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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION







FORM 10-K


FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934




|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | Annual report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934

For the fiscal year ended December 31, 2003 or



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | Transition report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934

Commission File Number: 000-24539




ECLIPSYS CORPORATION


(Exact name of registrant as specified in its
charter)


|                                 |  |                                                      
|-------------------------------- |  | -----------------------------------------------------
|                                
|                                
|                                
|                                
|Delaware(State of Incorporation) |  | 65-0632092(I.R.S. Employer Identification
    Number)

1750 Clint Moore Road

Boca Raton, Florida


33487


(Address of principal executive
offices)


(561)-322-4321

(Registrants telephone number, including
area code)


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

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



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 o

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

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act rule
12b-2). Yes x
No o

The aggregate market value of the common stock held by
non-affiliates of the registrant as of March 10, 2004 based
upon the closing price of the Common Stock on the NASDAQ
National Market for such date was $500,690,630.

Indicate the number of shares outstanding of each of the
issuers classes of common stock as of the latest
practicable date.

|                             |  |                   |            | 
|---------------------------- |  | ----------------- | ---------- | 
|                             |  | Shares           
|                             |  | Outstanding as of
|Class                        |  | March 10, 2004   
|                             |  |                  
|Common Stock, $.01 par value |  |                   | 46,337,485 | 

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Companys definitive Proxy
Statement to be used in connection with the annual meeting of
stockholders for the year 2004 will be incorporated by reference
into Part III of this Form 10-K.



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Part I

This report contains forward-looking statements. Any
statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements.
Without limiting the forgoing, the words believes,
anticipates, plans, expects,
intends and similar expressions are intended to
identify forward-looking statements. The important factors
discussed below under the caption Certain Factors That May
Affect Future Operating Results, among others, could cause
actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere
by management from time to time. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.

Item 1.     Business



Overview


Eclipsys is a healthcare information technology, or HIT,
company. We develop and license our proprietary software to
hospitals. Our software allows them to automate many of the key
clinical, administrative and financial functions that they
require. Our software is designed to improve patient care and
patient satisfaction for our customers, and allow them to reduce
their operating costs and enhance their revenues. Among other
things, our software enables physicians and nurses to check on a
patients condition; order patient tests; review test
results; monitor a patients medications; and provide
alerts to changes in a patients condition. Our software
also enables hospitals to admit patients; maintain patient
records; create invoices for billing patients or insurance
companies; control inventories; effect cost accounting; schedule
doctors visits; determine the profitability of physicians
and physician groups; understand the profitability of specific
medical procedures; and perform numerous other functions.

We also derive revenues from services we provide to our
customers for implementing our software; software and hardware
maintenance; outsourcing; remote hosting HIT applications;
network services; and training and consulting.

We believe one of the key selling points of our software is that
it is open and modular. This means that our software can be
installed one application at a time or all at once. Our software
is also created to work easily with the software developed by
other vendors. This enables our customers to install our
software without the disruption and expense of replacing their
entire software systems to gain additional software
functionality.

We maintain a decentralized sales force to better serve our
customers. We have ten North American sales regions through
which we maintain direct, sustained contact with our customers.
We market our software to small, stand-alone hospitals, large
multi-entity healthcare systems and academic medical centers. We
have one or more of our software applications installed in, or
licensed to be installed at, over 1,500 facilities. All 17 of
the top-ranked U.S. hospitals in the July 28, 2003 issue of
U.S. News & World Reportuse one or more of our
solutions.

Our Internet website address is www.eclipsys.com. Our annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments thereto that
have been filed with the SEC are available to you free of charge
through a hyperlink on our website.

Recent Developments

In October 2003, we identified the existence of certain
response time issues with some components of the newest version
of our software known as SunriseXA. We have concluded that the
root cause of the issue was in the technical design of
SunriseXA, which did not adequately support the throughput
required in the highly interactive patient care environment.
After careful analysis, we announced a strategy designed to
address these issues. The strategy involved replacing the
affected SunriseXA components with certain key components from
our Sunrise Clinical Manager product, or SCM, our prior
generation core clinical product. This strategy was designed to
allow SunriseXA customers to continue their deployment of
SunriseXA, and to enable us to continue the development of
advanced SunriseXA functionality.

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Since that time, we have been working to implement this
strategy. In February 2004, we announced the general
commercial availability of SunriseXA Release 3.3. The general
availability of this release fulfilled a key deliverable
expected by our customers that had implemented the initial
version of SunriseXA. Release 3.3 combines components of SCM
with the SunriseXA database schema, consistent with our new
SunriseXA strategy.

In addition, we are currently developing a more extensive
release of SunriseXA known as Release 3.5. SunriseXA Release 3.5
will utilize the same database engine and intuitive user
interface as is currently deployed in SunriseXA 3.3. Release 3.5
is currently scheduled for general availability in early summer
2004, and will contain advanced clinical functionality that will
serve as the next phase in the evolution of our product.

Although we believe that we have made significant progress in
implementing our strategy and proving its technological
feasibility, we continue to face a variety of risks and
uncertainties in this regard, including those described under
Certain Factors That May Affect Future Operating
Results.

Challenges and Compliance Pressures in the Healthcare
Industry

Hospitals are under increased pressure to reduce medical errors
and to increase operational efficiencies. We believe that our
software enables customers to achieve these objectives. Several
powerful organizations have lobbied for changes within the
healthcare industry to enable hospitals to deliver better
patient care, to increase patient satisfaction and to enhance
overall hospital efficiency. Legislation is also requiring
changes within the healthcare industry. We believe that these
changes may increase the demand for our products.

Institute of Medicine. In 1999, the Institute of
Medicine, or IOM, issued a report entitled To Err Is
Human: Building a Safer Health System. In it, the IOM
called for the expanded use of information technology to reduce
avoidable medical errors by 50 percent in the U.S. over the
ensuing five year period. According to that report, between
44,000 and 98,000 people died each year as a result of medical
errors. The IOM concluded that more people were injured from
preventable mistakes than from many other common illnesses or
accidents. The IOM report identified medication and pharmacy
errors as significant causes of deaths and adverse events. In
2003, the IOM released a separate report stating that medical
errors may be reduced through widespread adoption of information
technology, such as electronic medical records that can be
connected through a national system linking all healthcare
organizations.

The Leapfrog Group. The IOM report resulted in the
formation of The Leapfrog Group, a consortium of more than 150
companies including Fortune 500 companies and large private and
public healthcare purchasers representing more than
34 million healthcare consumers within the United States.
Leapfrog Group members and their employees spend billions of
dollars on healthcare annually. The Leapfrog Group is urging its
members and their employees to base their healthcare purchases
on principles that encourage hospitals to utilize stringent
patient-safety measures such as computerized physician order
entry systems, or CPOE. The adoption of CPOE is a leading
Leapfrog recommendation for reducing medical errors.

The IOM and The Leapfrog Group are leveraging their influence to
encourage hospitals to use advanced clinical software to reduce
adverse drug events and medical errors. Their influence, coupled
with consumer demands, are spurring new government legislation.
Twenty-one states have legislated mandatory reporting laws
regarding healthcare quality and patient safety. California has
passed legislation mandating the eventual adoption of
information technology for hospitals to reduce avoidable medical
errors.

Health Insurance Portability and Accountability Act.
Federal regulation in this area includes the Health Insurance
Portability and Accountability Act of 1996, or HIPAA. HIPAA
seeks to impose national health data standards on covered
entities. Under HIPAA, a covered entity includes (i) health
care providers that conduct electronic health transactions;
(ii) health care clearinghouses that convert health data
between HIPAA-compliant and non-compliant formats; and
(iii) health plans. The HIPAA standards prescribe, among
other things, transaction formats and code sets for electronic
health transactions, in order to protect individual privacy by
limiting the uses and disclosures of individually identifiable
health information. HIPAA also requires covered entities to
implement administrative, physical and technological safeguards
to ensure the

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Under HIPAA, covered entities are required to utilize
HIPAA-compliant products, software and services. The cost of
achieving HIPAA compliance has affected companies throughout the
health care industry, regardless of whether they are covered
entities. We believe that the need for HIPAA-compliant products,
software and services will continue to create demand for our
software and services. Though we are not a covered entity under
HIPAA, many of our customers are. Accordingly, we have developed
our software to be HIPAA compliant.

Joint Commission on Accreditation of Healthcare
Organizations, or The Joint Commission.The Joint
Commission on the Accreditation of Healthcare Organizations, or
JCAHO, is an independent non-profit organization that provides
voluntary evaluation and accreditation for nearly 18,000
healthcare organizations and programs in the United States.
JCAHO periodically introduces new process improvement
initiatives, standards and performance measurements that are
used to assess hospitals. JCAHO has also established patient
safety standards that require hospitals to initiate specific
efforts to prevent medical errors and inform patients when they
have been unknowingly harmed during treatment. Additionally,
each year since 2002, JCAHO has approved annual National Patient
Safety Goals that include specific recommendations for improving
patient safety. Most of our customers seek to comply with JCAHO
standards. We believe that our software and services aid our
customers in meeting JCAHO standards.

The Internet. We believe that growth in the use of the
Internet will enable consumers to be more involved in their
healthcare choices. Additionally, we expect that the Internet
will provide increased availability of medical information to
physicians, clinicians and healthcare workers. As consumers and
physicians adopt web-centric lifestyles, we believe that our
products and services will become more appealing to a wider
customer base and may increase demand for our software and
services.

The Eclipsys Solution

Our software and services are used primarily by physicians,
nurses and clinicians.We provide comprehensive software
functionality that enables hospitals and care providers to
address many of their key clinical, financial and administrative
needs.

Among other things, our software is designed to:



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide hospitals with automated processes that improve clinical
    workflow and support clinical decision-making;                                                                                                                                                  
|
| |  | provide clinicians with access to patient information and
    supporting references, such as medical journals, through a
    variety of technologies that include, among other things,
    wireless devices within the healthcare facility and over the
    Internet;
|
| |  | provide hospitals with the information that they need to
    negotiate with insurance companies, Medicare and Medicaid, and
    to help them maximize collections and minimize payment denials;                                                                      
|
| |  | provide clinicians with real-time information regarding the cost
    and effectiveness of patient tests and treatments;                                                                                                                                              
|
| |  | assist our customers in improving processes and implementing
    best practices within their hospitals;                                                                                                                                                              
|
| |  | allow our customers to meet their clinical and business needs
    while preserving the investments that they have made in their
    existing software and systems, to the extent possible; and                                                                       
|
| |  | encourage faster, more cost-effective implementation of
    customers in-house or remote-hosted software systems that
    our customers may operate with a lower total cost of ownership.                                                                           

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The Eclipsys Strategy

We seek to become the leading provider of software and services
within the healthcare industry. Key elements of our strategy
include the following:

Providing Comprehensive, Integrated Healthcare Information
Technology Solutions. We offer software and services that
run most of the critical functions in a hospital. Our research,
development and technical support professionals develop, support
and commercialize our proprietary software products. In the
development of our software products we utilize various software
technologies. Increasingly, our new and strategic development is
done using Microsoft .NET Framework. We believe our use of
Microsoft .NET Framework will allow us to focus our engineering
and development resources on the development of domain specific
features and functions while reducing our need to invest in the
development of proprietary infrastructure solutions and services.

Continue to Leverage Our Relationship with Microsoft. We
have a strategic alliance with Microsoft Corporation. We believe
that our alliance with Microsoft provides us with significant
advantages. The goal of this alliance is to provide innovative
healthcare solutions to our customers which, in turn, will make
it easier for them to use our software with their existing
software at a lower total cost of ownership. As a cornerstone of
this alliance, we are collaborating with Microsoft on marketing,
sales and software development fronts. We are also working with
Microsoft to create and execute cooperative sales and marketing
campaigns, which we believe will deliver value to our customers.
Together, we seek to embed Microsofts .NET Framework,
smart client technology and Web services into our SunriseXA
software. We believe that this will provide our customers with
richer, better connected and more productive experiences across
desktop and mobile devices.

Provide Flexible Product Options. We are committed to
offering our customers flexible products and product-delivery
options. Our software can be operated at the hospital or may be
hosted by us remotely. Our software solves many of our
customers clinical, financial and administrative needs.
Furthermore, our customers can purchase our software components
individually or in combination. Our software may also be
integrated into our customers existing systems to minimize
cost and disruption.

Continue Expansion and Penetration of Customer Base. We
believe that there is a significant opportunity for us to sell
our software and services to a wider target market. Our sales
professionals target both existing and prospective customers.
Our target customers include large healthcare organizations,
academic medical centers and small stand-alone hospitals. Few of
our current customers have enterprise-wide, health information
systems such as those that we offer for sale. Today, one or more
of our products are installed at, or are licensed to be
installed in, over 1,500 facilities. We intend to continue
marketing our software and services aggressively to capitalize
on the growth opportunities that we believe exist.

Contracting Model. We have adopted a contracting model
that is designed with our clients in mind. Our payment model
spreads the cost of our software and software maintenance over
the life of our customers contracts, which enables them to
more closely align the cost of our products and services with
the value that they derive. We believe that this is particularly
critical within todays capital-constrained, healthcare
industry.

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Products

Our products perform many of the core software and technology
functions that hospitals require. Our software is available for
implementation on site or through our remote hosting services.
Our software is designed to work in a variety of healthcare
settings and throughout a healthcare organization. The following
table summarizes our principal software offerings:

|                                      |  |                                                                                                                                                                                                                                                                                            
|------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                     
|                                     
|Product                               |  | Primary Functions                                                                                                                                                                                                                                                                          
|                                     
|                                     
|Sunrise Clinical Manager              |  |  Computer-based Patient Record
    providing clinical rules and information to facilitate clinical
    decision-making
     Access to patient records
     On-line ordering of clinical services and
    prescriptions (computerized physician order entry)
     Clinical documentation
|                                     
|Sunrise Access Manager                |  |  Access to patient information and
    coordination of gathering of additional information at each
    stage of patient care
     Coordinate scheduling of appointments
     Patient identification                                                                                     
|                                     
|Sunrise Patient
    Financial Manager |  |  Coordinate compliance with
    managed-care contract reimbursement terms, patient billing, and
    third-party reimbursement                                                                                                                                                             
|                                     
|Sunrise Decision
    Support Manager  |  |  Clinical and financial data
    repository to analyze past clinical, operational and financial
    performance
     Model future plans and alternatives
     Measure and monitor performance                                                                                           
|                                     
|Sunrise Record Manager                |  |  Automate medical record management
    system
     Manage documents and images throughout the enterprise                                                                                                                                                                                
|                                     
|eWebIT                                |  |  Tools to enable integration of data
    from existing systems                                                                                                                                                                                                                            
|                                     

Sunrise Clinical Manager. Sunrise Clinical Manager, or
SCM, is a computerized patient record system that provides
patient information to physicians, nurses and clinicians at the
point-of-care. SCM allows a physician to enter orders quickly
and efficiently, and provides clinical decision support at the
time of order entry. SCM is designed for use in the ambulatory
and acute care settings, and includes the following features:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Order entry, communication and management, which enable
    physicians to order online prescriptions and laboratory or
    diagnostic tests or procedures and routes the order to the
    appropriate department or party within the organization for
    fulfillment.                                                                                                                                                                                                                                          
|
| |  | Knowledge-based orders, which is a clinical decision support
    system that automatically provides real-time guidance to
    physicians by alerting them to possible problems with or
    conflicts between newly entered orders and existing patient
    information using the systems rules database. A
    comprehensive set of clinical rules developed by physicians is
    available with knowledge-based orders. Customers can modify
    these existing rules or can develop their own clinical rules.
|
| |  | Clinical decision support, which triggers alerts, including by
    email or pager, upon the occurrence of a specified change in a
    patients condition or any other physician-designated
    event, such as the delivery of unfavorable laboratory results,
    while relating the new information to information already in the
    system for that patient.                                                                                                                                                
|
| |  | Clinical pathways and scheduled activities lists, which provide
    access to standardized patient-care profiles and assist in the
    scheduling of clinical treatment procedures.                                                                                                                                                                                                                                                                                                                             
|
| |  | Clinical documentation, which gathers and presents organized,
    accurate and timely patient information by accepting and
    arranging input from caregivers, laboratories or monitoring
    equipment.                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sunrise Universal Viewer, which provides physicians with
    Web-based access to patient information from within the
    healthcare facility or at a remote location.
|
| |  | Clinical data repository, which permanently stores clinical and
    financial information in easily accessible patient care records.                                 

