   |            | 8.7   | %  |                               |   | 2,428   |         |  | 2.4   | %                                                                            |  |   | 9,949  |   |  | 409.8  | %
|                                    |  |                                                          |         |   |            |      
|Other income (expense), net         |  |                                                          | 1,317   |   |            | 0.9   | %  |                               |   | 116     |         |  | 0.1   | %                                                                            |  |   | 1,201  |   |  | 1035.3 | %
|Income tax (provision) benefit      |  |                                                          | (5,083  | ) |            | -3.6  | %  |                               |   | (967    | )       |  | -0.9  | %                                                                            |  |   | (4,116 | ) |  | 425.6  | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|Net Income                          |  | $                                                        | 8,611   |   |            | 6.0   | %  |                               | $ | 1,577   |         |  | 1.5   | %+                                                                           |  | $ | 7,034  |   |  | 446.0  | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  
|Diluted earnings per share          |  | $                                                        | 0.27    |   |            |       |    |                               | $ | 0.05    |         |  |       |                                                                              |  | $ | 0.22   |   |  | 440.0  | %
|                                    |  |                                                          |         |   |            |       |    |                               |   |         |         |  |       |                                                                              |  |   |        |   |  |        |  

---

|+ | 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, along with third party hardware and software, and royalty
income. Revenue recognized under system sales is dependant upon the timing of many variables such as the signing of the contract, the delivery of the hardware and software components, and the achievement of milestones through our implementation
efforts. Under certain royalty and revenue-sharing arrangements, we recognize royalty revenue from sales by third parties that incorporate technology licensed from IDX, or we share in revenues received by third parties from IDX customers.
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, outsourcing services, and other miscellaneous fees.



During the three
months ended March 31, 2005 as compared to the same period in 2004, total revenues increased 39.5% driven principally by increases in maintenance and service fees, which increased 51.6% due primarily to our development efforts in the UK. This
increase resulted in maintenance and service fees representing a larger portion of our total revenues. We currently anticipate this trend to continue due to increases in our development work in the UK. Moreover, as we market more comprehensive
clinical systems, the time and effort required to implement these systems is typically more extensive and these additional implementation costs result in increased maintenance and service fee revenue for us.



System Sales



System sales increased 14.6% during the three months ended March 31, 2005 as compared to the same period last year, primarily attributable
to increases in software license and subscription revenues of $3.1 million, hardware and third party software sales of $1.2 million. The increase is due primarily to new sales to existing customers during the first quarter of 2005 as compared to the
first quarter of 2004.



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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:



|                                        |  |                                    |         |         |            |   |                               |   |         |  |      |                                                                              |  |   |        |  |       |  
|--------------------------------------- |  | ---------------------------------- | ------- | ------- | ---------- | - | ----------------------------- | - | ------- |  | ---- | ---------------------------------------------------------------------------- |  | - | ------ |  | ----- | -
|                                        |  | ThreeMonthsEndedMarch 31,2005      |         | % Sales |            |   | ThreeMonthsEndedMarch 31,2004 |   | % Sales |  |      | Change Three MonthsEnded March 31, 2005 OverThree Months EndedMarch 31, 2004 | 
|                                        |  |                                    |         |         | $ Variance |   | % Variance                    |  
|                                        |  | (in thousands, except percentages) |        
|Maintenance fees                        |  | $                                  | 42,471  |         | 29.7       | % |                               | $ | 36,192  |  | 35.3 | %                                                                            |  | $ | 6,279  |  | 17.3  | %
|Installation fees                       |  |                                    | 18,549  |         | 13.0       | % |                               |   | 15,359  |  | 15.0 | %                                                                            |  |   | 3,190  |  | 20.8  | %
|Development services                    |  |                                    | 22,642  |         | 15.8       | % |                               |   |        |  |     |                                                                              |  |   | 22,642 |  | 100.0 | %
|                                        |  |                                    |         |         |            |  
|Consulting, professional and other fees |  |                                    | 20,943  |         | 14.6       | % |                               |   | 17,440  |  | 17.0 | %                                                                            |  |   | 3,503  |  | 20.1  | %
|                                        |  |                                    |         |         |            |   |                               |   |         |  |      |                                                                              |  |   |        |  |       |  
|Total maintenance and service fees      |  | $                                  | 104,605 |         | 73.1       | % |                               | $ | 68,991  |  | 67.3 | %                                                                            |  | $ | 35,614 |  | 51.6  | %
|                                        |  |                                    |         |         |            |   |                               |   |         |  |      |                                                                              |  |   |        |  |       |  