Sunrise Access Manager. Sunrise Access Manager, or SAM,
enables healthcare providers to identify the patient at any time
within a hospital and to collect and maintain patient
information on an enterprise-wide basis. SAMs single
database structure permits simultaneous access to the patient
record by authorized personnel from any access point within a
hospitals computer systems. SAM provides the following
functionality:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Comprehensive admission, discharge and transfer, or ADT,
    management. Patient registration captures demographic,
    insurance, referral and primary-care provider information and
    automates visit management by collecting and recording visit
    information in compliance with third-party billing regulations
    and managed care contractual requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Patient scheduling and resource management, which allows
    personnel to schedule patient appointments throughout an
    organization based on patient preferences and resource
    availability. An integrated application, it uses a single
    database with registration, ADT and patient accounting functions
    and provides complex scheduling capabilities such as multiple
    and linked conditional appointments. Patient details
    automatically populate both the Sunrise Access and Scheduler
    products, significantly reducing the opportunity for errors
    while streamlining the scheduling process. The Scheduler returns
    optimal time management for the staff and the patient, thereby
    preserving the enterprises greatest asset, time. The power
    of integration between billing, approvals, eligibility and
    access elevates patient management to new levels of efficiency.
|
| |  | Work Quality Monitor, which is a supervisory task that runs in
    the background to constantly match transactions against quality
    protocols to detect transaction errors, mismatches and
    omissions. When it identifies such exceptions, Work Quality
    Monitor sends a real-time alert to the party charged with the
    responsibility for remedying the situation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Enterprise person identifier, which is a single index of all
    patients and healthcare plan members within a healthcare
    providers system that supports searches on the basis of a
    variety of characteristics, such as name, Social Security number
    or other demographic data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Managed-care support features, such as verifying insurance
    eligibility online and compliance with managed-care plan rules
    and procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Centralized capabilities for bed management: bed reservations,
    transfers and discharges and tracking in-house patient
    information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Sunrise Patient Financial Manager. Sunrise Patient
Financial Manager, or SPFM, uses a single, integrated database
for patient-accounting processes, including the automatic
generation of patient billing and accounts receivable functions,
a system of reimbursement management to monitor receivables, the
automation of collection activities and contract compliance
analysis, as well as follow-up processing and reporting
functions. This product suite supports the growing trend toward
the centralized business office for multiple entities; a trend
that we believe generally improves compliance with managed care
contracts. SPFM includes the following functions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patient accounting, which automates the patient-billing and
    accounts receivable functions, including bill generation,
    reimbursement calculation, account follow-up and account
    write-offs. Paperless processing is achieved through real-time
    inquiry, editing, sorting, reporting, commenting and updating
    from other applications, including modules in SAM and SCM.
|
| |  | Contract management, which includes a repository for the payment
    terms, restrictions, approval requirements and other rules and
    regulations of each insurance plan and managed care contract                                                                                                                                                                                      

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| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | accepted by an organization. Contract management is used in
    conjunction with other Sunrise products to ensure that patient
    care complies with these rules and regulations.                                          
|
| |  | Reimbursement management, which facilitates the monitoring of
    receivables, performance of collection activity, reconciliation
    with third parties and analysis of contract compliance and
    performs the following:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | calculates expected payments and contractual allowances for all
    accounts and reports net receivables by contract, carrier, or
    individual account;
|
| |  | automatically creates third-party logs as a by-product of
    billing; and                                                                               
|
| |  | breaks down and ages each accounts receivables according
    to the responsible payer to facilitate collection activity and
    reporting.              



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multiple entity billing allows multiple entities to use
    single-statement billing and registration across the entire
    enterprise. Patient financial records may be maintained
    indefinitely by the entity and the enterprise, which allows
    enterprise-wide access and outcomes analysis.

Sunrise Decision Support Manager. Sunrise Decision
Support Manager, or SDSM, creates a clinical and financial data
repository by integrating data from throughout the enterprise.
SDSM gathers information from within a hospital or hospital
system. The data SDSM collects can then be analyzed to determine
the patient-level costs of care and for identifying areas for
improvement. This information allows a hospital to evaluate its
cost structure, make changes in clinical processes to reduce
costs and accurately price reimbursement contracts on a
profitable basis. SDSM also analyzes and measures clinical
process and outcomes data, and helps to identify the practice
patterns that most consistently result in the highest quality
care at the lowest cost. SDSM is an important component of our
customers ability to measure and document improved
clinical outcomes and return on investment. SDSM includes
support for:



| |   |                                                    
| | - | ---------------------------------------------------
| |  | case mix, reimbursement and utilization management;
|
| |  | cost and profitability analysis; and               
|
| |  | strategic planning, modeling and forecasting.      

Sunrise Record Manager. Sunrise Record Manager, or SRM,
provides comprehensive clinical data management and
enterprise-wide document and image-management functions. We
believe that SRM improves productivity, efficiency and
accountability. SRM provides multiple users with convenient and
concurrent access to information, wherever they are stationed
throughout a hospital. SRM includes the following functionality:



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | registration scanning to capture patient identification and
    consent forms and other documents;                                                  
|
| |  | document imaging and document scanning; interfaces with other
    electronic document systems;                                                      
|
| |  | tools for managing patient medical records, including tracking
    record locations, chart requests, and secured release of
    information;        
|
| |  | workflow tools for managing record movement between workgroups
    and areas in the operational team;                                               
|
| |  | JCAHO-compliant deficiency and chart completion management
    functions, including HIPAA-compliant electronic signature
    functions;             
|
| |  | medical records abstracting, working with industry standard
    encoders;                                                                           
|
| |  | patient account management functionality, including workflow,
    interfaces, remit processing, forms overlay and document image
    management; and
|
| |  | tools to manage enterprise documents for human resources,
    materials management and other applications not involving
    patient care.           

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eWebIT. eWebIT provides tools to enable the integration
of data from a customers existing systems. As integrated
health networks emerge, the individual entities within the
network will often have their own different information systems.
The clinical and financial data in these disparate systems must
be integrated to provide an enterprise-wide view. eWebITs
product suite includes tools to achieve this integration,
primarily through the use of Web-based integration technologies.
eWebIT achieves a comprehensive integration solution which,
provides:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | a Web-based composite view of data from different information
    systems;
|
| |  | data sharing among disparate information systems; and                     
|
| |  | enterprise security and single system sign-on capabilities.               

SunriseXA Initiative

During 2003, we continued the SunriseXA initiative that we began
approximately 30 months ago. This initiative is focused on
re-engineering and migrating our Sunrise suite of software to
the Microsoft .NET Framework. SunriseXAs extended
architecture is built on Microsofts .NET Framework as well
as other technologies. We believe our approach allows our
software to be more open and extensible, which allows it to work
more easily with a customers legacy and ancillary systems.
This architecture also enables hospitals to use their existing
technology investments, and to add other software products as
functional needs and resources dictate. SunriseXA is built upon
a single database known as a computer-based patient record, or
CPR. The CPR can be used by all components within SunriseXA
regardless of where in the hospital a physician, nurse or
employee resides. SunriseXA is designed to prevent the isolation
of information and duplication of functionality that can occur
with other information technology, or IT, systems. We believe
that this approach will enable a faster, more cost-effective
implementation of our software, simplify software maintenance
and provide a lower total cost of ownership for customers.

During 2002 and throughout 2003, we released components of
SunriseXA. These releases have included core physician and
nursing applications in the inpatient, ambulatory and emergency
department venues. We also released expanded clinical decision
support application security software, along with advanced
user-friendly configuration tools.

On October 20, 2003, we announced the existence of certain
response time issues within some components of our SunriseXA
software. To address these issues, we developed a strategy that
would allow our SunriseXA customers to continue their deployment
of SunriseXA, while at the same time enabling us to continue our
development of advanced SunriseXA functionality. Our announced
strategy is to replace the affected SunriseXA components with
certain components of our SCM product.

We intend to continue to develop planned advanced SunriseXA
functionality, including Clinical Documentation, Ambulatory,
Emergency Department, Secure Health Messaging, Access and
Medication Management. In addition, we intend to continue our
development of SunriseXA Objects Plus, which is designed to meet
customer demand for the customization of SunriseXA. We are also
working to develop SunriseXA Portal, which is designed to allow
remote Web-based access to the SunriseXA database. This portal
and mobility strategy is intended to allow our customers to
review results and place patient orders securely and easily
using a web browser and brings us closer to the realization of
our vision of providing the right information at the right time.

For further discussion on SunriseXA and the response time issue
see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations.

Hardware and Related Offerings Finally, as
part of our commitment to being a comprehensive software and
services provider, we sell a variety of desktop, network and
platform solutions including hardware, middleware and related
services.

9



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Services Drawing on the functionality and
flexibility of our software products, we offer a range of
professional services to our customers for which we earn
revenues. Our services may be summarized as follows:

Implementation, Integration, Product Support, Training and
Maintenance  We offer our customers professional
assistance in the implementation of our software, the conversion
and integration of their historical data into our software and
systems, as well as ongoing training and support. We offer
24-hour software support to our customers, and provide them with
the latest information regarding our products. We also provide
regular maintenance releases to our customers, as well as
comprehensive training programs.

Outsourcing Services  We provide outsourcing
services to our customers. This means that we assume all
responsibilities for a hospitals IT operations using our
employees. Our outsourcing services include facilities
management, network outsourcing and transition management.



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Facilities management enables our customers to improve their IT
    operations by allowing us to assume responsibility for all
    aspects of their internal IT operations.                                                                  
|
| |  | Network outsourcing provides our customers with total
    information network support. This relieves our customers of the
    need to secure and maintain an expensive IT infrastructure in a
    rapidly changing technological environment.
|
| |  | Transition management offers our customers a solution for
    migrating their IT to new processes, technologies or platforms
    without interfering with their delivery of healthcare.                                                      



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Remote Hosting Services  We provide remote
    hosting services to our customers. This means that we assume
    complete processing of our customers IT operations using
    our equipment and personnel at a facility that we maintain in
    Mountain Lakes, New Jersey. This frees an organization from
    maintaining the environment, equipment and technical staff
    required to support their IT operations.                                                                                                              
|
| | Network Services  We offer a comprehensive
    package of services for our customers computer networks.
    Our professionals are able to assess changes in network
    utilization and function, forecast necessary upgrades to
    accommodate a customers growth, and design required
    changes to provide our customers with required network
    performance and functionality. We offer our services in various
    forms, ranging from onsite assistance to complete project
    deliveries with guaranteed fixed prices.
|
| | Solutions Consulting  We also offer consulting
    services to help customers to improve their operations.                                                                                                                                                                                                                                                                                                                                                                                                                           

Marketing and Sales

Our marketing and sales teams target small, stand-alone
hospitals, large multi-entity healthcare systems and academic
medical centers. We sell our products and services in North
America exclusively through our direct sales force. The
management of our sales force is decentralized, with three
senior vice presidents having primary responsibility for sales
and marketing within three areas. The areas, in turn, are broken
down into a total of ten regions. Within each sales region, our
sales force is organized into two separate groups. The first is
focused on generating sales to new customers. The second is
focused on additional sales to existing customers. Our direct
sales force works closely with our implementation and product
line specialists. We also have a team of experts with extensive
experience with each of our specific software applications that
support our sales force. Our sales personnel are compensated
principally on a performance basis.

Research and Development

We believe that our future success depends on our ability to
maintain and enhance our product lines and in developing new
products that appeal to our customers. We seek to maintain
technological competitiveness and respond to our customers
expanding needs. We are currently developing our software based
on Microsofts .NET Framework and other industry standards.
We are also creating new functionality for our existing
software. Since the announcement of our SunriseXA response time
issues in October 2003, we have made significant changes
within our research and development department. Among other
things, we have

10



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Competition

We face intense competition in the marketplace. We are
confronted by rapidly changing technology, evolving user needs
and the frequent introduction of new products to meet the needs
of our current and future customers. Our principal competitors
include Cerner Corporation, Epic Systems Corporation, GE Medical
Systems, IDX Systems Corporation, McKesson Corporation,
QuadraMed Corporation and Siemens AG. Other competitors include
providers of practice management, general decision support and
database systems, as well as segment-specific applications and
healthcare technology consultants.

Several of our competitors are better established, benefit from
greater name recognition and have significantly more financial,
technical and marketing resources than we do. We also anticipate
that competition will further increase as a result of continued
consolidation in both the information technology and healthcare
industries. The principal factors that impact competition within
our market include product functionality, performance,
flexibility and features, use of open industry standards,
quality of customer service and support, company reputation,
price and total cost of ownership.

Employees

As of December 31, 2003, we had 1,877 employees. Our
success depends on our continued ability to attract and retain
highly skilled and qualified personnel. Competition for such
personnel is intense in our industry, particularly for software
developers, service consultants and sales and marketing
personnel. We cannot be assured that we will be able to attract
and retain qualified personnel in the future. Our employees are
not represented by any labor unions. We consider our relations
with our employees to be good.

Financial Information About Geographic Areas

Revenue from U.S. operations totaled $244.3 million in
2003. Revenue from outside the United States totaled
$10.4 million in 2003. Long-lived assets totaled
$73.6 million in the United States in 2003 and
$0.1 million in other countries in 2003.

Certain Factors That May Affect Future Operating Results

There are a number of important factors that could affect our
business and future operating results including, without
limitation, the factors set forth below. The information
contained in this report should be read in light of such
factors. Any of the following factors could harm our business
and future operating results.



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | We face a number of risks relating to our recently
    announced strategy to address SunriseXA response time
    issues

In October 2003, we announced the existence of certain
response time issues within some components of SunriseXA, the
newest version of our Sunrise family of products. We concluded
that the root cause of the issue was in the technical design of
SunriseXA, which did not adequately support the throughput
required in the highly interactive patient care environment.
After substantial analysis, we announced and are pursuing a
strategy designed to address these issues. Our strategy is to
replace the affected SunriseXA components with certain
components from our SCM product, which is our prior generation,
core clinical product. Although we

11



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may encounter technical obstacles and delays in implementing
    this approach. As we continue to implement our strategy, it is
    possible that we could discover additional problems with our
    software.                                                                                                                                                                                                                                                                                                                                           
|
| |  | It is possible that the availability of SunriseXA Release 3.5,
    or the releases of anticipated additional features for our
    products, may be delayed. This could result in delayed or lost
    sales.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Customers who are currently implementing SunriseXA have faced
    delays in their implementations. As a result, existing SunriseXA
    customers could attempt to cancel their contracts with us or
    seek financial or other concessions from us.                                                                                                                                                                                                                                                                                                        
|
| |  | As a result of the changes we will make to our SunriseXA product
    offering, potential customers may find such products less
    appealing, which could decrease demand for our products.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Operating results for the year ended December 31, 2003
    reflect a $1.2 million write-down of capitalized software
    development costs related to certain SunriseXA components and a
    warranty reserve of $4.4 million related to the anticipated
    costs associated with the SunriseXA response time issue.
    Although we believe that this reserve is adequate to cover any
    potential losses, it is possible that we may discover additional
    facts that lead us to conclude that additional write-offs or
    reserves may be required.

These issues could harm our relationships with customers
generally and our reputation in the marketplace.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our product strategy is dependent on the continued
    development and support by Microsoft of its .Net Framework and
    other technologies

Our product strategy is substantially dependent upon
Microsofts .Net Framework and other Microsoft
technologies. The .Net Framework, in particular, is a relatively
new and evolving technology. If Microsoft were to cease actively
supporting .Net or other technologies, fail to update and
enhance them to keep pace with changing industry standards,
encounter technical difficulties in the continuing development
of these technologies or make them unavailable to us, we could
be required to invest significant resources in re-engineering
our products. This could lead to lost or delayed sales,
unanticipated development expenses and harm to our reputation,
and would cause our financial results and business to suffer.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Given the length of our sales and implementation cycles,
    if a significant number of our customers delay implementation,
    our future operating results may suffer

We have experienced long sales and implementation cycles. How
and when to implement, replace, expand or substantially modify
an information system, or modify or add business processes, are
major decisions for hospitals, our target market. Furthermore,
our software is expensive and generally requires significant
capital expenditures by our customers. The sales cycle for our
software ranges from 6 to 18 months or more from initial
contact to contract execution. Historically, our implementation
cycle has ranged from 6 to 36 months from contract execution to
complete software implementation. During the sales and
implementation cycles, we expend substantial time, effort and
financial resources preparing contract proposals, negotiating
the contract and implementing the software. We may not realize
any revenues to offset these expenditures and, if we do,
accounting principles may not allow us to recognize the revenues
during corresponding periods. This could harm our future
operating results. Additionally, any decision by our customers
to delay a purchase or implementation may adversely affect our
revenues.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | The healthcare industry faces financial constraints that
    could adversely affect the demand for our products and
    services

The healthcare industry faces significant financial constraints.
For example, the shift to managed healthcare in the 1990s put
pressure on healthcare organizations to reduce costs, and the
Balanced Budget Act

12



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| |                                                                                     
| | ------------------------------------------------------------------------------------
| | We have a history of operating losses and we cannot
    predict future profitability

We had a net loss of $56.0 million for the year ended
December 31, 2003. We also had net losses of
$29.8 million in 2002, $34.0 million in 2000, $9.4
million in 1999, $35.3 million in 1998, and
$126.3 million in 1997. In 2001, we had net income of
$4.4 million, although we had a loss from operations of
$1.6 million. We may continue to incur net losses and
cannot predict when, or if, we will be profitable in the future.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Our operating results may fluctuate significantly and may
    cause our stock price to decline

We have experienced significant variations in revenues and
operating results from quarter to quarter. Our operating results
may continue to fluctuate due to a number of factors, including:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our progress in implementing our strategy to address our
    SunriseXA response time issues and the level of costs associated
    with that effort;
|
| |  | the timing, size and complexity of our product sales and
    implementations;                                                                      
|
| |  | overall demand for healthcare information technology;                                                                                              
|
| |  | the financial condition of our customers and potential customers;                                                                                  
|
| |  | market acceptance of new services, products and product
    enhancements by us and our competitors;                                                
|
| |  | product and price competition;                                                                                                                     
|
| |  | the relative proportions of revenues we derive from software,
    services and hardware;                                                           
|
| |  | changes in our operating expenses;                                                                                                                 
|
| |  | the timing and size of future acquisitions;                                                                                                        
|
| |  | personnel changes;                                                                                                                                 
|
| |  | the performance of our products;                                                                                                                   
|
| |  | significant estimates made by management in the application of
    generally accepted accounting principles; and                                   
|
| |  | fluctuations in general economic and financial market
    conditions, including interest rates.                                                    

It is difficult to predict the timing of revenues that we
receive from product sales, because the sales cycle can vary
depending upon several factors. These include the size and terms
of the transaction, the changing business plans of the customer,
the effectiveness of the customers management, general
economic conditions and the regulatory environment. In addition,
the timing of our revenue recognition could vary considerably
depending upon the extent to which our customers elect to
license our products under arrangements where revenues are
recognized monthly. Generally, less revenue is recognized under
these arrangements during the first 12 to 24 months
compared to traditional licensing arrangements. We will also
continue to offer contracts using our more traditional licensing
arrangements. Because a significant percentage of our expenses
will be relatively fixed, a variation in the timing of sales and
implementations could cause significant variations in operating
results from quarter to quarter. We believe that
period-to-period comparisons of our historical results of
operations are not necessarily meaningful. Stockholders should
not rely on these comparisons as indicators of future
performance.

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| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because in many cases we recognize revenues for our
    software monthly over the term of a customer contract, downturns
    or upturns in sales will not be fully reflected in our operating
    results until future periods

We recognize a significant portion of our revenues from
customers monthly over the terms of their agreements, which are
typically 7 years. As a result, much of the revenue that we
report each quarter is attributable to agreements executed
during prior quarters. Consequently, a decline in sales, client
renewals, or market acceptance of our products in one quarter,
would not necessarily be reflected in revenues in that quarter,
and may negatively affect our revenues and profitability in
future quarters. In addition, we may be unable to adjust our
cost structure to reflect these reduced revenues. This monthly
revenue recognition makes it difficult for us to rapidly
increase our revenues through additional sales in any period, as
revenues from new customers must be recognized over the
applicable agreement term.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in an intensely competitive market that
    includes companies that have greater financial, technical and
    marketing resources than we do

We operate in a market that is intensely competitive. Our
principal competitors include Cerner Corporation, Epic Systems
Corporation, GE Medical Systems, IDX Systems Corporation,
McKesson Corporation, QuadraMed Corporation and Siemens AG. We
also face competition from providers of practice management
systems, general decision support, database systems and other
segment-specific applications, as well as from HIT consultants.
A number of existing and potential competitors are more
established than we are, and have greater name recognition and
financial, technical and marketing resources than we do. We
expect that competition will continue to increase. Increased
competition could harm our business.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the healthcare industry continues to undergo
    consolidation, this could impose pressure on our products
    prices, reduce our potential customer base and reduce demand for
    our products

Many hospitals have consolidated to create larger healthcare
enterprises with greater market power. If this consolidation
continues, it could erode our customer base and could reduce the
size of our target market. In addition, the resulting
enterprises could have greater bargaining power, which may lead
to erosion of the prices for our products.



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Potential regulation by the U.S. Food and Drug
    Administration of our products as medical devices could impose
    increased costs, delay the introduction of new products and hurt
    our business

The U.S. Food and Drug Administration, or FDA, is likely to
become increasingly active in regulating computer software
intended for use in the healthcare setting. 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, FDC Act. If the FDA chooses to regulate
any of our products as medical devices, it can impose extensive
requirements upon us, including the following:



| |   |                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | requiring us to seek FDA clearance of a pre-market notification
    submission demonstrating that a product is substantially
    equivalent to a device already legally marketed, or to obtain
    FDA approval of a pre-market approval application establishing
    the safety and effectiveness of the product;
|
| |  | requiring us to comply with rigorous regulations governing the
    pre-clinical and clinical testing, manufacture, distribution,
    labeling and promotion of medical devices; and                                                                                                                               
|
| |  | requiring us to comply with the FDA Act regarding general
    controls including establishment registration, device listing,
    compliance with good manufacturing practices, reporting of
    specified device malfunctions and adverse device events.                                                          

If we fail to comply with applicable requirements, the FDA could
respond by imposing fines, injunctions or civil penalties,
requiring recalls or product corrections, suspending production,
refusing to grant pre-market clearance or approval of products,
withdrawing clearances and approvals, and initiating criminal
prosecution. Any final FDA policy governing computer products,
once issued, may increase the cost and time to market of new or
existing products or may prevent us from marketing our products.

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| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in federal and state regulations relating to
    patient data could depress the demand for our products and
    impose significant product redesign costs on us

The demand for health care information systems is affected by
state and federal laws and regulations that govern the
collection, use, transmission and other disclosures of
electronic health information. These laws and regulations may
change rapidly and may be unclear or difficult to apply.

HIPAA imposes national health data standards on (i) health
care providers that conduct electronic health transactions;
(ii) health care clearinghouses that convert health data
between HIPAA-compliant and non-compliant formats; and
(iii) health plans. Collectively, these groups are known as
Covered Entities. The HIPAA standards prescribe transaction
formats and code sets for electronic health transactions;
protect individual privacy by limiting the uses and disclosures
of individually identifiable health information; and 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. Though we
are not a covered entity, most of our customers are and require
that our software and services be HIPAA compliant.

There are several HIPAA compliance deadlines for Covered
Entities. The final compliance deadline for the transaction and
code set standards was October 16, 2003. The compliance
deadline for the privacy standards was April 14, 2003 for most
Covered Entities. Any failure or perception of failure of our
products or services to comply with HIPAA standards could
adversely affect demand for our products and services, and force
us to expend significant capital, research and development and
other resources to modify our products or services to address
the privacy and security requirements of our customers.

States may adopt privacy standards that are more stringent than
the federal HIPAA privacy standards. This may lead to different
restrictions for handling individually identifiable health
information. As a result, our customers may demand information
technology solutions and services that are adaptable to reflect
different and changing regulatory requirements. In the future,
federal or state governmental authorities may impose additional
restrictions on the collection, use, transmission and other
disclosures of health information. We cannot predict the
potential impact that these future rules, as finally approved,
may have on our business. However, the demand for our products
and services may decrease if we are not able to develop and
offer products and services that can address the regulatory
challenges and compliance obligations facing our customers.



| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products are used to assist clinical decision-making
    and provide information about patient medical histories and
    treatment plans, and if these products fail to provide accurate
    and timely information, our customers could assert claims
    against us that could result in substantial cost to us, harm our
    reputation in the industry and cause demand for our products to
    decline

We provide products that, among other things, assist in clinical
decision-making, provide access to patient medical histories and
assist in creating patient treatment plans. If our software
fails to provide accurate and timely information, customers
could assert liability claims against us. Litigation with
respect to liability claims, regardless of its outcome, could
result in substantial cost to us, divert managements
attention from operations and decrease market acceptance of our
products. We attempt to limit by contract our liability for
damages arising from negligence, errors or mistakes. In
addition, we require that our customers approve all system rules
and protocols. Despite these precautions, the limitations of
liability set forth in our contracts may not be enforceable or
may not otherwise protect us from liability for damages. We
maintain general liability insurance coverage, including
coverage for errors or omissions. However, this coverage may not
continue to be available on acceptable terms or may not be
available in sufficient amounts to cover one or more large
claims against us. In addition, the insurer might disclaim
coverage as to any future claim. One or more large claims could
exceed our available insurance coverage.

Highly complex software products such as ours often contain
undetected errors or failures when first introduced or as
updates and new versions are released. It is particularly
challenging for us to test our products because it is difficult
to simulate the wide variety of computing environments in which
our customers may deploy them. Despite testing, from time to
time we have discovered defects or errors in our products.
Defects,

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| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we undertake additional acquisitions, they may be
    disruptive to our business and could have an adverse effect on
    our future operations and the market price of our common
    stock

An important element of our business strategy has been expansion
through acquisitions. Since 1997, we have completed nine
acquisitions. Any future acquisitions would involve a number of
risks, including the following:



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The anticipated benefits from any acquisition may not be
    achieved. The integration of acquired businesses requires
    substantial attention from management. The diversion of
    managements attention and any difficulties encountered in
    the transition process could hurt our business.
|
| |  | In future acquisitions, we could issue additional shares of our
    capital stock, incur additional indebtedness or pay
    consideration in excess of book value, which could have a
    dilutive effect on future net income, if any, per share.                                                   
|
| |  | New business acquisitions must be accounted for under the
    purchase method of accounting. These acquisitions may generate
    significant intangible assets and result in substantial related
    amortization charges to us.                                                                     



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to attract, motivate and retain highly
    qualified technical, marketing, sales and management personnel,
    our ability to execute our business strategy could be
    impaired

Our success depends, in significant part, upon the continued
services of our key technical, marketing, sales and management
personnel, and on our ability to continue to attract, motivate
and retain highly qualified employees. Competition for these
employees is intense. In addition, the process of recruiting
personnel with the combination of skills and attributes required
to execute our business strategy can be difficult,
time-consuming and expensive. We believe that our ability to
implement our strategic goals depends to a considerable degree
on our senior management team. The loss of any member of that
team could hurt our business.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Changing customer requirements could decrease the demand
    for our products, which could harm our business and decrease our
    revenues

The market for our products and services is characterized by
rapidly changing technologies, evolving industry standards and
new product introductions and enhancements that may render
existing products obsolete or less competitive. As a result, our
position in the HIT market could erode rapidly due to unforeseen
changes in the features and functions of competing products, as
well as the pricing models for such products. Our future success
will depend in part upon our ability to enhance our existing
products and services, particularly our ability to continue to
release our products onto Microsofts .NET Framework under
the SunriseXA initiative, and to develop and introduce new
products and services to meet changing customer requirements.
The process of developing products and services such as those we
offer is extremely complex and is expected to become
increasingly complex and expensive in the future as new
technologies are introduced. If we are unable to enhance our
existing products or develop new products to meet changing
customer requirements, demand for our products could suffer.

16



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| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on licenses from third parties for rights to the
    technology used in several of our products, and if we are unable
    to continue these relationships and maintain our rights to this
    technology, our business could suffer

We depend upon licenses for some of the technology used in our
products from a number of third-party vendors, including
Computer Corporation of America, Computer Associates, Oracle
Corporation and Microsoft. Most of these licenses expire within
one to five years, can be renewed only by mutual consent and may
be terminated if we breach the terms of the license and fail to
cure the breach within a specified period of time. We may not be
able to continue using the technology made available to us under
these licenses on commercially reasonable terms or at all. As a
result, we may have to discontinue, delay or reduce product
shipments until we obtain equivalent technology, which could
hurt our business. Most of our third-party licenses are
non-exclusive. Our competitors may obtain the right to use any
of the technology covered by these licenses and use the
technology to compete directly with us. In addition, if our
vendors choose to discontinue support of the licensed technology
in the future or are unsuccessful in their continued research
and development efforts, particularly with regard to Microsoft,
we may not be able to modify or adapt our own products.



| |                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products rely on our intellectual property, and any
    failure by us to protect our intellectual property, or any
    misappropriation of it, could enable our competitors to market
    products with similar features, which could reduce demand for
    our products

We are dependent upon our proprietary information and
technology. Our means of protecting our proprietary rights may
not be adequate to prevent misappropriation. The laws of some
foreign countries may not protect our proprietary rights as
fully as do the laws of the United States. Also, despite the
steps we have taken to protect our proprietary rights, it may be
possible for unauthorized third parties to copy aspects of our
products, reverse engineer our products or otherwise obtain and
use information that we regard as proprietary. In some limited
instances, customers can access source-code versions of our
software, subject to contractual limitations on the permitted
use of the source code. Although our license agreements with
these customers attempt to prevent misuse of the source code,
the possession of our source code by third parties increases the
ease and likelihood of potential misappropriation of such
software. Furthermore, others could independently develop
technologies similar or superior to our technology or design
around our proprietary rights. In addition, infringement or
invalidity claims or claims for indemnification resulting from
infringement claims could be asserted or prosecuted against us.
Regardless of the validity of any claims, defending against
these claims could result in significant costs and diversion of
our resources. The assertion of infringement claims could also
result in injunctions preventing us from distributing products.
If any claims or actions are asserted against us, we might be
required to obtain a license to the disputed intellectual
property rights, which might not be available on reasonable
terms or at all.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We face litigation that could force us to pay significant
    damages and could distract our management team

From July through September 2002, our company and three of
its then current officers (Messrs. Robert J. Colletti, John
T. Patton, Jr. and Harvey J. Wilson) were named in seven
complaints filed by purported shareholders of our company in the
United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint
sought certification as a class and monetary damages, and
alleged that we and the named officers violated federal
securities laws. We believe that the actions are without merit,
and are conducting a vigorous defense.

On February 4, 2003, the District Court issued an order
consolidating all seven cases into one single case and appointed
the City of Philadelphia Board of Pensions and Retirement, Louis
Giannakokas and Norman K. Mielziner to serve as lead plaintiffs.
On April 30, 2003, the plaintiffs filed with the District
Court an amended, consolidated complaint, the Amended Complaint.
On July 31, 2003, we filed a motion to dismiss the Amended
Complaint. On September 16, 2003, the plaintiffs filed
opposition to the motion to dismiss, and we filed a reply brief
on October 16, 2003. On November 4, 2003, the District
Court granted our motion to dismiss the Amended Complaint in its
entirety. In so doing, the District Court granted the plaintiffs
fifteen

17



---



##### 





On December 5, 2003, the plaintiffs filed with the District
Court their second amended complaint, or the Second Amended
Complaint. In it, among other things, the plaintiffs reduced the
class period by a total of eight months and eliminated numerous
allegations that had been contained in their Amended Complaint.
On January 5, 2004, we filed a motion to dismiss the Second
Amended Complaint. The plaintiffs filed opposition papers to our
motion on February 20, 2004. In March 2004, we will file a brief
in further support of our motion. At this time, our motion is
pending. We do not know when the District Court will rule on our
motion or whether our motion will be granted.

Separately, in October 2003, we were contacted by the
attorneys for the lead plaintiffs who sought our consent to
their filing of an amended complaint that would add new counts
asserting new claims and a new class period due to our announced
SunriseXA response time issues. We did not formally respond to
their request, and have not yet seen any pleadings filed in
which the lead plaintiffs have sought to add or assert claims.
Accordingly, we are unable to predict whether new claims may be
filed against us, or what effect any new claims could have on
our pending cases. We are also unable to predict the nature of
any new claims or the damages that may be sought if any new
claims are filed.

We are involved in other litigation incidental to its business
from time to time. In the opinion of management, after
consultation with legal counsel, the ultimate outcome of such
litigation will not have a material adverse effect on our
financial position, results of operation or cash flows.



| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our charter documents and Delaware law may
    inhibit potential acquisition bids that a stockholder may
    believe is desirable, and the market price of our common stock
    may be lower as a result

Our board of directors has the authority to issue up to
4,900,000 shares of preferred stock. Our board of directors can
fix the price, rights, preferences, privileges and restrictions
of the preferred stock without any further vote or action by our
stockholders. The issuance of shares of preferred stock may
discourage, delay or prevent a merger or acquisition of our
company. The issuance of preferred stock may result in the loss
of voting control to other stockholders. We have no current
plans to issue any shares of preferred stock. In
August 2000, our board of directors adopted a shareholder
rights plan under which we issued preferred stock purchase
rights that would adversely affect the economic and voting
interests of a person or group that seeks to acquire us or a 15%
or more interest in our common stock without negotiations with
our board of directors.

Our charter documents contain additional anti-takeover devices
including:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | only one of the three classes of directors is elected each year;                                                     
|
| |  | the ability of our stockholders to remove directors, without
    cause, is limited;                                  
|
| |  | the right of stockholders to act by written consent has been
    eliminated;                                         
|
| |  | the right of stockholders to call a special meeting of
    stockholders has been eliminated; and                     
|
| |  | advance notice must be given to nominate directors or submit
    proposals for consideration at stockholder meetings.

Section 203 of the Delaware corporate statute may inhibit
potential bids to acquire our company. We are subject to the
anti-takeover provisions of the Delaware corporate statute,
which regulates corporate acquisitions. Delaware law will
prevent us from engaging, under specified circumstances, in a
business combination with any interested stockholder for three
years following the date that the interested stockholder became
an interested stockholder, unless our board of directors or a
supermajority of our uninterested stockholders agree. For
purposes of Delaware law, a business combination includes a
merger or consolidation involving us and the interested
stockholder, and the sale of more than 10% of our assets. In
general, Delaware law defines an interested stockholder as any
holder beneficially owning 15% or more of the outstanding voting
stock of a corporation and any entity or person affiliated with
or controlling or controlled by the holder.

18



---



##### 



These provisions could discourage potential acquisition
proposals and could delay or prevent a change in control
transaction. They could also have the effect of discouraging
others from making tender offers for our common stock. As a
result, these provisions may prevent the market price of our
common stock from increasing substantially in response to actual
or rumored takeover attempts. These provisions may also prevent
changes in our management.