The increase in maintenance and
service fees was driven largely by our business in the UK. The increases in development services, which represent revenues for our development efforts associated with the production and customization of certain product functionalities required under
our UK contracts, and installation fees were both primarily related to work performed for our UK customers. The increase in maintenance fees for software and hardware support was primarily due to an increase in our installed base of $5.1 million
combined with annual maintenance price increases of approximately $1.2 million. Consulting, professional and other fees increased 20.1% primarily attributable to increases in our eCommerce and Business Services Outsourcing (BSO)
services. ECommerce revenues increased $1.4 million and BSO revenues increased $1.6 million for the three months ended March 31, 2005 as compared to the same period in 2004. The growth in our eCommerce revenues was primarily due to an increase in
our installed based from our medical and physician group practice customers. BSO is a new offering that was launched during the second quarter of 2004.



Cost of Sales



The following table indicates the total cost of system sales and maintenance and service fees as a percentage of total revenues and the cost of system sales and maintenance and service fees as a percentage of their
respective revenues:



|                                                                                              |  |                                   |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                              |  | Three Months EndedMarch 31,       |        
|                                                                                              |  | 2005                              |         |   | 2004 |  
|                                                                                              |  | (in thousands, exceptpercentages) |        
|Total revenues                                                                                |  | $                                 | 143,059 |   |      | $ | 102,550 |  
|Total cost of system sales and maintenance and service fees                                   |  |                                   | 86,309  |   |      |   | 57,808  |  
|Total cost of system sales and maintenance and service fees as a percentage of total revenues |  |                                   | 60.3    | % |      |   | 56.4    | %
|                                                                                              |  |                                  
|System sales:                                                                                 |  |                                   |         |   |      |   |         |  
|System sales                                                                                  |  | $                                 | 38,454  |   |      | $ | 33,559  |  
|Cost of system sales                                                                          |  |                                   | 13,970  |   |      |   | 11,969  |  
|Cost of system sales as a percentage of system sales                                          |  |                                   | 36.3    | % |      |   | 35.7    | %
|                                                                                              |  |                                  
|Maintenance and service fees:                                                                 |  |                                   |         |   |      |   |         |  
|Maintenance and service fees                                                                  |  | $                                 | 104,605 |   |      | $ | 68,991  |  
|Cost of maintenance and service fees                                                          |  |                                   | 72,339  |   |      |   | 45,839  |  
|Cost of maintenance and service fees as a percentage of maintenance and service fees          |  |                                   | 69.2    | % |      |   | 66.4    | %



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
the costs of maintenance and service fees are employee-driven and consist primarily of employee and related infrastructure costs incurred in providing maintenance and installation



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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, 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 higher cost percentages and lower margins. Under certain royalty agreements, we incur royalty expense from
sales that incorporate technology licensed from third parties, which is included in our cost of system sales.



Cost of System Sales



For the
three months ended March 31, 2005 as compared to the same period in 2004, our cost of system sales as a percentage of system sales increased principally due to an increase in royalty expense of $0.9 million. The increase in royalty expense was due
to an increase in our installed base that incorporated technology from third parties. This was partially offset by 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, 2005 as compared to the same period in 2004.



Cost of Maintenance and Service Fees



The cost of maintenance and service fees as a percentage of maintenance and service fee revenue for the three months ended March 31, 2005 as compared to the same
period in 2004 increased to 69.2% from 66.4% due primarily to increases in development costs related to services provided in the UK, which carry higher cost percentages than installation and maintenance services. The cost of maintenance and service
fees increased $26.4 million or 57.6% during the three months ended March 31, 2005 as compared to the same period in 2004 to support the growth in our installed base of software applications. The increase was primarily attributable to increases of
$11.7 million in employee compensation and benefit costs, $8.2 million in subcontractor expenses, $2.0 million in professional fees, $1.8 million in third party maintenance contract costs and $1.1 million in occupancy related expenses. Employee
compensation and benefit costs, subcontractor expenses, professional fees and occupancy related expenses increased primarily to support the growth in our revenues from our operations in the UK. A portion of our research and development costs,
principally employee compensation and benefit costs, were allocated to the cost of maintenance and services that relate to the development work in the UK. Certain third party maintenance contract costs increased as customers upgraded to new systems,
which have a higher support cost per user and due to the increase in third-party software sales relating to our clinical solutions.