As of March 15, 2004 our executive officers were as follows:

Executive Officers of the Registrant

|                        |  |     |    |       |  |                                                                     
|----------------------- |  | --- | -- | ----- |  | --------------------------------------------------------------------
|Name                    |  | Age |    | Title
|                        |  |     |    |      
|                       
|                       
|                       
|                       
|Paul L. Ruflin          |  |     | 50 |       |  | President and Chief Executive Officer                               
|                       
|                       
|                       
|                       
|John S. Cooper          |  |     | 48 |       |  | Executive Vice President of Sales and Marketing                     
|                       
|                       
|                       
|                       
|Russ J. Rudish          |  |     | 51 |       |  | Executive Vice President of Services                                
|                       
|                       
|                       
|                       
|John Depierro           |  |     | 67 |       |  | Executive Vice President of Technology Solutions
    Group          
|                       
|                       
|                       
|                       
|Robert J. Colletti      |  |     | 45 |       |  | Senior Vice President, Chief Financial Officer
    and Treasurer    
|                       
|                       
|                       
|                       
|John Gomez              |  |     | 39 |       |  | Senior Vice President of Technology and Chief
    Technology Officer
|                       
|                       
|                       
|                       
|T. Jack Risenhoover, II |  |     | 38 |       |  | Senior Vice President                                               

Paul L. Ruflinhas served as our president and
chief executive officer since July 2002. Prior to joining
us, Mr. Ruflin was chief operating officer of Cap Gemini
Ernst & Young, North America, or CGE&Y. During his more
than 24 years at CGE&Y, Mr. Ruflin also served in
several other leadership capacities, including director of
CGE&Ys health managed care consulting practice.

John S. Cooperhas served as our executive vice
president of sales since March 2002, and assumed
responsibility for our marketing functions in January 2004. From
October 2000 until March 2002, Mr. Cooper was
chairman and chief executive officer of iMedium Inc., a
marketing and sales-effectiveness solutions firm. From 1988
until 2000, Mr. Cooper was employed by Shared Medical
Systems Corp., or SMS, where he held a number of
sales-management positions, including vice president of
eSolutions. In 2000, SMS was acquired by Siemens AG.

Russ J. Rudishhas served as our executive vice
president of services since November 2003. Prior to joining
us, Mr. Rudish spent over 20 years at Ernst &
Young LLP, before it sold its consulting practice to CGE&Y
in May 2000. From April 2002 until
September 2003, Mr. Rudish served as the national
practice leader of CGE&Ys Health Provider Consulting
Practice. In addition, from August 2000 to April 2002,
Mr. Rudish served as regional director, northeast, for
CGE&Ys Health Provider Consulting Practice.

John Depierrohas served as executive vice
president of our Technology Solutions Group since
June 2002. From January 1999 to June 2002,
Mr. Depierro served as a senior vice president of our
former international division. From January 1997 to
January 1999, Mr. Depierro served as the President of
Sales for our Northeast Sales Region. Before joining Eclipsys,
Mr. Depierro was president and founder of Medical Data
Technology which we acquired in January 1997 as part of our
acquisition of ALLTEL Healthcare Information Services, Inc.

Robert J. Collettihas served as our senior vice
president and chief financial officer since August 2001.
From June to August 2001, Mr. Colletti served as
senior vice president of finance and chief accounting officer.
From January 1997 to June 2001, Mr. Colletti
served as our vice president of finance. Mr. Colletti
joined Eclipsys in January 1997 as part of our acquisition
of ALLTEL Healthcare Information Services, Inc.

John Gomezhas served as our senior vice president
and chief technology officer since August 2003. From
October 2002 to January 2003, Mr. Gomez was a
senior vice president and chief technology officer at WebMD
Corporation. Prior to that, from February 2001 to
October 2002 Mr. Gomez served as chief technology
officer and senior vice president of strategic business
development at Brill Media Holdings, an e-commerce and media
publication company. From April 1998 through
January 2001 Mr. Gomez was employed by Microsoft
Corporation.

19



---



##### 



T. Jack Risenhoover, IIhas served as a senior
vice president since March 2000. He was a vice president
from February 1997 through March 2000.
Mr. Risenhoover also served as secretary from
February 1997 through January 2003, and as general counsel
from February 1997 through March 2002.

Item 2.     Properties

Our corporate offices are located in Boca Raton, Florida under a
lease that expires in February 2008. In addition, we
maintain leased office space in Phoenix, Arizona; Tucson,
Arizona; Newport Beach, California; San Jose, California; Santa
Rosa, California; Alpharetta, Georgia; Atlanta, Georgia;
Westchester, Illinois; Overland Park, Kansas; Rockville,
Maryland; Boston, Massachusetts; Mountain Lakes, New Jersey;
Albany, New York; Uniondale, New York; Malvern, Pennsylvania;
Richmond (a suburb of Vancouver), British Columbia; and Grand
Rapids, Michigan. These leases expire at various times through
October 2013.

Item 3.     Legal
Proceedings

From July through September 2002, our company and three of
its then current officers (Messrs. Robert J. Colletti, John
T. Patton, Jr. and Harvey J. Wilson) were named in seven
complaints filed by purported shareholders of our company in the
United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint
sought certification as a class and monetary damages, and
alleged that we and the named officers violated federal
securities laws. We believe that the actions are without merit,
and are conducting a vigorous defense.

On February 4, 2003, the District Court issued an order
consolidating all seven cases into one single case and appointed
the City of Philadelphia Board of Pensions and Retirement, Louis
Giannakokas and Norman K. Mielziner to serve as lead plaintiffs.
On April 30, 2003, the plaintiffs filed with the District
Court an amended, consolidated complaint, or the Amended
Complaint. On July 31, 2003, we filed a motion to dismiss the
Amended Complaint. On September 16, 2003, the plaintiffs
filed opposition to the motion to dismiss, and we filed a reply
brief on October 16, 2003. On November 4, 2003, the
District Court granted our motion to dismiss the Amended
Complaint in its entirety. In so doing, the District Court
granted the plaintiffs fifteen days to file a further amended
complaint that conforms to applicable law as well as the
District Courts ruling. The plaintiffs subsequently
obtained an extension of that fifteen day deadline.

On December 5, 2003, the plaintiffs filed with the District
Court their second amended complaint, or the Second Amended
Complaint. In it, among other things, the plaintiffs reduced the
class period by a total of eight months and eliminated numerous
allegations that had been contained in their Amended Complaint.
On January 5, 2004, we filed a motion to dismiss the Second
Amended Complaint. The plaintiffs filed opposition papers to our
motion on February 20, 2004. In March 2004, we will file a
brief in further support of our motion. At this time, our motion
is pending. We do not know when the District Court will rule on
our motion or whether our motion will be granted.

Separately, in October 2003, we were contacted by the
attorneys for the lead plaintiffs who sought our consent to
their filing of an amended complaint that would add new counts
asserting new claims and a new class period due to our announced
SunriseXA response time issues. We did not formally respond to
their request, and have not yet seen any pleadings filed in
which the lead plaintiffs have sought to add or assert claims.
Accordingly, we are unable to predict whether new claims may be
filed against us, or what effect any new claims could have on
our pending cases. We are also unable to predict the nature of
any new claims or the damages that may be sought if any new
claims are filed.

We are involved in other litigation incidental to its business
from time to time. In the opinion of management, after
consultation with legal counsel, the ultimate outcome of such
litigation will not have a material adverse effect on our
financial position, results of operation or cash flows.

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

No matters were submitted to a vote of our stockholders during
the fourth quarter of 2003.

20



---



##### 



Part II

Item 5.  Market for Registrants
Common Equity and Related Stockholder Matters

Price Range of Common Stock

Our common stock has been publicly traded on the Nasdaq National
Market under the symbol ECLP since our initial
public offering on August 6, 1998. The following table
shows the high and low sales prices of our common stock as
reported by the Nasdaq National Market for the periods indicated.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2002           |  |      |       |     |  |   |       | 
|               |  |      |       |     |  |   |       | 
|First quarter  |  | $    | 17.85 |     |  | $ | 14.29 | 
|              
|              
|              
|              
|Second quarter |  | $    | 19.17 |     |  | $ | 5.30  | 
|              
|              
|              
|              
|Third quarter  |  | $    | 9.20  |     |  | $ | 4.68  | 
|              
|              
|              
|              
|Fourth quarter |  | $    | 6.69  |     |  | $ | 3.92  | 
|2003           |  |      |       |     |  |   |       | 
|               |  |      |       |     |  |   |       | 
|First quarter  |  | $    | 8.51  |     |  | $ | 5.23  | 
|              
|              
|              
|              
|Second quarter |  | $    | 11.88 |     |  | $ | 6.85  | 
|              
|              
|              
|              
|Third quarter  |  | $    | 18.58 |     |  | $ | 10.05 | 
|              
|              
|              
|              
|Fourth quarter |  | $    | 19.47 |     |  | $ | 8.72  | 

Holders of Record

On March 10, 2004, the last reported sale price of our
common stock on the Nasdaq National Market was $13.30 per share.
Also as of March 10, 2004, we had approximately 195
stockholders of record.

Dividends

We have never paid or declared any cash dividends on our common
stock or other securities and do not anticipate paying cash
dividends in the foreseeable future. We currently intend to
retain all future earnings, if any, for use in the operation of
our business.

Shares Available Under Equity Compensation Plans

Information regarding securities authorized for issuance under
equity compensation plans is provided under
Item 12  Security Ownership of Certain
Beneficial Owners and Management elsewhere in this document.

Item 6.  Selected Financial Data

You should read the following selected financial data in
conjunction with our consolidated financial statements and the
related notes thereto, along with Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, that is included
elsewhere in this document. Our statement of operations data for
the years ended December 31, 2003, 2002 and 2001 and the
balance sheet data at December 31, 2003 and 2002 are
derived from, and are qualified by reference to, our audited
consolidated financial statements, which appear elsewhere in
this document. Our statement of operations data for the years
ended December 31, 2000 and 1999 and the balance sheet data
at December 31, 2001, 2000 and 1999 set forth below, are derived
from, and are qualified by reference to, our audited
consolidated financial statements which are not included in this
document and are retroactively restated to give effect to the
pooling of MSI Solutions, Inc. and PowerCenter Systems, Inc.,
acquisitions that are discussed in more detail in Item 7,
Managements

21



---



##### 





|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |         |         | 
|-------------------------------------------------- | ----------------------------- | ----------------------------------------------- | ---------- | ------- | ------- | ---- | ---------- | ------- | ------- | ---- | ---------- | ------- | ------- | - | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                   |                               |                                                
|                                                   |                               | Year Ended December 31,                        
|                                                   |                               | (In thousands, except share and per share data)
|                                                   |                               |                                                
|                                                   |                               | 2003                                            |            | 2002    |         | 2001 |            | 2000    |         | 1999
|                                                   |                               |                                                 |            |         |         |      |            |         |         |     
|Statement of Operations Data:                      |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|                                                  
|                                                  
|                                                  
|                                                  
|Total revenues                                     |                               | $                                               | 254,679    |         |         | $    | 218,068    |         |         | $    | 239,676    |         |         | $ | 221,318    |         |         | $ | 254,169    |        
|                                                  
|                                                  
|                                                  
|                                                  
|Costs and expenses:                                |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Costs of revenues             |                                                 |            | 161,013 |         |      |            | 131,314 |         |      |            | 137,826 |         |   |            | 155,503 |         |   |            | 151,469 |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Sales and marketing           |                                                 |            | 69,734  |         |      |            | 53,175  |         |      |            | 42,698  |         |   |            | 40,143  |         |   |            | 36,316  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Research and development      |                                                 |            | 58,306  |         |      |            | 46,228  |         |      |            | 37,034  |         |   |            | 37,382  |         |   |            | 44,151  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | General and administrative    |                                                 |            | 13,528  |         |      |            | 12,434  |         |      |            | 10,278  |         |   |            | 10,380  |         |   |            | 11,426  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Depreciation and amortization |                                                 |            | 10,492  |         |      |            | 8,531   |         |      |            | 13,900  |         |   |            | 13,442  |         |   |            | 14,706  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Pooling and transaction costs |                                                 |            |        |         |      |            |        |         |      |            | (472    | )       |   |            | 1,900   |         |   |            | 1,648   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Restructuring charge          |                                                 |            |        |         |      |            |        |         |      |            |        |         |   |            | 1,198   |         |   |            | 5,133   |        
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|                                                   |                               | Total costs and expenses                        |            |         | 313,073 |      |            |         | 251,682 |      |            |         | 241,264 |   |            |         | 259,948 |   |            |         | 264,849 | 
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Loss from operations                               |                               |                                                 | (58,394    | )       |         |      | (33,614    | )       |         |      | (1,588     | )       |         |   | (38,630    | )       |         |   | (10,680    | )      
|                                                  
|                                                  
|                                                  
|                                                  
|Interest income, net                               |                               |                                                 | 2,430      |         |         |      | 4,016      |         |         |      | 5,996      |         |         |   | 1,075      |         |         |   | 1,235      |        
|                                                  
|                                                  
|                                                  
|                                                  
|Other income, net                                  |                               |                                                 |           |         |         |      |           |         |         |      |           |         |         |   | 3,596      |         |         |   |           |        
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|(Loss) income before income taxes                  |                               |                                                 | (55,964    | )       |         |      | (29,598    | )       |         |      | 4,408      |         |         |   | (33,959    | )       |         |   | (9,445     | )      
|                                                  
|                                                  
|                                                  
|                                                  
|Provision for income taxes                         |                               |                                                 |           |         |         |      | 165        |         |         |      |           |         |         |   |           |         |         |   |           |        
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Net (loss) income                                  |                               | $                                               | (55,964    | )       |         | $    | (29,763    | )       |         | $    | 4,408      |         |         | $ | (33,959    | )       |         | $ | (9,445     | )      
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Basic net (loss) income per common share           |                               | $                                               | (1.23      | )       |         | $    | (0.67      | )       |         | $    | 0.10       |         |         | $ | (0.92      | )       |         | $ | (0.27      | )      
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Diluted net (loss) income per
    common share     |                               | $                                               | (1.23      | )       |         | $    | (0.67      | )       |         | $    | 0.09       |         |         | $ | (0.92      | )       |         | $ | (0.27      | )      
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Basic weighted average common shares outstanding   |                               |                                                 | 45,404,754 |         |         |      | 44,710,754 |         |         |      | 43,243,512 |         |         |   | 36,765,975 |         |         |   | 34,803,934 |        
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        
|Diluted weighted average common shares outstanding |                               |                                                 | 45,404,754 |         |         |      | 44,710,754 |         |         |      | 46,795,361 |         |         |   | 36,765,975 |         |         |   | 34,803,934 |        
|                                                   |                               |                                                 |            |         |         |      |            |         |         |      |            |         |         |   |            |         |         |   |            |        

|                                |  |                         |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | (in thousands)         
|                                |  |                        
|                                |  | 2003                    |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                |  |                         |         |      |  |      |         |      |  |     
|Balance Sheet Data:             |  |                         |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|                               
|                               
|                               
|                               
|Cash and cash equivalents       |  | $                       | 151,683 |      |  | $    | 183,500 |      |  | $    | 168,942 |  |  | $ | 20,799  |  |  | $ | 33,956  | 
|                               
|                               
|                               
|                               
|Working capital                 |  |                         | 79,553  |      |  |      | 140,368 |      |  |      | 174,951 |  |  |   | 17,985  |  |  |   | 33,103  | 
|                               
|                               
|                               
|                               
|Total assets                    |  |                         | 295,783 |      |  |      | 301,197 |      |  |      | 300,494 |  |  |   | 156,112 |  |  |   | 202,935 | 
|                               
|                               
|                               
|                               
|Debt, including current portion |  |                         |        |      |  |      |        |      |  |      |        |  |  |   | 1,491   |  |  |   |        | 
|                               
|                               
|                               
|                               
|Stockholders equity            |  |                         | 143,153 |      |  |      | 192,597 |      |  |      | 218,201 |  |  |   | 73,404  |  |  |   | 101,301 | 



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

This report contains forward-looking statements. For this
purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words
believes, anticipates,
plans, expects, intends, and
similar expressions are intended to identify forward-looking
statements. The important factors discussed in Item 1 above
under the caption Certain Factors That May Affect Future
Operating Results, among others, could cause actual
results to differ materially from those indicated by
forward-looking statements made herein. We undertake no
obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.

22



---



##### 



Executive Overview

The following should be read in conjunction with our
consolidated financial statements, including the notes thereto,
which are included elsewhere in this document.

Eclipsys is a healthcare information technology company. We
develop and license our proprietary software to hospitals. Our
software allows them to automate many of the key clinical,
administrative and financial functions that they require. Our
software is designed to improve patient care and patient
satisfaction for our customers, and allow them to reduce their
operating costs and enhance their revenues.



| |           
| | ----------
| | Background

We were founded in December 1995 to commercialize an
integrated clinical and financial information software system
for use by hospitals. Historically, hospitals have operated in a
paper environment. This environment has resulted in patient
safety concerns, including avoidable medical errors, duplicative
and unnecessary procedures, inefficient use of limited
resources, and an inability to track, bill and collect for
services rendered. Our software is designed to address these
issues by turning data into information that can be easily used,
accessed by or provided to the right person, at the right time,
in the right place at a hospital. This enables hospital
employees to redesign business processes, deliver higher quality
care at lower cost, and receive expedited payment for services
rendered. Our software helps to improve collaboration within a
hospital across all venues of care.

We initially grew through a series of strategic acquisitions
which were completed in 1999. Our acquisitions were focused on
acquiring strong customer bases and advanced software pertaining
to the healthcare industry.