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 the increase in development costs related to services provided in the UK as costs of maintenance and
service fees. The use of specialized professional outside services may increase as well, further increasing cost of services, which may reduce our overall margin.



Selling, General and Administrative Expenses



Selling, general and administrative expenses as a percentage of total revenues were 21.4% for the three months ended March 31, 2005 as
compared to 27.7% for the same period last year. Start-up expenses for our operations in the UK contributed to the higher percentage during the three months ended March 31, 2004. Selling, general and administrative expenses consist primarily of
employee compensation and benefit costs for sales, corporate, financial and administrative personnel, advertising and trade show costs, related infrastructure costs and professional fees. The increase of $2.3 million was due primarily to the growth
in our business.



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.



Software Development Costs



Software
development costs consist primarily of costs related to our software developers, associated infrastructure costs required to fund product development initiatives and amortization of such costs. As described in Note 1 to the notes of the accompanying
condensed consolidated financial statements and notes thereto, 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 or detail program design. 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



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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 $1.0 and $1.6 million of software development costs were capitalized during the
three months ended March 31, 2005 and 2004, respectively. Amortization of software development costs was approximately $812,000 and $406,000 during the three months ended March 31, 2005 and 2004, respectively.



The following table indicates software development costs as a percentage of system sales:



|                                                           |  |                                   |        |   |      |   |        |  
|---------------------------------------------------------- |  | --------------------------------- | ------ | - | ---- | - | ------ | -
|                                                           |  | Three Months EndedMarch 31,       |       
|                                                           |  | 2005                              |        |   | 2004 |  
|                                                           |  | (in thousands, exceptpercentages) |       
|Software development costs:                                |  |                                   |        |   |      |   |        |  
|System sales                                               |  | $                                 | 38,454 |   |      | $ | 33,559 |  
|Software development costs                                 |  |                                   | 13,694 |   |      |   | 13,887 |  
|Software development costs as a percentage of system sales |  |                                   | 35.6   | % |      |   | 41.4   | %



Research and development employee
compensation and benefit costs decreased $1.9 million, offset by an increase in professional fees of $1.1 million related to various development projects and a decrease in capitalized software development costs, net of amortization, of $0.9 million.
A portion of our research and development costs, principally employee compensation and benefit costs, are allocated to the cost of maintenance and services that relate to the development work in the UK which resulted in the decline in employee
compensation and benefit costs. The decrease in capitalized software costs, net of amortization was primarily related to costs capitalized during the three months ended March 31, 2004 relating to Flowcast 3.0 release.



Total Other Income (Expense), Net



The following table sets forth the components of total other income, net:



|                                      |  |                             |       |   |      |   |      |  
|------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ---- | -
|                                      |  | Three Months EndedMarch 31, |      
|                                      |  | 2005                        |       |   | 2004 |  
|                                      |  | (in thousands)              |      
|Other income (expense)                |  |                             |       |   |      |   |      |  
|Interest income                       |  | $                           | 1,111 |   |      | $ | 456  |  
|Interest expense                      |  |                             | (79   | ) |      |   | (151 | )
|Foreign currency exchange losses, net |  |                             | (215  | ) |      |   | (189 | )
|Gain on sale of investments           |  |                             | 500   |   |      |   |     |  
|                                      |  |                             |       |   |      |   |      |  
|Total other income, net               |  | $                           | 1,317 |   |      | $ | 116  |  
|                                      |  |                             |       |   |      |   |      |  



Interest Income



The increase in interest income was due primarily to higher domestic
interest rates for the three months ended March 31, 2005 as compared to the same period in 2004.



Gain on Sale of Equity Investment



During the three months ended March 31, 2005 we realized a gain of $500,000 on the sale of approximately 40,000 shares of Allscripts Healthcare Solutions (Allscripts) common stock.



Foreign Currency Exchange Gains (Losses), net



Receivables generated for IDX Systems Corporation from certain contractual arrangements with
customers in the UK are primarily denominated in the pound sterling. In addition, since we have both the intent and ability to settle our inter-company balances, we have designated these balances, which are denominated in pounds sterling, as
short-term in nature and therefore, record foreign currency exchange gains (losses) to our consolidated statements of income. For the three months ended March 31, 2005 and 2004, we incurred a net foreign currency exchange loss of $215,000 and
$189,000, respectively.