Our acquisitions are summarized in the following table:

|                                                                                                                                          |  |      |          |            |  |                              |                 |  |         |  |          | 
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | ---------- |  | ---------------------------- | --------------- |  | ------- |  | -------- | 
|                                                                                                                                          |  |      |          | Functional |  | Method of                   
|Transaction                                                                                                                               |  | Date |          | Area       |  | Accounting                  
|                                                                                                                                          |  |      |          |            |  |                             
|ALLTEL Healthcare Information Services, Inc.,
    or Alltel                                                                               |  |      | 1/24/97  |            |  |                              | Clinical        |  |         |  | Purchase | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|SDK Medical Computer Services Corporation,
    or SDK                                                                                     |  |      | 6/26/97  |            |  |                              | Financial       |  |         |  | Purchase | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Emtek Healthcare Systems, or Emtek a division of
    Motorola, Inc., or Motorola                                                          |  |      | 1/30/98  |            |  |                              | Clinical        |  |         |  | Purchase | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|HealthVISION, Inc. (acquired by Transition),
    or HealthVISION                                                                          |  |      | 12/3/98  |            |  |                              | Clinical        |  |         |  | Purchase | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Transition Systems, Inc., or Transition                                                                                                   |  |      | 12/31/98 |            |  | Decision Support             |                 |  | Pooling | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|PowerCenter Systems, Inc., or PCS                                                                                                         |  |      | 2/17/99  |            |  | Enterprise Resource Planning |                 |  | Pooling | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|Intelus Corporation, or Intelus, and MedData
    Systems, Inc., or Med Data, wholly owned subsidiaries of Sun
    Gard Data Systems, Inc. |  |      | 3/31/99  |            |  |                              | Medical Records |  |         |  | Purchase | 
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|                                                                                                                                         
|MSI Solutions, Inc. and MSI Integrated Services,
    Inc., or collectively MSI                                                            |  |      | 6/17/99  |            |  |                              | Integration     |  |         |  | Pooling  | 

In addition to these acquisitions, in 1996 we licensed certain
intellectual property on an exclusive basis from Partners
HealthCare System, Inc., or Partners. This intellectual property
related to clinical workflows including order management and
clinical decision support. The Partners technology has been
incorporated within our product offerings.



| |                    
| | -------------------
| | Product Development

Since June 1999, we have primarily focused on taking the
intellectual property that we acquired through acquisitions and
re-expressing it on a common platform to provide integrated
software to our customers. In 1999, we announced the general
availability of SCM, the first version of our Sunrise suite of
software. SCM

23



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##### 





In 2001, we announced our SunriseXA strategy. This strategy is
to migrate our Sunrise suite of products to an open architecture
and platform. SunriseXAs architecture is built on
Microsofts .NET Framework, Microsoft SQL Server and the
Microsoft Windows family of operating systems. In 2002 and 2003,
we announced the general availability of certain components of
SunriseXA.

In October 2003, we identified and announced certain
response time issues within components of SunriseXA. Although
some of our SunriseXA software components had been implemented
in and were working at some customer sites, we determined that
the software did not produce acceptable response times for the
complex, high-volume hospital environments. To address the
issue, we implemented a strategy to allow SunriseXA customers to
continue their deployment of SunriseXA, while at the same time
allowing us to continue our development of advanced SunriseXA
components. This strategy replaces the affected SunriseXA
components with certain components from our SCM product. The
response time issue resulted in a product delivery delay for
certain of our advanced SunriseXA functionality. The
announcement of these issues also impacted the implementation
schedules for a number of our customers. We believe that this
delay will have a temporary effect on our sales cycle for the
affected SunriseXA applications.

In connection with the response time issue, we recorded a
$1.2 million write-down of capitalized software development
costs to net realizable value for certain SunriseXA components
in the third quarter of 2003. The write-down was included in the
costs of systems and services revenue. Also, we believe that the
correction of the response time issue may be covered by our
warranty to our customers, and we intend to remediate the
problem. Accordingly, we established a warranty reserve of
$4.4 million in the fourth quarter of 2003 related to the
estimated costs associated with this issue. The charge reflects
our estimate of warranty-related costs that include
implementation and third-party costs for customers affected by
the response time issue. Actual warranty costs could differ
materially from managements estimate. Professional
services revenue and cash flows will be negatively impacted
during the first half of 2004 as we deliver services and
third-party costs related to this issue.



| |                        
| | -----------------------
| | Operational Initiatives

During 2001, management made two strategic decisions that
significantly impacted our operating results. First, we
substantially increased our gross research and development
spending, which includes research and development expenses and
capitalized software development costs. This decision was made
to enable us to bring components of our SunriseXA product line
to market more rapidly. Second, we invested heavily in sales and
marketing to enhance market awareness surrounding the Company
and its products and services. We did this to capitalize on
perceived market demand for our products and services.
Additionally, in 2002, we moved aggressively to change our
contracting model, offering customers payment terms over time
compared to our historical licensing model in which software
fees were paid in advance. We took this approach to meet the
needs of our customers, by matching the timing of their payments
more closely to the value that we deliver to them. We believe
that this new contracting model makes purchase decisions easier
for our customers.

The change in our contracting model has had a material affect on
our business. Most notably, our revenues, gross margins, and
cash flows have been affected by our adoption of this approach.
Because customers now pay us over time for software and
services, our revenue is spread over a longer time period, while
a significant portion of our operating expenses remain
relatively fixed. For example, in 2003, our gross margins,
operating margins, and cash flow from operating activities were
negatively impacted from lower upfront software payments.
However, we believe that this new contracting model will provide
for more predictable revenues on a year over year basis. We
believe that over time, our margins will return to historical
levels.

Based upon the foregoing, we consumed cash in 2003 because cash
collections under our new contracting method from new contract
signings was not sufficient to offset our higher operating
expenses. To fund these initiatives, we used a portion of our
cash on hand. During 2004, we expect to continue with these
initiatives.

24



---



##### 



We believe that the most significant issues that we face in 2004
relate to the delivery of SunriseXA 3.5, which we expect to
release in mid 2004, as well as our ability to sign new business.

Critical Accounting Policies

We believe there are several accounting policies that are
critical to understanding our historical and future performance,
as these policies affect the reported amount of revenue and
other significant areas involving managements judgments
and estimates. On an ongoing basis, management evaluates and
adjusts its estimates and judgments, if necessary. These
significant accounting policies relate to revenue recognition,
allowance for doubtful accounts, software development and our
warranty reserve. Please refer to Note 2 to the consolidated
financial statements for further discussion of our accounting
policies.



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

We generally contract under multiple element arrangements, which
include software license fees, hardware and services including
consulting, implementation, and software maintenance for periods
of 3 to 7 years. We evaluate revenue recognition on a
contract-by-contract basis as the terms of each arrangement
vary. The evaluation of our contractual arrangements often
requires judgments and estimates that affect the timing of
revenue recognized in our statements of operations.
Specifically, we may be required to make judgments about:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | whether the fees associated with our products and services are
    fixed or determinable;                                                 
|
| |  | whether collection of our fees is reasonably assured;                                                                                     
|
| |  | whether professional services are essential to the functionality
    of the related software product;                                     
|
| |  | whether we have the ability to make reasonably dependable
    estimates in the application of the percentage-of-completion
    method; and
|
| |  | whether we have verifiable objective evidence of fair value for
    our products and services.                                            

We recognize revenues in accordance with the provisions of
Statement of Position, or SOP, No. 97-2, Software
Revenue Recognition, as amended by SOP No. 98-9,
Staff Accounting Bulletin, or SAB, 101, Revenue
Recognition in Financial Statements (which has been
superseded by SAB 104) and Emerging Issues Task Force, or EITF
00-21, Revenue Arrangements with Multiple
Deliverables. SOP 97-2 and SAB 101, as amended, require
among other matters, that there be a signed contract evidencing
an arrangement exists, delivery has occurred, the fee is fixed
or determinable, and collectibility is probable. For those
license arrangements in which the fee is not considered fixed or
determinable, the license revenue is recognized as payments
become due. For arrangements where vendor specific objective
evidence, or VSOE, only exists for all undelivered elements, we
account for the delivered elements in accordance with the
residual method prescribed by SOP 98-9.

For software license arrangements that are bundled with services
and maintenance where services are considered essential to the
functionality of the software, we recognize revenues using the
percentage-of-completion method. Under these arrangements,
software license fees and implementation fees are recognized
over the implementation period, which has typically ranged from
12 to 24 months. Under the percentage-of-completion method,
revenues are recognized based upon the proportion of labor hours
incurred in relation to the total labor hours estimated under
the agreement. Determining factors for percentage-of-completion
include the nature of services required and the provision for
payments of software and services upon the achievement of
implementation milestones. Changes in estimates of total labor
hours and the related effect on the timing of revenues and
profits are recognized in the period in which they are
determinable. Accordingly, changes in these estimates could
occur and could have a material effect on our operating results
in the period of change.

We also enter into subscription arrangements that typically
include multiple software products (including the right to
future products within the suites purchased), implementation and
consulting services, maintenance and, where desired by the
customer, outsourcing and remote hosting services. The customer
is entitled

25



---



##### 





If other judgments or assumptions were used in the evaluation of
our revenue arrangements, the timing and amounts of revenue
recognized may have been significantly different.



| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts

In evaluating the collectibility of our accounts receivable, we
assess a number of factors including a specific customers
ability to meet its financial obligations to us, as well as
general factors such as the length of time the receivables are
past due and historical collection experience. Based on these
assessments, we record both specific and general reserves for
bad debt to reduce the related receivables to the amount we
ultimately expect to collect from customers. If circumstances
related to specific customers change, or economic conditions
deteriorate such that our past collection experience is no
longer relevant, our estimate of the recoverability of our
accounts receivable could be further reduced from the levels
provided for in the consolidated financial statements.



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

We capitalize software development costs in accordance with FASB
Statement No. 86 Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed. We
capitalize software development costs incurred subsequent to
establishing technological feasibility of the software being
developed. These costs include salaries, benefits, consulting
and other directly related costs incurred in connection with
coding and testing software products. Capitalization ceases when
the products are generally released for sale to customers, at
which time amortization of the capitalized costs begins. At each
balance sheet date, we perform a detailed assessment of our
capitalized software development costs which includes a review
of, among other factors, projected revenues, customer demand
requirements, product lifecycle, changes in software and
hardware technologies, and product development plans. Based on
this analysis we record adjustments, when appropriate, to
reflect the net realizable value of our capitalized software
development costs. The estimates of expected future revenues
generated by the software, the remaining economic life of the
software, or both, could change, materially affecting the
carrying value of capitalized software development costs, as
well as our consolidated operating results in the period of
change.

On October 20, 2003, we announced response time issues with
some components of SunriseXA, the newest version of our Sunrise
suite of products. To address the issue, we announced a strategy
to allow our SunriseXA customers to continue their deployment of
SunriseXA, while enabling us to continue the development of our
advanced SunriseXA components. Our strategy is to replace the
affected SunriseXA components with certain components from our
SCM product. As a result, in 2003 we recorded a
$1.2 million write-down of capitalized software development
costs for certain SunriseXA components to net realizable value.
The write-down is included in the cost of systems and services
revenues.



| |                 
| | ----------------
| | Warranty Reserve

The agreements that we use to license our software include a
limited warranty. The warranty provides that our software, in
its unaltered form, will perform substantially in accordance
with the related documentation. Through September 30, 2003,
we did not incur any material warranty costs related to our
products. Due to the response time issues that we identified in
October 2003, we recorded a warranty reserve of
$4.4 million at December 31, 2003. Warranty costs are
charged to costs of systems and services revenues when they are
probable and reasonably estimable. In determining this warranty
reserve, we used significant judgments and

26



---



##### 





Results of Operations



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

We derive revenues from licensing our software and the delivery
of services including software and hardware maintenance;
professional services (including implementation, integration,
training and consulting); remote hosting; outsourcing; network
services; and the sale of computer hardware. Our products and
services are generally sold to customers under contracts that
range in duration from 3 to 7 years, and 10 years for some
outsourcing contracts.



| |                  
| | -----------------
| | Costs of Revenues

The principal costs of systems and services revenues are
salaries, benefits and related overhead costs for
implementation, remote hosting and outsourcing personnel. Other
significant costs are the amortization of capitalized software
development costs, acquired technology and a network services
intangible asset. Capitalized software development costs are
amortized generally over three years on a straight-line basis
commencing upon general release of the related product, or are
based on the ratio that current revenues bear to total
anticipated revenues for the applicable product. Acquired
technology is amortized over three to five years based upon the
estimated economic life of the underlying asset, and the
remaining balance became fully amortized in March 2003.
Cost of revenues related to hardware sales includes only our
cost to acquire the hardware from the manufacturer.

During the third quarter of 2003, we recorded a write-down of
capitalized software costs to net realizable value of certain
components of our SunriseXA software in the amount of
$1.2 million. This related to the SunriseXA response time
issue discussed above. Additionally, we recorded a warranty
reserve of $4.4 million during the fourth quarter of 2003
related to anticipated costs of our SunriseXA response time
issue. This warranty reserve reflects an estimate of
implementation and third party costs for certain customers. The
write-down and warranty reserve are included in the costs of
systems and services revenues.



| |                    
| | -------------------
| | Sales and Marketing

Sales and marketing expenses consist primarily of salaries,
benefits, commissions, and related overhead costs. Other costs
include expenditures for marketing programs and events, public
relations, trade shows, advertising, and related communications.



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

Research and development expenses consist primarily of salaries,
benefits and related overhead, as well as consultants for the
design, development and testing of new products. We capitalize
certain software development costs subsequent to attaining
technological feasibility. These costs are amortized as an
element of the costs of systems and services revenues.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses consist primarily of
salaries, benefits and related overhead costs for
administration, executive, finance, legal, human resources,
purchasing and internal systems personnel, as well as accounting
and legal fees and expenses.



| |                              
| | -----------------------------
| | Depreciation and Amortization

We depreciate the costs of our tangible capital assets on a
straight-line basis over the estimated economic lives of the
assets, which generally range from 3 to 7 years, and may reach
10 years for outsourcing contracts. Acquisition-related
intangible assets, which primarily consisted of the value of
ongoing customer relationships

27



---



##### 







| |      
| | -----
| | Taxes

As of December 31, 2003, we had net operating loss
carryforwards for federal income tax purposes of
$226.5 million. The carryforwards expire in varying amounts
through 2023 and are subject to certain restrictions. We did not
record a benefit for the resulting net deferred tax asset at
December 31, 2001, 2002 or 2003, because we believed it was
more likely than not that we would not realize our net deferred
tax asset. Accordingly, we have recorded a valuation allowance
against our total net deferred tax asset.



Statement of Operations


(in thousands, except per share data)


|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |      |   | 
|-------------------------- | -------------------------------------- | ------------------------ | ------- | ---------- | ------- | ---- | ----- | ---------- | ----- | -------- | ------- | -------- | ------- |  | ----- | ---- | ----- | - | ------- | ------ | ------ |  | ----- | ---- | - | 
|                           |                                        |                          |         | 2003       |         |      |       | 2002       |       |          |         |         
|                           |                                        |                          |         | % of Total |         |      |       | % of Total |       |          |         |         
|                           |                                        | 2003                     |         | Revenue    |         | 2002 |       | Revenue    |       | Change $ |         | Change %
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |         
|Revenues:                  |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|                          
|                          
|                          
|                          
|                           | Systems and services                   |                          | $       | 233,971    |         |      |       | 91.9       | %     |          | $       | 203,218  |         |  |       | 93.2 | %     |   | $       | 30,753 |        |  |       | 15.1 | %
|                          
|                          
|                          
|                          
|                           | Hardware                               |                          |         | 20,708     |         |      |       | 8.1        |       |          |         | 14,850   |         |  |       | 6.8  |       |   |         | 5,858  |        |  |       | 39.4 |  
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|                           |                                        | Total revenues           |         |            | 254,679 |      |       |            | 100.0 |          |         |          | 218,068 |  |       |      | 100.0 |   |         |        | 36,611 |  |       |      |   | 
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Costs and expenses:        |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|                          
|                          
|                          
|                          
|                           | Costs of systems and services revenues |                          |         | 143,761    |         |      |       | 56.4       |       |          |         | 119,044  |         |  |       | 54.6 |       |   |         | 24,717 |        |  |       | 20.8 |  
|                          
|                          
|                          
|                          
|                           | Costs of hardware revenues             |                          |         | 17,252     |         |      |       | 6.8        |       |          |         | 12,270   |         |  |       | 5.6  |       |   |         | 4,982  |        |  |       | 40.6 |  
|                          
|                          
|                          
|                          
|                           | Sales and marketing                    |                          |         | 69,734     |         |      |       | 27.4       |       |          |         | 53,175   |         |  |       | 24.4 |       |   |         | 16,559 |        |  |       | 31.1 |  
|                          
|                          
|                          
|                          
|                           | Research and development               |                          |         | 58,306     |         |      |       | 22.9       |       |          |         | 46,228   |         |  |       | 21.2 |       |   |         | 12,078 |        |  |       | 26.1 |  
|                          
|                          
|                          
|                          
|                           | General and administrative             |                          |         | 13,528     |         |      |       | 5.3        |       |          |         | 12,434   |         |  |       | 5.7  |       |   |         | 1,094  |        |  |       | 8.8  |  
|                          
|                          
|                          
|                          
|                           | Depreciation and amortization          |                          |         | 10,492     |         |      |       | 4.1        |       |          |         | 8,531    |         |  |       | 3.9  |       |   |         | 1,961  |        |  |       | 23.0 |  
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|                           |                                        | Total costs and expenses |         | $          | 313,073 |      |       |            | 122.9 | %        |         | $        | 251,682 |  |       |      | 115.4 | % |         | $      | 61,391 |  |       |      |   | 
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Loss from operations       |                                        |                          | (58,394 | )          |         |      | (22.9 | )          |       |          | (33,614 | )        |         |  | (15.4 | )    |       |   | (24,780 | )      |        |  |       |     
|                          
|                          
|                          
|                          
|Interest income, net       |                                        |                          | 2,430   |            |         |      | 1.0   | %          |       |          | 4,016   |          |         |  | 1.8   | %    |       |   | (1,586  | )      |        |  | (39.5 | )%  
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Loss before income taxes   |                                        |                          | (55,964 | )          |         |      |       |            |       |          | (29,598 | )        |         |  |       |      |       |   | (26,366 | )      |        |  |       |     
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Provision for income taxes |                                        |                          |        |            |         |      |       |            |       |          | 165     |          |         |  |       |      |       |   | (165    | )      |        |  |       |     
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Net loss                   |                                        | $                        | (55,964 | )          |         |      |       |            |       | $        | (29,763 | )        |         |  |       |      |       | $ | (26,201 | )      |        |  |       |     
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Basic net loss per share   |                                        | $                        | (1.23   | )          |         |      |       |            |       | $        | (0.67   | )        |         |  |       |      |       | $ | (0.56   | )      |        |  |       |     
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     
|Diluted net loss per share |                                        | $                        | (1.23   | )          |         |      |       |            |       | $        | (0.67   | )        |         |  |       |      |       | $ | (0.56   | )      |        |  |       |     
|                           |                                        |                          |         |            |         |      |       |            |       |          |         |          |         |  |       |      |       |   |         |        |        |  |       |     

Year Ended December 31, 2003 compared to Year Ended
December 31, 2002

Total revenues for the year ended December 31, 2003
increased $36.6 million, or 16.8%, to $254.7 million, from
$218.1 million for 2002. Systems and services revenues
increased $30.8 million, or 15.1%, to $234.0 million,
for the year ended December 31, 2003, from
$203.2 million for 2002. The increase in systems and
services revenues in 2003 was primarily a result of increases in
revenue generated from arrangements, which generally provide for
revenue recognition on a monthly basis. These revenues include
license fees,

28



---



##### 





Hardware revenues increased approximately $5.9 million, or
39.4%, to $20.7 million, for the year ended December 31,
2003, from $14.9 million for 2002. The increase in hardware
revenues in 2003 was primarily due to increased shipments during
the third, and fourth quarters of 2003 for business contracted
during the second, third, and fourth quarters. We expect
hardware revenue to continue to fluctuate in future periods.

Cost of systems and services revenues increased approximately
$24.7 million, or 20.8%, to $143.8 million, for the year
ended December 31, 2003, compared to $119.0 million
for 2002. Gross margins on systems and services revenues were
38.6% for the year ended December 31, 2003 compared to
41.4% for 2002. The increase in cost of systems and services
revenues was related to several factors, including:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the warranty reserve for anticipated costs, and the write-down
    of capitalized software development costs to net realizable
    value, both related to SunriseXA response time issue;
|
| |  | higher amortization of capitalized software development costs
    related to the release of SunriseXA;                                                                                  
|
| |  | higher third-party costs including royalties and consulting;                                                                                                                            
|
| |  | higher costs associated with providing our outsourcing, remote
    hosting and networking services; and                                                                                 
|
| |  | increased payroll and related costs associated with providing
    our implementation and integration services related to higher
    volumes of new contracts.                           

These increases were partially offset by lower amortization of
acquired technology, and due to some assets becoming fully
amortized during 2002 and the first quarter of 2003.

Cost of hardware revenues increased $5.0 million, or 40.6%,
to $17.3 million, for the year ended December 31, 2003,
compared to $12.3 million for 2002. The increase in cost of
hardware revenues for 2003 was primarily attributable to the
increase in hardware revenues discussed above. Gross margin on
hardware revenues was relatively consistent at 16.7% in 2003 and
17.4% in 2002.

Sales and marketing expenses increased $16.6 million, or
31.1%, to $69.7 million, for the year ended December 31,
2003, from $53.2 million for 2002. The increase in sales
and marketing expenses was related to increased payroll and
related costs due to our initiative to significantly expand the
size of our sales and marketing organization, including
approximately $2.8 million higher commissions resulting
from increased sales volume. We expect that sales and marketing
will continue at these higher expense levels in the future.

Research and development expenses increased $12.1 million,
or 26.1% to $58.3 million, for the year ended
December 31, 2003, compared to $46.2 million for 2002.
Gross spending on research and development, consisting of
research and development expenses and capitalized software
development costs, increased approximately $21.1 million
primarily due to our initiative to accelerate the migration of
our products onto the Microsoft .NET platform. In 2003, under
this initiative, we increased the number of employees in our
research and development organization, and increased the use of
outside consultants. The percentage of research and development
expenditures capitalized for the year ended December 31,
2003 was 23.8%, or $18.2 million, compared to 16.0%, or
$8.8 million, for 2002. The percentage of research and
development costs capitalized increased as a result of the
incremental expenses incurred during the second, third and
fourth quarters of 2003 for coding and testing of two releases
of SunriseXA products that were technologically feasible, one of
which was generally released during the third quarter. As
discussed above, amortization of capitalized software
development costs, which is included in cost of systems and
services revenues, increased by approximately $1.9 million,
to $8.2 million for the year ended December 31, 2003,
compared to $6.3 million for 2002.

29



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##### 



General and administrative expenses increased approximately
$1.1 million, or 8.8% to $13.5 million, for the year
ended December 31, 2003, compared to $12.4 million for
2002. The increase in general and administrative expenses was
primarily due to higher insurance premiums and legal costs.

Depreciation and amortization increased $2.0 million, or
23.0%, to $10.5 million, for the year ended December 31,
2003, from $8.5 million for 2002. The increase was
primarily the result of investments in computer hardware and
software to expand our research and development infrastructure
and to increase capacity at our Technology Solutions Center to
address the higher volume of remote hosting services. As a
result of continuing investments, we expect depreciation and
amortization to continue to increase in the future.

Interest income decreased $1.6 million to $2.4 million
for the year ended December 31, 2003, from
$4.0 million for 2002. This decrease in interest income was
primarily due to a decline in yields, related to changes in
general economic conditions. A decline in the average combined
balance in cash and cash equivalents and marketable securities
during the third and fourth quarters of 2003 also contributed to
the decrease in interest income.

As a result of these factors, we had a net loss of
$56.0 million for the year ended December 31, 2003,
compared to a net loss of $29.8 million for the year ended
December 31, 2002.

Statement of Operations

(in thousands, except per share data)


|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |       |    | 
|----------------------------------- | -------------------------------------- | ------------------------ | ------- | ---------- | ------- | ---- | ----- | ---------- | ----- | -------- | ------ | -------- | ------- |  | ---- | ---- | ----- | - | ------- | ------- | ------- | - | ----- | ----- | -- | 
|                                    |                                        |                          |         | 2002       |         |      |       | 2001       |       |          |        |         
|                                    |                                        |                          |         | % of Total |         |      |       | % of Total |       |          |        |         
|                                    |                                        | 2002                     |         | Revenue    |         | 2001 |       | Revenue    |       | Change $ |        | Change %
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |         
|Revenues:                           |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Systems and services                   |                          | $       | 203,218    |         |      |       | 93.2       | %     |          | $      | 223,171  |         |  |      | 93.1 | %     |   | $       | (19,953 | )       |   |       | (8.9  | )%
|                                   
|                                   
|                                   
|                                   
|                                    | Hardware                               |                          |         | 14,850     |         |      |       | 6.8        |       |          |        | 16,505   |         |  |      | 6.9  |       |   |         | (1,655  | )       |   |       | (10.0 | ) 
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|                                    |                                        | Total revenues           |         |            | 218,068 |      |       |            | 100.0 |          |        |          | 239,676 |  |      |      | 100.0 |   |         |         | (21,608 | ) |       |       |    | 
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Costs and expenses:                 |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Costs of systems and services revenues |                          |         | 119,044    |         |      |       | 54.6       |       |          |        | 124,255  |         |  |      | 51.8 |       |   |         | (5,211  | )       |   |       | 4.2   |   
|                                   
|                                   
|                                   
|                                   
|                                    | Costs of hardware revenues             |                          |         | 12,270     |         |      |       | 5.6        |       |          |        | 13,571   |         |  |      | 5.7  |       |   |         | (1,301  | )       |   |       | 9.6   |   
|                                   
|                                   
|                                   
|                                   
|                                    | Sales and marketing                    |                          |         | 53,175     |         |      |       | 24.4       |       |          |        | 42,698   |         |  |      | 17.8 |       |   |         | 10,477  |         |   |       | (24.5 | ) 
|                                   
|                                   
|                                   
|                                   
|                                    | Research and development               |                          |         | 46,228     |         |      |       | 21.2       |       |          |        | 37,034   |         |  |      | 15.5 |       |   |         | 9,194   |         |   |       | (24.8 | ) 
|                                   
|                                   
|                                   
|                                   
|                                    | General and administrative             |                          |         | 12,434     |         |      |       | 5.7        |       |          |        | 10,278   |         |  |      | 4.3  |       |   |         | 2,156   |         |   |       | (21.0 | ) 
|                                   
|                                   
|                                   
|                                   
|                                    | Depreciation and amortization          |                          |         | 8,531      |         |      |       | 3.9        |       |          |        | 13,900   |         |  |      | 5.8  |       |   |         | (5,369  | )       |   |       | 38.6  |   
|                                   
|                                   
|                                   
|                                   
|                                    | Pooling and transaction costs          |                          |         |           |         |      |       |           |       |          |        | (472     | )       |  |      | (0.2 | )     |   |         | 472     |         |   |       | 100.0 |   
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|                                    |                                        | Total costs and expenses |         | $          | 251,682 |      |       |            | 115.4 | %        |        | $        | 241,264 |  |      |      | 100.7 | % |         | $       | 10,418  |   |       |       |    | 
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Loss from operations                |                                        |                          | (33,614 | )          |         |      | (15.4 | )          |       |          | (1,588 | )        |         |  | (0.7 | )    |       |   | (32,026 | )       |         |   |       |      
|                                   
|                                   
|                                   
|                                   
|Interest income, net                |                                        |                          | 4,016   |            |         |      | 1.8   | %          |       |          | 5,996  |          |         |  | 2.5  | %    |       |   | (1,980  | )       |         |   | (32.5 | )%   
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|(Loss) income before income taxes   |                                        |                          | (29,598 | )          |         |      |       |            |       |          | 4,408  |          |         |  |      |      |       |   | (34,006 | )       |         |   |       |      
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Provision for income taxes          |                                        |                          | 165     |            |         |      |       |            |       |          | 0      |          |         |  |      |      |       |   |        |         |         |   |       |      
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Net (loss) income                   |                                        | $                        | (29,763 | )          |         |      |       |            |       | $        | 4,408  |          |         |  |      |      |       | $ | (34,171 | )       |         |   |       |      
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Basic net (loss) income per share   |                                        | $                        | (0.67   | )          |         |      |       |            |       | $        | 0.10   |          |         |  |      |      |       | $ | (0.77   | )       |         |   |       |      
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      
|Diluted net (loss) income per share |                                        | $                        | (0.67   | )          |         |      |       |            |       | $        | 0.09   |          |         |  |      |      |       | $ | (0.76   | )       |         |   |       |      
|                                    |                                        |                          |         |            |         |      |       |            |       |          |        |          |         |  |      |      |       |   |         |         |         |   |       |      

30



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##### 



Year Ended December 31, 2002 compared to Year Ended
December 31, 2001

Total revenues for the year ended December 31, 2002
decreased $21.6 million, or 9.0%, to $218.1 million, from
$239.7 million for 2001. Systems and services revenues
decreased $20.0 million, or 8.9%, to $203.2 million
for the year ended December 31, 2002, from
$223.2 million for 2001. The decrease in systems and
services revenues in 2002 was primarily a result of minimal
software license fees in the third and fourth quarters of 2002.
The decrease in license fees was the result of a shortfall in
new sales bookings during the third quarter of 2001 and the
second quarter of 2002, which negatively impacted revenues
during the last three quarters of 2002. Additionally, the
decrease was related to a change in contracting mix in the last
two quarters of 2002, in which we began to predominantly
contract under arrangements that provide for revenue to be
recognized on a monthly basis as compared to our historical
contracting methods. Since the third quarter of 2002, the
majority of our contracts have been executed under these types
of arrangements. As we continue to contract under these
arrangements, we expect our operating results to reflect lower
revenues and cash flows in the short-term. In addition, we
believe that some of our customers and prospects delayed their
decisions to purchase our products in anticipation of the
initial SunriseXA releases in 2002.

Furthermore, in the fourth quarter of 2001, we began an
initiative to expand our sales and marketing functions. Under
this initiative, our sales and marketing team grew from
approximately 190 persons at December 31, 2001, to more
than 260 persons at December 31, 2002, including the
addition of a new executive vice president responsible for all
sales activities and other key management positions. This
program was implemented to increase the market presence of our
sales organization and to enhance the market awareness of our
company, its products and services. During this expansion, our
sales and marketing organization experienced considerable change
and administrative disruption, which negatively impacted the
closing of new contracts during the second quarter of 2002.

Hardware revenues decreased approximately $1.7 million, or
10.0%, to $14.9 million, for the year ended December 31,
2002, from $16.5 million for 2001. The decrease in hardware
revenues in 2002 was primarily due to decreased shipments under
contracts entered into in 2001 and 2002. The lower shipments
were primarily attributable to a higher percentage of new
contracts being remotely hosted as well as the shortfall in
bookings during the second quarter of 2002.

Cost of systems and services revenues decreased approximately
$5.2 million, or 4.2%, to $119.0 million, for the year
ended December 31, 2002, compared to $124.3 million
for 2001. These costs decreased primarily due to lower
amortization of acquisition related acquired technology and
network services assets, which amounted to $16.6 million
for 2001, compared to $2.9 million for 2002, as a result of
certain assets becoming fully amortized. These reductions were
partially offset by various other factors including:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | higher software royalties;                                                                                                                                                                                                
|
| |  | higher payroll related costs, in particular medical insurance;                                                                                                                                                            
|
| |  | higher amortization of capitalized software development costs as
    a result of certain new products, such as new releases of our
    Sunrise suite, including SunriseXA, becoming available for
    general release; and
|
| |  | incremental costs of $1.6 million related to additional
    obligations arising from contracts assumed in prior acquisitions.                                                                                             

Cost of hardware revenues decreased $1.3 million, or 9.6%,
to $12.3 million, for the year ended December 31, 2002,
compared to $13.6 million for 2001. The decrease in cost of
hardware revenues for 2002 was directly attributable to the
decreased shipments of hardware related the items discussed
above. Gross margins on hardware revenues was relatively
consistent at 17.4% in 2002 and 17.8% in 2001.

Sales and marketing expenses increased $10.5 million, or
24.5%, to $53.2 million for the year ended December 31,
2002, from $42.7 million for 2001. The increase in sales
and marketing expenses was primarily due to the program we
initiated, during the fourth quarter of 2001, to significantly
expand the size of our sales and marketing organization. This
program continued in 2003. Additionally, there was an increase
in expenditures for marketing events held in 2002, as compared
to 2001.

31



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##### 



Research and development expenses increased $9.2 million,
or 24.8% to $46.2 million for the year ended
December 31, 2002, compared to $37.0 million for 2001.
The increase in research and development expenses was due
primarily to an initiative we implemented in the fourth quarter
of 2001. This initiative was designed to accelerate the
migration onto the Microsoft .NET platform of our SunriseXA
products. This initiative is expected to result in continued
heightened research and development expenses. The percentage of
gross research and development expenditures capitalized for the
year ended December 31, 2002 was 16.0%, or
$8.8 million, compared to 15.7%, or $6.9 million, for
2001. As discussed above, amortization of capitalized software
development costs, which is included as a component of cost of
systems and services revenues, increased by approximately
$1.8 million, to $6.3 million for the year ended
December 31, 2002, compared to $4.5 million for 2001.

General and administrative expenses increased approximately
$2.2 million, or 21.0% to $12.4 million, for the year
ended December 31, 2002, compared to $10.3 million for
the year ended 2001. The increase in general and administrative
expenses was the result of higher legal expenses, primarily
related to our shareholder litigation, and higher insurance
costs.

Depreciation and amortization decreased $5.4 million, or
38.6%, to $8.5 million, for the year ended December 31,
2002, from $13.9 million for 2001. The decrease was
primarily the result of lower acquisition-related amortization,
which amounted to $0.2 million in 2002, compared to
$6.7 million in 2001. This decline related to the
completion of amortization of certain intangibles, which became
fully amortized during the fourth quarter of 2001, as well as
the adoption of SFAS 142, which eliminated the amortization of
goodwill. The decrease in amortization was partially offset by
higher depreciation of fixed assets purchased during 2001 and
2002.

Pooling and transaction costs in 2001 for integration pertaining
to one of our acquisitions was approximately $0.5 million
less than previously estimated.

Interest income decreased $2.0 million to $4.0 million
for the year ended December 31, 2002, from
$6.0 million for 2001. This decrease was a result of
significantly lower interest earned on our cash and cash
equivalents in 2002, compared to 2001, due to lower interest
rates. The effect of lower interest rates was only partially
offset by higher average balances of cash and cash equivalents
throughout 2002, compared to 2001. Cash and cash equivalents
increased during 2002 primarily from cash generated from
operating activities.