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Income Tax Provision



Our effective income tax rate was 37.1% for the three months ended March 31, 2005 and 38.0% for the three months ended March 31, 2004, resulting in an income tax
provision of $5.1 million and $967,000 for the three months ended March 31, 2005 and 2004, respectively. Our effective tax rate for 2005 was lower than the statutory rate of 40.0% due to the utilization of state net operating losses and research and
development credits to offset income taxes. Our effective income tax rates for 2004 was lower than the statutory rate of 40.0% primarily due to our use of research and development credits 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 lines of credit. At March 31, 2005, we had no debt, $45.0 million in cash and cash equivalents, $164.4 million in short-term investments, and $214.6 million of working capital.



Operating Activities:



Net cash provided by (used in) continuing operations is principally comprised of net income
and is primarily affected by the net change in accounts and unbilled receivables, deferred contract costs, accounts payable and accrued expenses, deferred revenues 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, deferred contract costs, 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. As we continue to market
more comprehensive clinical systems, the required amount of customization and length of the delivery cycle has also increased.



Net cash of $5.1 million was used in operating activities during the three months ended March 31, 2005 due primarily to an increase in accounts receivable and deferred
contract costs relating to our UK contracts and a decrease in accounts payable due primarily to the timing of payments. The increase in accounts receivable and unbilled receivables of $5.0 million was primarily due to our expansion in the UK. Our
Days Sales Outstanding (DSO), which is the average number of days sales in accounts receivable, was 80 days during the three months ended March 31, 2005 as compared to 104 days during the same period in 2004 and 86 days for the year
ended December 31, 2004. Our DSO was high for the three months ended March 31, 2004 due to pre-billings under certain of our UK contracts at quarter end. During the fourth quarter of 2004, we completed one contract that was accounted for under the
completed-contract method of accounting whereby revenues and costs are included in operations in the year during which the contract is completed. Included in 2004 revenues were approximately $13.5 million in revenues related to this contract.
Excluding the completed contract revenues, our DSO was 88 days during the year ended December 31, 2004. We currently expect DSO to range from 80 to 85 days during 2005.



Deferred contract costs, which represent costs incurred on revenues not yet recognized, increased $9.5 million during the three months ended
March 31, 2005 primarily due to payments for goods and services related to future deliverables under certain of our UK contracts. We determine the amount of revenues and contract costs to be recognized in operations, including deferred contract
costs, based upon a measurement of progress to completion in accordance with the provisions of SOP 81-1. The costs that accumulate in the deferred contract costs account are contract costs as contemplated by SOP 81-1 and consist primarily of third
party networking and software licensing costs, IDX labor costs and third party labor costs. These costs pertain to the customization and modification of the software required under these contracts. Certain of our contracts provide for fixed,
date-dependent payments that, during the software customization phase of the arrangement, are payable to IDX after the associated services are performed. We deem this schedule of payments to constitute extended payment terms. Accordingly, we limit
the revenue to be recognized to the amount of payments that are due. We currently expect billings and associated revenues to occur according to the contract terms on contracts where costs have been incurred in excess of billings and associated
revenues. The deferred revenues and billings in excess of revenues earned will be earned as services are performed.



During the three months ended March 31, 2005, deferred tax liabilities increased by $19.3 million primarily as a result of the recognition of a deferred tax liability on
the unrealized gains relating to available-for-sale securities due to the increase in the amount of Allscripts shares that can be sold within one year.



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Investing Activities:



Cash flows used in 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 $25.8 million through December 31, 2004 on the acquisition and implementation of an Enterprise Resource Planning (ERP) system and
have invested an additional $1.1 million in the ERP system during the three months ended March 31, 2005. We anticipate investing an additional $2.7 million during 2005 related to this system implementation. In 2005, we currently expect to begin the
second phase of the expansion of our principal corporate offices in South Burlington, Vermont. We currently anticipate investing approximately $4.3 million each in 2005 and 2006 related to the expansion project.



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., 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. Stentor is a privately held company and therefore it is difficult to determine a fair
market value for these shares. Management periodically reviews this investment for indications of impairment.



Financing Activities:



Cash
flows provided by (used in) financing activities historically relate to the issuance of common stock through the exercise of employee stock options and in connection with the employee stock purchase plan and proceeds from our line of credit. In
December 2004, we entered into a new $50.0 million Revolving Credit Facility with several banks. This agreement provides revolving credit for $50.0 million with additional minimum increments of $25.0 million available up to a maximum of $150.0
million. Interest on outstanding borrowings is based upon one of two options, which we select at the time of the borrowing. The first option is the highest of the banks prime rate, the secondary market rate for three-month certificates of
deposit plus 1.0%, and the federal funds effective rate plus 0.5%. The second option is the London Interbank Offered Rate (LIBOR) plus applicable margins ranging from 75.0 to 175.0 basis points as defined in the agreement and is
available only for borrowings in excess of $2.0 million. In addition, we may, subject to availability, request Letters of Credit in an aggregate amount not to exceed $10.0 million. The Revolving Credit Facility will expire on December 22, 2009. At
March 31, 2005, no amounts were outstanding under the Revolving Credit Facility and the Company had no letters of credit outstanding.



We currently own, through a wholly owned subsidiary, approximately 7.2 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 $103.5 million as of March 31, 2005, based on the last reported sales price per share of Allscripts common stock on the NASDAQ National
Market on that date, of which $79.6 million is included in marketable securities at March 31, 2005. The common stock is subject to certain sale restrictions that may significantly impact the market value. See Note 4 of the Notes to Consolidated
Financial Statements.



FASB Statement 123(R) will require the benefits of tax
deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current accounting literature. This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized
in prior periods for such excess tax deductions were $1.0 million and $2.7 million during the three months ended March 31, 2005 and 2004, respectively.



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 2005 as needed to meet anticipated sales volume and to support research and development efforts for certain products. To the extent necessary
to support increases in staffing, we may obtain additional office space.



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Contractual Obligations



The following table summarizes our contractual obligations at March 31, 2005, and the effect such obligations are expected to have on our
liquidity and cash in the future periods:



|                                |  |                  |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |        
|------------------------------- |  | ---------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ---------- |  | ----- | ------ |  | - | ------ |  | - | -------
|(in thousands)                  |  | Remainder of2005 |        | 2006 |   | 2007   |  | 2008 |        | 2009 |   | Thereafter |  | Total
|Noncancelable leases           |  | $                | 11,444 |      | $ | 13,916 |  | $    | 14,176 |      | $ | 14,512     |  | $     | 13,911 |  | $ | 66,289 |  | $ | 134,248
|Purchase commitments            |  |                  | 5,666  |      |   | 3,778  |  |      |       |      |   |           |  |       |       |  |   |       |  |   | 9,444  
|Acquisition related commitments |  |                  | 3,000  |      |   |       |  |      |       |      |   |           |  |       |       |  |   |       |  |   | 3,000  
|                                |  |                  |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |        
|Total contractual obligations   |  | $                | 20,110 |      | $ | 17,694 |  | $    | 14,176 |      | $ | 14,512     |  | $     | 13,911 |  | $ | 66,289 |  | $ | 146,692
|                                |  |                  |        |      |   |        |  |      |        |      |   |            |  |       |        |  |   |        |  |   |        



Of the $134.2 million in
non-cancelable lease obligations, approximately $2.5 million is accrued at March 31, 2005 as a lease abandonment charge and as a restructuring cost. See Notes 3 and 7 of the Notes to Consolidated Financial Statements.



We believe that the level of our cash and investment balances, anticipated cash flow from
operations and our $50 million revolving credit facility will be sufficient to satisfy our cash requirements for the next eighteen months. To date, inflation has not had a material impact on our revenues or income.



FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE



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:



RISKS ASSOCIATED WITH OPERATIONS AND CONTRACTS IN THE
UNITED KINGDOM.We have been awarded contracts to perform services in relation to a large information systems project for the British government, which require the expansion of our operations in the United Kingdom, including additions to and
changes in management. Significant management attention and financial resources are required to develop our UK operations, 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 development of our products to meet applicable standards;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | difficulties and costs of staffing and managing complex projects and operations, especially in another country;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | uncertainties and complexities in interpreting the broad range of functional and technical requirements;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | uncertainties and difficulties in working with multiple parties in defining these functional and technical requirements and moving toward acceptance of a deliverable meeting those
requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties and costs associated with delays in the process of defining these functional and technical requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in foreign currency exchange rates;
| | - |  | ------------------------------------------------



| |  |  | unexpected changes in UK regulatory requirements;
| | - |  | -------------------------------------------------



| |  |  | changes in the relationship between our prime contractors, BT and Fujitsu Services, and the National Health Service (NHS), including any changes relating to the
timeliness or willingness of the NHS to pay BT and Fujitsu Services for goods and services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Termination or renegotiation of all or a portion of the prime contracts between BT and Fujitsu Services and NHS, which could lead to a corresponding termination or renegotiation of
our subcontracts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our relationships with our prime contractors or our sub-contractors, including difficulties in finalizing the documentation of these relationships, or pressure to
re-negotiate the terms of these relationships;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in the development of new products contemplated by our contracts in the UK; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | difficulties in the deployment of our products in the UK.
| | - |  | ---------------------------------------------------------