As a result of these factors, we had a net loss of
$29.8 million for the year ended December 31, 2002,
compared to a net income of $4.4 million for the year ended
December 31, 2001.

Liquidity and Capital Resources

During 2003, operating activities used $3.4 million of
cash, primarily as a result of heightened research and
development activities, costs related to the expansion of our
sales and marketing forces and the impact of our new contract
arrangements. Investing activities used $34.7 million of
cash, consisting of $18.2 million of capitalized software
development costs and $16.0 million for the procurement of
property and equipment. The property and equipment was primarily
related to activities at our Technology Solutions Center for the
expansion of our remote hosting function and activities in our
research and development area.

As of December 31, 2003, our principal source of liquidity
was our cash and cash equivalents balance of
$151.7 million. It is likely that we will continue to have
negative cash flows in the near future as we continue our
development efforts in connection with our SunriseXA initiative.
Additionally, our new contracting method will result in lower
cash flows during the early stages of a customer contract. We
expect this will continue to impact our short term cash
position. Furthermore, we expect that capital expenditures will
continue at levels similar to or greater than 2003 as we
continue to invest in our Technology Solutions Center.

Our future liquidity requirements will depend on a number of
factors, including the timing and level of our new sales
volumes, the cost of our development efforts related to
SunriseXA, the success and market acceptance of our future
product releases, and other related items. As of
December 31, 2003, we did not have any material commitments
for capital expenditures. We believe that our current cash and
marketable

32



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##### 





Contracts and Commitments

The following table provides information related to our
contractual cash obligations under various financial and
commercial agreements as of December 31, 2003 (in thousands):

|                                   |  |                        |        |           |  |             |        |             |  |       |        |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | ---------------------- | ------ | --------- |  | ----------- | ------ | ----------- |  | ----- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                        |        | More     
|                                   |  |                        |        | Less than |  |             |        | than 5     
|                                   |  | Total                  |        | 1 year    |  | 1  3 years |        | 3  5 years |  | years
|Contractual Obligations            |  |                        |        |           |  |             |        |             |  |      
|Operating Leases                   |  | $                      | 36,694 |           |  | $           | 10,632 |             |  | $     | 14,010 |  |  | $ | 6,658 |  |  | $ | 5,394 | 
|                                  
|                                  
|                                  
|                                  
|Unconditional Purchase Obligations |  |                        | 17,528 |           |  |             | 7,840  |             |  |       | 9,688  |  |  |   |      |  |  |   |      | 
|                                   |  |                        |        |           |  |             |        |             |  |       |        |  |  |   |       |  |  |   |       | 
|Total Contractual Cash Obligation  |  | $                      | 54,222 |           |  | $           | 18,472 |             |  | $     | 23,698 |  |  | $ | 6,658 |  |  | $ | 5,394 | 
|                                   |  |                        |        |           |  |             |        |             |  |       |        |  |  |   |       |  |  |   |       | 

The unconditional purchase obligations consist of minimum
purchase commitments for telecommunication services, computer
equipment, maintenance, consulting, airplane charters and other
commitments. The contract for airplane charters is discussed in
further detail in Note 9 to the consolidated financial
statements, Related Party Transactions included
herein.

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation 46,
Consolidation of Variable Interest Entities. This
interpretation of Accounting Research Bulletin 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities that possess certain characteristics. The
interpretation requires that if a business enterprise has a
controlling financial interest in a variable interest entity, or
VIE, the assets, liabilities and results of operations of the
VIE must be included in the consolidated financial statements
with those of the business enterprise. This interpretation
applies immediately to each VIE created after January 31,
2003 and to each VIE in which an enterprise obtains an interest
after that date. In December 2003, the FASB published a
revision to FIN 46 or FIN 46R, to clarify some of the
provisions of FIN 46 and exempt certain entities from its
requirements. Under FIN 46R, a legal entity is considered a
VIE with some exceptions if specific criteria are met including
whether it has sufficient equity at risk to finance its own
activities without relying on financial support from other
parties. Additional criteria must be applied to determine if
this condition is met or if the equity holders, as a group, lack
any one of the three stipulated characteristics of a controlling
financial interest. If the legal entity is a VIE, then the
reporting entity determined to be the primary beneficiary of the
VIE must consolidate it. Even if the reporting entity is not
required to consolidate a VIE, then certain disclosures must be
made about the VIE if the reporting entity has a significant
variable interest. The effective date of the interpretation was
modified under FIN 46R. A reporting entity is required to
apply the provisions of FIN 46R to each VIE that previously
was subject to certain previously issued special purpose entity,
or SPE, accounting pronouncements for all reporting periods
after December 14, 2003. For each VIE, a reporting entity
is required to adopt the provisions of FIN 46R for all
reporting periods after March 15, 2004. We believe
FIN 46R will not impact our financial position or results
of operations.

In December 2003, the Staff of the Securities and Exchange
Commission issued SAB 104, Revenue Recognition, which
supersedes SAB 101, Revenue Recognition in Financial
Statements. The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to
multiple element arrangements, superseded as a result of the
issuance of EITF 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (EITF 00-21). The guidance
contained in SAB 104 reflects the issuance of
EITF 00-21, but the revenue recognition principles remain
largely unchanged. As we have already incorporated
EITF 00-21 and SAB 101, into our revenue recognition
policies, the adoption of SAB 104 did not have a
significant impact on our financial statements.

33



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##### 



Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We do not currently use derivative financial instruments. We
generally buy investments with maturities of 90 days or
less. Based upon the nature of our investments, we do not expect
any material loss from our investments.

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 have seen 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.

We account for cash equivalents and marketable securities in
accordance with SFAS 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.

We do not currently enter into foreign currency hedge
transactions. Through December 31, 2003, foreign currency
fluctuations have not had a material impact on our financial
position or results of operations.

Item 8.     Financial
Statements and Supplementary Data

Index to Consolidated Financial Statements:



| |                      
| | ---------------------
| | Financial Statements:

|                                                                                                                                                      |                                                                                                                            |      |  |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                                                                                                                                      |                                                                                                                            | Page
|                                                                                                                                                      |                                                                                                                            |     
|                                                                                                                                                      | Report of Independent Certified
    Public Accountants                                                                     |      |  | 35 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                           |      |  | 36 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                             |      |  | 37 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                             |      |  | 38 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Consolidated Statement of Stockholders
    Equity for the years ended December 31, 2003, 2002
    and 2001                |      |  | 39 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Notes to the Consolidated
    Financial Statements                                                                         |      |  | 40 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Financial Statement Schedules:                                                                                             |      |  |    | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Schedule II -  Valuation of
    Qualifying Accounts for each of the three years in the period
    ended December 31, 2003 |      |  | 56 | 
|All other schedules are omitted as they are not
    applicable or the required information is shown in the financial
    statements or notes thereto.
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                      | Signatures                                                                                                                 |      |  | 61 | 

34



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##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors



In our opinion, the consolidated financial statements listed in
the accompanying index under Item 8 present fairly, in all
material respects, the financial position of Eclipsys
Corporation and its subsidiaries (the Company) at
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index under Item 8
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, as of January 1, 2002.

PricewaterhouseCoopers LLP

Atlanta, Georgia



35



---



##### 



ECLIPSYS CORPORATION

Consolidated Balance Sheets

(in thousands, except share and per share data)


|                                            |                                                                                                                                      |                                                |        |          |         |  |        |          |         | 
|------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                            |                                                                                                                                      |                                               
|                                            |                                                                                                                                      | December 31,                                  
|                                            |                                                                                                                                      |                                               
|                                            |                                                                                                                                      | 2003                                           |        | 2002    
|                                            |                                                                                                                                      |                                                |        |         
|Assets                                      |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|Current assets:                             |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|                                            | Cash and cash equivalents                                                                                                            |                                                | $      | 151,683  |         |  | $      | 183,500  |        
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts receivable, net of allowance for
    doubtful accounts of $4,807 and $3,412 at December 31, 2003
    and 2002, respectively |                                                |        | 54,903   |         |  |        | 46,822   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Inventory                                                                                                                            |                                                |        | 530      |         |  |        | 656      |        
|                                           
|                                           
|                                           
|                                           
|                                            | Prepaid expenses                                                                                                                     |                                                |        | 13,989   |         |  |        | 15,393   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Other current assets                                                                                                                 |                                                |        | 1,004    |         |  |        | 1,528    |        
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                            |                                                                                                                                      | Total current assets                           |        |          | 222,109 |  |        |          | 247,899 | 
|                                           
|                                           
|                                           
|                                           
|Property and equipment, net                 |                                                                                                                                      |                                                | 32,304 |          |         |  | 26,800 |         
|                                           
|                                           
|                                           
|                                           
|Capitalized software development costs, net |                                                                                                                                      |                                                | 25,260 |          |         |  | 16,375 |         
|                                           
|                                           
|                                           
|                                           
|Acquired technology, net                    |                                                                                                                                      |                                                |       |          |         |  | 267    |         
|                                           
|                                           
|                                           
|                                           
|Goodwill, net                               |                                                                                                                                      |                                                | 454    |          |         |  | 454    |         
|                                           
|                                           
|                                           
|                                           
|Other assets                                |                                                                                                                                      |                                                | 15,656 |          |         |  | 9,402  |         
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                            |                                                                                                                                      | Total assets                                   |        | $        | 295,783 |  |        | $        | 301,197 | 
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|Liabilities and Stockholders
    Equity    |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|Current liabilities:                        |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|                                            | Deferred revenue                                                                                                                     |                                                | $      | 91,782   |         |  | $      | 79,235   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Accounts payable                                                                                                                     |                                                |        | 18,415   |         |  |        | 3,364    |        
|                                           
|                                           
|                                           
|                                           
|                                            | Accrued compensation costs                                                                                                           |                                                |        | 17,189   |         |  |        | 14,442   |        
|                                           
|                                           
|                                           
|                                           
|                                            | Other current liabilities                                                                                                            |                                                |        | 15,169   |         |  |        | 10,490   |        
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                            |                                                                                                                                      | Total current liabilities                      |        |          | 142,555 |  |        |          | 107,531 | 
|                                           
|                                           
|                                           
|                                           
|Deferred revenue                            |                                                                                                                                      |                                                | 9,390  |          |         |  | 843    |         
|                                           
|                                           
|                                           
|                                           
|Other long-term liabilities                 |                                                                                                                                      |                                                | 684    |          |         |  | 226    |         
|                                           
|Commitments and contingencies (See Note 7)  |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|                                           
|Stockholders Equity:                       |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                           
|                                           
|                                           
|                                           
|                                            | Common stock, $0.01 par value, 200,000,000 shares
    authorized; issued and outstanding, 45,976,655 and 45,088,872                  |                                                |        | 460      |         |  |        | 451      |        
|                                           
|                                           
|                                           
|                                           
|                                            | Additional paid-in capital                                                                                                           |                                                |        | 411,634  |         |  |        | 405,380  |        
|                                           
|                                           
|                                           
|                                           
|                                            | Unearned stock compensation                                                                                                          |                                                |        | (795     | )       |  |        | (1,021   | )      
|                                           
|                                           
|                                           
|                                           
|                                            | Accumulated deficit                                                                                                                  |                                                |        | (267,778 | )       |  |        | (211,814 | )      
|                                           
|                                           
|                                           
|                                           
|                                            | Accumulated other comprehensive income                                                                                               |                                                |        | (367     | )       |  |        | (399     | )      
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                            |                                                                                                                                      | Total stockholders equity                     |        |          | 143,154 |  |        |          | 192,597 | 
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         
|                                            |                                                                                                                                      | Total liabilities and
    stockholders equity |        | $        | 295,783 |  |        | $        | 301,197 | 
|                                            |                                                                                                                                      |                                                |        |          |         |  |        |         

The accompanying notes are an integral part of these
consolidated financial statements.

36



---



##### 



ECLIPSYS CORPORATION

Consolidated Statements of Operations

(in thousands, except share and per share data)


|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |            |         | 
|--------------------------------- | ------------------------------------------------------ | ------------------------ | ------- | ---------- | ------- | ---- | ------- | ---------- | ------- | - | ------ | ---------- | ------- | 
|                                  |                                                        |                         
|                                  |                                                        | Year Ended December 31, 
|                                  |                                                        |                         
|                                  |                                                        | 2003                     |         | 2002       |         | 2001
|                                  |                                                        |                          |         |            |         |     
|Revenues:                         |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                 
|                                 
|                                 
|                                 
|                                  | Systems and services                                   |                          | $       | 233,971    |         |      | $       | 203,218    |         |   | $      | 223,171    |        
|                                 
|                                 
|                                 
|                                 
|                                  | Hardware                                               |                          |         | 20,708     |         |      |         | 14,850     |         |   |        | 16,505     |        
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                  |                                                        | Total revenues           |         |            | 254,679 |      |         |            | 218,068 |   |        |            | 239,676 | 
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|Costs and expenses:               |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                 
|                                 
|                                 
|                                 
|                                  | Costs of systems and services revenues                 |                          |         | 143,761    |         |      |         | 119,044    |         |   |        | 124,255    |        
|                                 
|                                 
|                                 
|                                 
|                                  | Costs of hardware revenues                             |                          |         | 17,252     |         |      |         | 12,270     |         |   |        | 13,571     |        
|                                 
|                                 
|                                 
|                                 
|                                  | Sales and marketing                                    |                          |         | 69,734     |         |      |         | 53,175     |         |   |        | 42,698     |        
|                                 
|                                 
|                                 
|                                 
|                                  | Research and development                               |                          |         | 58,306     |         |      |         | 46,228     |         |   |        | 37,034     |        
|                                 
|                                 
|                                 
|                                 
|                                  | General and administrative                             |                          |         | 13,528     |         |      |         | 12,434     |         |   |        | 10,278     |        
|                                 
|                                 
|                                 
|                                 
|                                  | Depreciation and amortization                          |                          |         | 10,492     |         |      |         | 8,531      |         |   |        | 13,900     |        
|                                 
|                                 
|                                 
|                                 
|                                  | Pooling and transaction costs                          |                          |         |           |         |      |         |           |         |   |        | (472       | )      
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                  |                                                        | Total costs and expenses |         |            | 313,073 |      |         |            | 251,682 |   |        |            | 241,264 | 
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|Loss from operations              |                                                        |                          | (58,394 | )          |         |      | (33,614 | )          |         |   | (1,588 | )         
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|Interest income, net              |                                                        |                          | 2,430   |            |         |      | 4,016   |            |         |   | 5,996  |           
|                                 
|                                 
|                                 
|                                 
|(Loss) income before income taxes |                                                        |                          | (55,964 | )          |         |      | (29,598 | )          |         |   | 4,408  |           
|                                 
|                                 
|                                 
|                                 
|Provision for income taxes        |                                                        |                          |        |            |         |      | 165     |            |         |   |       |           
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|Net (loss) income                 |                                                        | $                        | (55,964 | )          |         | $    | (29,763 | )          |         | $ | 4,408  |           
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|Net (loss) income per share:      |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                 
|                                 
|                                 
|                                 
|                                  | Basic net (loss) income per common share               |                          | $       | (1.23      | )       |      | $       | (0.67      | )       |   | $      | 0.10       |        
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                  | Diluted net (loss) income per
    common share         |                          | $       | (1.23      | )       |      | $       | (0.67      | )       |   | $      | 0.09       |        
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                  | Basic weighted average common
    shares outstanding   |                          |         | 45,404,754 |         |      |         | 44,710,754 |         |   |        | 43,243,512 |        
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           
|                                  | Diluted weighted average common
    shares outstanding |                          |         | 45,404,754 |         |      |         | 44,710,754 |         |   |        | 46,795,361 |        
|                                  |                                                        |                          |         |            |         |      |         |            |         |   |        |           

The accompanying notes are an integral part of these
consolidated financial statements.