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;
| | - |  | ----------------------------------------------------------------------



| |  |  | 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.



INTERNAL CONTROLS.Our management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. Management assessed all deficiencies on both an individual basis and in combination to determine if, when aggregated, they constitute more than an
inconsequential deficiency. We identified a number of control deficiencies related to revenue recognition. Due to the concentration of such deficiencies in this area, management concluded that the deficiencies, in aggregate, represented a material
weakness in internal controls relating to revenue recognition. We have established a remediation program, which includes additional accounting and finance personnel, the evaluation and purchase of contracting software and the implementation of a
comprehensive training program. We cannot provide any assurance to you that they will be effective in remediating the material weakness, or that they will be effective in preventing other material weaknesses or significant deficiencies in our
internal controls.



We continue to monitor controls for any additional
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 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.



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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | our ability to exercise effective internal controls over the newly acquired business; and
| | - |  | -----------------------------------------------------------------------------------------



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



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, healthcare, and Internet industries;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | announcements of technological innovations, including web-based 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;
| | - |  | -----------------------------



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



| |  |  | changes in laws and regulations, including changes in accounting standards.
| | - |  | ---------------------------------------------------------------------------



These factors 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 access financial markets;
| | - |  | ----------------------------------------



| |  |  | 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 U.S. 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 the 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 might not be permitted to make any payments to us.



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HIPAA and Related Regulations



Federal regulations issued in accordance with 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 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, have not
achieved full compliance with the TCS Standards as of the October 16, 2003 deadline. 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 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



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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.



HIPAA  Security Standards



The Security Standards establish detailed requirements for safeguarding patient information that is electronically transmitted or electronically stored.



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 to be a 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. In addition, as we continue to grow globally, we may do business in countries where laws are less
protective of intellectual property rights than in the United States. 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. If financial trends are unfavorable some of our customers might delay making purchasing decisions with respect to some of our software systems,
resulting in longer sales cycles for such systems. These delays can occur as a result of a number of factors, including customer organization changes, government approvals, pressure to reduce expenses, product complexity, competition and terrorist
attacks on the United States. If these delays occur, 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; and
| | - |  | ---------------------------------------------------



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



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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.



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



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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.



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.



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 IDX breaches the strategic alliance, we may be left without critical
clinical components for our information systems offerings in the physician group practice markets.



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 litigation matters, which are described in greater
detail in Part II, Item 1, Legal Proceedings and in the Companys Annual Report on Form 10-K for the year ended December 31, 2004. An unfavorable resolution of pending litigation could have a material adverse effect on our financial condition.



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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 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 the ultimate scope of this investigation 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 U.S. Commerce Departments
Technology Administration, 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, adverse publicity
resulting from this investigation and related matters could have such a material adverse effect. The following important factors affect our business and operations:



Item 3. Quantitative and Qualitative Disclosures about Market Risk



Foreign Currency Exchange Rate Risk



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. Our United Kingdom customers are invoiced in British pounds sterling, and to a
lesser extent in U.S. dollars. Expenses to service our UK contracts are incurred both by our UK subsidiary in the local currency and by the parent company in U.S. dollars. As such, our operating results and certain assets and liabilities that are
denominated in the British pound sterling are affected by changes in the relative strength of the United States dollar against the British pound sterling. Our revenues are adversely affected when the United States dollar strengthens against the
British pound sterling and are positively affected when the United States dollar weakens. Conversely our expenses are positively affected when the United States dollar strengthens against the British pound sterling and adversely affected when the
United States dollar weakens.



As described in Note 5 in Notes to Consolidated
Financial Statements contained in Part I; Item 1 of this Quarterly Report on Form 10-Q, from time to time we use forward foreign exchange contracts to mitigate our foreign currency exchange rate exposures related to our foreign currency denominated
assets and liabilities, and more specifically, to hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities denominated in the British pound sterling. The terms of these forward contracts are for periods
matching the underlying exposures and generally are for one to three months. At March 31, 2005, the Company had $15.0 million outstanding forward foreign exchange contracts to exchange British pounds for U.S. dollars. We do not use forward contracts
for trading or speculative purposes.



The market risk associated with the
forward foreign exchange contracts resulting from currency exchange rate or interest rate movements is expected to mitigate the market risk of the underlying assets and liabilities being hedged. Our foreign currency denominated net assets were
approximately $32.8 million at March 31, 2005. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease net assets by approximately $3.3 million with a corresponding charge to operations. At March 31, 2005, we had
$15.0 million outstanding forward foreign exchange contracts to exchange British pounds for US dollars. During the three months ended March 31, 2005, fluctuations in foreign currency exchange rates have not had a material impact on our results of
operations.



Interest Rate Risk



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 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 income on our investments is included in Other Income.



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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.



Equity Price Risk



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. 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. Although these investments in available-for-sale securities are subject to price risk, we do not
expect any material loss from our marketable security investments.



The only
significant equity investment that we hold is our investment in Allscripts. The fair value of the available-for-sale portion of our investment in Allscripts recorded in marketable securities as of March 31, 2005 was $79.6 million. An adverse change
in the stock price of Allscripts would result in a reduction in the fair value of our investment; however, it would not result in a loss since our investment in Allscripts was previously accounted for under the equity method of accounting, which
resulted in the elimination of the carrying value of the investment.



The
Company also has certain other minority equity investments in non-publicly traded securities. These investments are generally carried at cost, which is only adjusted if an other-than-temporary impairment exists, as the Company owns less than 20% of
the voting equity and does not have the ability to exercise significant influence over these companies. The carrying value of these investments at March 31, 2005 was $9,340,000. These investments are inherently high risk as the market for
technologies and content by these companies are usually early stage at the time of the investment by the Company and such markets may never be significant. The Company could lose its entire investment in certain or all of these companies. The
Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary.



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 Exchange Act as
of March 31, 2005. Based on this evaluation, the Companys chief executive officer and chief financial officer concluded that, as of March 31, 2005, 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 control over financial reporting



There
has been no change in the Companys internal control over financial reporting that occurred during the fiscal quarter for which this Quarterly Report on Form 10-Q is filed that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.



Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2004. The Companys Report of Management on Internal Control over Financial Reporting is contained in the
Annual Report on Form 10-K for the year ended December 31, 2004. The Company identified, based on its assessment, a number of control deficiencies related to revenue recognition. Due to the concentration of such deficiencies in this area, management
concluded that the deficiencies, in aggregate, represented a material weakness in internal controls relating to revenue recognition.



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Management concluded that the underlying weakness relates primarily to the accounting for software revenue and the
interpretation of technical accounting guidance related to software revenue recognition. Management determined that a lack of sufficient, specialized, technical accounting personnel to determine the appropriate application of authoritative
accounting literature to its software contracts resulted in the material weakness in internal control over financial reporting related to revenue recognition. This material weakness affects revenue, unbilled receivables, deferred revenue, cost of
sales and deferred contract costs.



Management continues to address the
remediation of the material weakness in internal controls over financial reporting relating to revenue recognition. Actions taken to date include:



| |  |  | Management has performed an assessment of its accounting and finance resources to ensure that the Company has the sufficient depth of resources and technical expertise to address
the identified material weakness. To date, in 2005, the Company has added three positions, which consist of a Director of Revenue Accounting, an additional Technical Accounting Specialist and a Senior Internal Auditor, all of whom are Certified
Public Accountants.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Management is actively recruiting several other positions within finance, which include a Technical Accounting Specialist and a Lead Revenue Analyst.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Management has commenced a Standard Contracting Process Project utilizing Six Sigma tools to refine and enhance controls relating to the standardized contracting
process. Six Sigma is a business process improvement program that is being implemented company-wide across all functional areas. Management believes that the Six Sigma tools will better enable IDX to meet customer needs, make data driven decisions,
reduce variability and increase standardization in processes. Management has engaged a consultant to facilitate this process.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Management has implemented a comprehensive training program on software revenue recognition accounting for personnel involved in the contracting process using company resources and
outside consultants with software revenue recognition expertise.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management is committed to remediating the material weakness as quickly as possible, although there can be no assurance that management will be able to do so.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



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



On March 31, 2004, we submitted certain information to NIST, which NIST requested in
conjunction with a proposed amendment to the Cooperative Agreement. As a result of the amendment, payment on the award was discontinued until we demonstrated regulatory compliance relating to certain aspects of its grant accounting and reporting
procedures and relating to an in-kind contribution of software we made to the project. In issuing the amendment, NIST made no finding of regulatory noncompliance by us in connection with the award. On March 25, 2005, NIST issued another amendment to
the Cooperative Agreement that lifted the suspension on funding, permitted us to recover project costs incurred during the period of the suspension and extended the project for another year.



From June through November 2004, the U.S. Commerce Department, Office of Inspector General
(OIG), conducted an audit of the SAGE Project. On March 11, 2005, OIG issued a final audit report recommending that NIST disallow certain costs and subsequently, we submitted our response contesting certain findings. NIST will issue an
audit resolution determination, which could reject some or all of the recommendations in the final audit. If the audit resolution determination adopts the final audit reports recommendations, we intend to contest it vigorously through the
administrative appeals process and/or through judicial review in federal court.



We believe 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. IDX has no information regarding the specific allegations in the qui tam complaint. Further, we have no information concerning the actual amount of money at issue in the qui tam complaint. We have 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, in conjunction with the U.S. Commerce Department, OIG, is investigating whether we made false
statements in connection with the application for the project award from NIST. The government has informed us that it has essentially concluded its investigative work, and is determining whether to proceed with a Federal False Claims Act lawsuit.



In May 2003, the employee filed a complaint against IDX 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 we had knowledge that the employee engaged in protected activity and retaliated
against the employee in violation of the Federal False Claims Act. In addition, among other causes of action, the employee alleged that we had 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 requested relief including, but not limited to, an injunction against IDX enjoining and restraining us from the
alleged harassment and discrimination, wages, damages, attorneys fees, interest and costs. In addition, the employees complaint alleges that we submitted false statements to the government to obtain the grant and to obtain reimbursement
from the government for project costs.



On September 30, 2004, the U.S.
District Court issued an order dismissing all of the employees claims. The dismissal was based on the Courts finding that the employee acted in bad faith in destroying evidence that he had a duty to preserve. The Court also awarded us
$65,000 as sanctions, reflecting the cost of investigating and litigating the destruction of evidence. As a result of the District Courts dismissal order, we have requested the District Court to tax costs (e.g., litigation copying costs,
deposition costs and the like) against the employee in the amount of $51,259. The Court has not yet ruled on this request for costs. The employee has appealed the dismissal. The employees appeal has been stayed pending the District
Courts ruling on our request for costs, and, as discussed below, our motion to enjoin the employee and the Department of Labor from further processing the employees complaint before that agency.



In May 2003, the employee filed a complaint against us 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



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us of the employees allegations, 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 we 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, compensation for any damages sustained by the employee as a result of the
alleged discrimination, and attorneys fees. The Occupational Health and Safety Administration (OSHA) is investigating the employees complaint on behalf of the U.S. Department of Labor, and we intend to cooperate in the
investigation.



On October 14, 2004, we requested the U.S. District Court that
dismissed the employees retaliation claims under the Federal False Claims Act, as noted above, to enter an order enjoining the employee and OSHA from further processing the employees retaliation claim filed with the Department of Labor.
OSHA has opposed the motion. The Court denied this motion to enjoin the employee and OSHA on February 15, 2005 and we filed a motion for reconsideration, which was also denied. We have appealed this finding. If the appeal is denied, OSHA will likely
issue the results of its investigation. If the finding is adverse to the Company, we will contest such finding vigorously.



We intend to continue to vigorously defend against all of the employees claims, which we continue to maintain are without merit. However, the outcome or the impact
these claims may have on our operations cannot currently be predicted.



From
time to time, IDX is a party to or may be threatened with other litigation in the ordinary course of its business. We regularly analyze current information, including, as applicable, our 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 our business, financial condition or results of operations.



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



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



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.



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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 3, 2005 |  | 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       |  | Asset Purchase Agreement dated April 27, 2005 by and among IDX Information Systems Corporation, IDX R&D Israel, Ltd., RealTime Image, Ltd., RealTime Image, Inc., and HTI Associates, LLC
as Shareholders Agent ( Agreement)
|            | 
|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 have been separately filed with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------



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