37



---



##### 



ECLIPSYS CORPORATION

Consolidated Statements of Cash Flows

(in thousands)


|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |         |         |         |         |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | -------------------------------------------- | --------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | ------- | ------ | ------ | ------- | ------- | ------- | ------- | ------- | -
|                                                          |                                                                                                        |                                             
|                                                          |                                                                                                        | Year Ended December 31,                     
|                                                          |                                                                                                        |                                             
|                                                          |                                                                                                        | 2003                                         |                             | 2002                                                    |        | 2001   
|                                                          |                                                                                                        |                                              |                             |                                                         |        |        
|Operating activities:                                     |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net (loss) income                                                                                      |                                              | $                           | (55,964                                                 | )      |         | $       | (29,763 | )      |        | $       | 4,408   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Adjustments to reconcile net (loss) income
    to net cash (used in) provided by operating activities: |                                              |                             |                                                         |        |         |         |         |        |        |         |         |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Depreciation and amortization                |                             |                                                         | 21,902 |         |         |         | 19,576 |        |         |         | 36,472  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Write-off of capitalized software            |                             |                                                         | 1,200  |         |         |         |       |        |         |         |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Provision for bad debts                      |                             |                                                         | 2,625  |         |         |         | 2,205  |        |         |         | 4,305   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Loss on sale of marketable securities        |                             |                                                         | 424    |         |         |         |       |        |         |         |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Stock compensation expense                   |                             |                                                         | 226    |         |         |         | 134    |        |         |         | 144     |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        | Changes in operating assets and liabilities: |                             |                                                         |        |         |         |         |        |        |         |         |         |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Accounts receivable         |                                                         |        | (10,706 | )       |         |        | 16,443 |         |         |         | (6,487  | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Inventory                   |                                                         |        | 126     |         |         |        | 11     |         |         |         | 202     |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Other current assets        |                                                         |        | 1,928   |         |         |        | 1,503  |         |         |         | (11,570 | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Other assets                |                                                         |        | (9,232  | )       |         |        | (4,203 | )       |         |         | (684    | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Deferred revenue            |                                                         |        | 21,094  |         |         |        | 21,233 |         |         |         | 7,617   |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Other current liabilities   |                                                         |        | 22,477  |         |         |        | 5,547  |         |         |         | (5,613  | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          |                                                                                                        |                                              | Other long-term liabilities |                                                         |        | 458     |         |         |        | (473   | )       |         |         | (928    | )      
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                          |                                                                                                        |                                              |                             | Total adjustments                                       |        |         | 52,522  |         |        |        | 61,976  |         |         |         | 23,458  |  
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                          |                                                                                                        |                                              |                             | Net cash (used in) provided by
    operating activities |        |         | (3,442  | )       |        |        | 32,213  |         |         |         | 27,866  |  
|                                                         
|                                                         
|                                                         
|                                                         
|Investing activities:                                     |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Purchases of property and equipment                                                                    |                                              |                             | (15,997                                                 | )      |         |         | (12,857 | )      |        |         | (11,601 | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Purchase of marketable securities                                                                      |                                              |                             | (73,785                                                 | )      |         |         |        |        |        |         |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Proceeds from sale of marketable securities                                                            |                                              |                             | 73,361                                                  |        |         |         |        |        |        |         |        |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Capitalized software development costs                                                                 |                                              |                             | (18,249                                                 | )      |         |         | (8,823  | )      |        |         | (6,876  | )      
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                          |                                                                                                        |                                              |                             | Net cash used in investing activities                   |        |         | (34,670 | )       |        |        | (21,680 | )       |         |         | (18,477 | )
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|Financing activities:                                     |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Payments on borrowings                                                                                 |                                              |                             |                                                        |        |         |         |        |        |        |         | (1,491  | )      
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Sale of common stock                                                                                   |                                              |                             |                                                        |        |         |         |        |        |        |         | 123,231 |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Exercises of stock options                                                                             |                                              |                             | 3,554                                                   |        |         |         | 1,470   |        |        |         | 14,683  |        
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Employee stock purchase plan                                                                           |                                              |                             | 2,709                                                   |        |         |         | 2,552   |        |        |         | 2,498   |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|                                                          |                                                                                                        | Net cash provided by financing activities    |                             |                                                         | 6,263  |         |         |         | 4,022  |        |         |         | 138,921 |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|Effect of exchange rates on cash and
    cash equivalents |                                                                                                        |                                              | 32                          |                                                         |        |         | 3       |         |        |        | (167    | )      
|                                                         
|                                                         
|                                                         
|                                                         
|Net (decrease) increase in cash and
    cash equivalents  |                                                                                                        |                                              | (31,817                     | )                                                       |        |         | 14,558  |         |        |        | 148,143 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Cash and cash equivalents  beginning
    of year         |                                                                                                        |                                              | 183,500                     |                                                         |        |         | 168,942 |         |        |        | 20,799  |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|Cash and cash equivalents  end
    of year               |                                                                                                        | $                                            | 151,683                     |                                                         |        | $       | 183,500 |         |        | $      | 168,942 |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|Cash paid for interest                                    |                                                                                                        | $                                            |                            |                                                         |        | $       |        |         |        | $      | 51      |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        
|Cash paid for income taxes                                |                                                                                                        | $                                            | 155                         |                                                         |        | $       | 110     |         |        | $      | 69      |        
|                                                          |                                                                                                        |                                              |                             |                                                         |        |         |         |         |        |        |         |        

The accompanying notes are an integral part of these
consolidated financial statements.

38



---



##### 



ECLIPSYS CORPORATION

Consolidated Statement of Changes in Stockholders
Equity

(in thousands)


|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|--------------------------------------- |  | ------------ | ---------- | ---------- |  | -------- | --- | ------------ |  | ------------- | ------- | ------------- |  | ------------- | ------ | ----- |  | - | -------- | - |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |              
|                                        |  | Voting and   |            |            |  |          |     |              |  |               |         |               |  |              
|                                        |  | Non-Voting   |            |            |  |          |     |              |  |               |         | Accumulated   |  |              
|                                        |  | Common Stock |            | Additional |  | Unearned |     |              |  | Comprehensive |         | Other         |  |              
|                                        |  |              |            | Paid-in    |  | Stock    |     | Accumulated  |  | Income        |         | Comprehensive |  |              
|                                        |  | Shares       |            | Amount     |  | Capital  |     | Compensation |  | Deficit       |         | (Loss)        |  | Income (Loss) |        | Total
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |      
|Balance at
    December 31, 2000        |  |              | 37,136,121 |            |  | $        | 371 |              |  | $             | 259,903 |               |  | $             | (176   | )     |  | $ | (186,459 | ) |  |   |         |   |  | $ | (235 | ) |  | $ | 73,404  |  
|                                       
|                                       
|                                       
|                                       
|Exercise of stock options               |  |              | 1,317,632  |            |  |          | 15  |              |  |               | 14,668  |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 14,683  |  
|                                       
|                                       
|                                       
|                                       
|Employee stock purchase plan            |  |              | 178,660    |            |  |          |     |              |  |               | 2,498   |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 2,498   |  
|                                       
|                                       
|                                       
|                                       
|Public offering                         |  |              | 5,750,000  |            |  |          | 58  |              |  |               | 123,173 |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 123,231 |  
|                                       
|                                       
|                                       
|                                       
|Compensation expense recognized         |  |              |            |            |  |          |     |              |  |               |         |               |  |               | 144    |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 144     |  
|                                       
|                                       
|                                       
|                                       
|Comprehensive income:                   |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|                                       
|                                       
|                                       
|                                       
|Net income                              |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   | 4,408    |   |  | $ | 4,408   |   |  |   |      |   |  |   | 4,408   |  
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | (167    | ) |  |   | (167 | ) |  |   | (167    | )
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Other comprehensive income              |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | (167    | ) |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Comprehensive income                    |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  | $ | 4,241   |   |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at
    December 31, 2001        |  |              | 44,382,413 |            |  | $        | 444 |              |  | $             | 400,242 |               |  | $             | (32    | )     |  | $ | (182,051 | ) |  |   |         |   |  | $ | (402 | ) |  | $ | 218,201 |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Exercise of stock options               |  |              | 190,917    |            |  |          | 2   |              |  |               | 1,468   |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 1,470   |  
|                                       
|                                       
|                                       
|                                       
|Employee stock purchase plan            |  |              | 365,542    |            |  |          | 4   |              |  |               | 2,548   |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 2,552   |  
|                                       
|                                       
|                                       
|                                       
|Issuance of restricted stock            |  |              | 150,000    |            |  |          | 1   |              |  |               | 1,122   |               |  |               | (1,123 | )     |  |   |          |   |  |   |         |   |  |   |      |   |  |   |        |  
|                                       
|                                       
|                                       
|                                       
|Compensation expense recognized         |  |              |            |            |  |          |     |              |  |               |         |               |  |               | 134    |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 134     |  
|                                       
|                                       
|                                       
|                                       
|Comprehensive income:                   |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   | (29,763  | ) |  |   | (29,763 | ) |  |   |      |   |  |   | (29,763 | )
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | 3       |   |  |   | 3    |   |  |   | 3       |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Other comprehensive income              |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | 3       |   |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Comprehensive loss                      |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  | $ | (29,760 | ) |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at
    December 31, 2002        |  |              | 45,088,872 |            |  | $        | 451 |              |  | $             | 405,380 |               |  | $             | (1,021 | )     |  | $ | (211,814 | ) |  |   |         |   |  | $ | (399 | ) |  | $ | 192,597 |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Exercise of stock options               |  |              | 430,132    |            |  |          | 4   |              |  |               | 3,550   |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 3,554   |  
|                                       
|                                       
|                                       
|                                       
|Employee stock purchase plan            |  |              | 457,651    |            |  |          | 5   |              |  |               | 2,704   |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 2,709   |  
|                                       
|                                       
|                                       
|                                       
|Compensation expense recognized         |  |              |            |            |  |          |     |              |  |               |         |               |  |               | 226    |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   | 226     |  
|                                       
|                                       
|                                       
|                                       
|Comprehensive income:                   |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|                                       
|                                       
|                                       
|                                       
|Net loss                                |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   | (55,964  | ) |  |   | (55,964 | ) |  |   |      |   |  |   | (55,964 | )
|                                       
|                                       
|                                       
|                                       
|Foreign currency translation adjustment |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | 32      |   |  |   | 32   |   |  |   | 32      |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Other comprehensive income              |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   | 32      |   |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Comprehensive loss                      |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  | $ | (55,932 | ) |  |   |      |   |  |   |         |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  
|Balance at
    December 31, 2003        |  |              | 45,976,655 |            |  | $        | 460 |              |  | $             | 411,634 |               |  | $             | (795   | )     |  | $ | (267,778 | ) |  |   |         |   |  | $ | (367 | ) |  | $ | 143,154 |  
|                                        |  |              |            |            |  |          |     |              |  |               |         |               |  |               |        |       |  |   |          |   |  |   |         |   |  |   |      |   |  |   |         |  

The accompanying notes are an integral part of these
consolidated financial statements.

39



---



##### 



ECLIPSYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     Organization and Description
of Business

Eclipsys is a healthcare information technology company. We
develop and license our proprietary software to hospitals. Our
software allows them to automate many of the key clinical,
administrative and financial functions that they require. Among
other things, our software enables physicians and nurses to
check on a patients condition; order patient tests; review
test results; monitor a patients medications; and provide
alerts to changes in a patients condition. Our software
also enables hospitals to admit patients; maintain patient
records; create invoices for billing patients or insurance
companies; control inventories; effect cost accounting; schedule
doctors visits; determine the profitability of physicians
and physician groups; understand the profitability of specific
medical procedures; and perform numerous other functions.

2.     Summary of Significant
Accounting Policies

Principles of Consolidation

The financial statements include the accounts of Eclipsys and
its wholly owned subsidiaries. All intercompany transactions
have been eliminated in consolidation. Eclipsys manages its
business as one reportable segment.

Use of Estimates

The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosures of
contingent assets and liabilities. The estimates and assumptions
used in the accompanying consolidated financial statements are
based upon managements evaluation of the relevant facts
and circumstances as of the date of the financial statements.
Actual results could differ from those estimates. The most
significant estimates relate to the allowance for doubtful
accounts, revenues recognized, the amounts recorded for
capitalized software development costs, the warranty reserve and
the valuation allowance for deferred tax assets.

Reclassifications

Certain prior period amounts have been reclassified to conform
to the 2003 presentation.

Cash and Cash Equivalents

For purposes of the consolidated statement of cash flows,
Eclipsys considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at cost plus accrued
interest, which approximates market value.

Revenue Recognition

Revenues are derived from licensing of computer software;
software and hardware maintenance; professional services
(including implementation, integration, training and
consulting); remote hosting; outsourcing; network services; and
the sale of computer hardware.

Systems and Services Revenue



Multiple Element Arrangements


Eclipsys generally contracts under multiple element
arrangements, which include software license fees, hardware and
services including consulting, implementation and software
maintenance for periods of 3 to 7 years. Eclipsys
recognizes revenue in accordance with the provisions of
Statement of Position, or SOP, No. 97-2, Software
Revenue Recognition, as amended by SOP No. 98-9,
Staff Accounting Bulletin, or

40



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies  (Continued)


SAB, 101, Revenue Recognition in Financial
Statements (which has been superseded by SAB 104) and
Emerging Issues Task Force, or EITF 00-21, Revenue
Arrangements with Multiple Deliverables. SOP 97-2 and
SAB 101, as amended, require among other matters, that
there be a signed contract evidencing an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. For those license arrangements in
which the fee is not considered fixed or determinable, the
license revenue is recognized as payments become due.

For arrangements where vendor specific objective evidence
(VSOE) only exists for all undelivered elements,
Eclipsys accounts for the delivered elements in accordance with
the residual method prescribed by the AICPA
Statement of Position (SOP, 98-9) Modification
of SOP 97-2, Software Revenue Recognition, With Respect of
Certain Transactions.

For software license arrangements that are bundled with
services, and maintenance where services are considered
essential to the functionality of the software, we recognize
revenues using the percentage-of-completion method. Under these
arrangements, software license fees and implementation fees are
recognized over the implementation period, which has typically
ranged from 12 to 24 months.

Eclipsys also enters into subscription arrangements that
typically include multiple software products or services
(including the right to future products within the suites
purchased), implementation, consulting and maintenance services,
along with outsourcing and remote hosting services, if requested
by the customer. The customer is entitled to these elements
throughout the term of the arrangements, which range from 3 to
7 years and up to 10 years in certain outsourcing
agreements. Payments are due annually, quarterly or monthly over
the arrangement term. For these arrangements, revenue is
recognized monthly over the term of the agreement. In these
arrangements, Eclipsys capitalizes related direct costs
consisting of third party software costs and direct software
implementation costs. These costs are amortized over the term of
the arrangement.

The license agreements for Eclipsys software products
include a limited warranty. The warranty provides that the
product, in its unaltered form, will perform substantially in
accordance with the related documentation. Through
September 30, 2003, Eclipsys had not incurred any material
warranty costs related to its products. As a result of the
response time issues identified during the fourth quarter of
2003, Eclipsys recorded a warranty reserve of $4.4 million at
December 31, 2003. Warranty costs are charged to costs of
systems and services revenues when they are probable and
reasonably estimable. A summary of the activity in
Eclipsys warranty reserve was as follows:

|                                                      |  |                   |       | 
|----------------------------------------------------- |  | ----------------- | ----- | 
|                                                      |  | Year ended       
|                                                      |  | December 31, 2003
|                                                      |  |                  
|Balance at beginning of period                        |  | $                 |      | 
|                                                     
|                                                     
|                                                     
|                                                     
|Provision for warranties issued during
    the period |  |                   | 4,400 | 
|                                                      |  |                   |       | 
|Balance at the end of period                          |  | $                 | 4,400 | 
|                                                      |  |                   |       | 

Services

Remote hosting and outsourcing services are marketed under
long-term arrangements generally over periods from 5 to
10 years. Revenues from these arrangements are recognized
as the services are performed.

41



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies  (Continued)


Software maintenance fees are marketed under annual and
multi-year agreements and are recognized as revenue ratably over
the contracted maintenance term. Eclipsys software
maintenance arrangements include when and if available upgrades
and do not contain specific upgrade rights.

Implementation revenues and other services, including training
and consulting, are recognized as services are performed for
time and material arrangements and using the percentage of
completion method based on labor input measures for fixed fee
arrangements.

Hardware Sales and Maintenance Revenue

Hardware sales are generally recognized upon delivery of the
equipment to the customer. Hardware maintenance revenues are
billed and recognized monthly over the contracted maintenance
term.

Unbilled Accounts Receivable and Deferred Revenue

The timing of revenue recognition and contractual billing terms
under certain multiple element arrangements may not precisely
coincide, resulting in the recording of unbilled accounts
receivable or deferred revenue. Customer payments are due under
these arrangements in varying amounts upon the achievement of
certain contractual milestones throughout the implementation
periods, which generally range from 12 to 24 months. The
current portion of unbilled accounts receivable is included in
accounts receivable.

In addition, Eclipsys maintains certain long-term contracts used
to finance a portion of certain customer hardware and software
fees owed. These arrangements generally provide for payment
terms that range from 3 to 5 years and carry interest rates that
range from 7% to 10%. Such amounts are recorded as non-current
unbilled accounts receivable. The non-current portion of amounts
due related to these arrangements was $1.0 million and
$1.5 million as of December 31, 2003 and 2002,
respectively, and is included in other assets in the
accompanying financial statements. The current portion of
amounts due related to these arrangements is included in
accounts receivable in the accompanying financial statements.
Accounts receivable was composed of the following as of
December 31, (in thousands):

|                     |                                         |                                |   |        |        |  |   |        |        | 
|-------------------- | --------------------------------------- | ------------------------------ | - | ------ | ------ |  | - | ------ | ------ | 
|                     |                                         | 2003                           |   | 2002  
|                     |                                         |                                |   |       
|Accounts Receivable: |                                         |                                |   |        |        |  |   |       
|                    
|                    
|                    
|                    
|                     | Billed accounts receivable, net         |                                | $ | 49,150 |        |  | $ | 42,280 |       
|                    
|                    
|                    
|                    
|                     | Total unbilled accounts receivable, net |                                |   | 5,753  |        |  |   | 4,542  |       
|                     |                                         |                                |   |        |        |  |   |       
|                     |                                         | Total accounts receivable, net |   | $      | 54,903 |  |   | $      | 46,822 | 
|                     |                                         |                                |   |        |        |  |   |       

Inventory

Inventory consists of computer equipment, parts and peripherals
and is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

Capitalized Software Development Costs

Eclipsys capitalizes a portion of its computer software
development costs incurred subsequent to establishing
technological feasibility. These costs include salaries,
benefits, consulting and other directly related costs incurred
in connection with programming and testing software products.
Capitalization ceases when the products are generally released
for sale to customers. Management monitors the net realizable
value of development costs to ensure that the investment will be
recovered through future revenues. Capitalized software
development costs were approximately $18.2 million,
$8.8 million and $6.9 million for the years ended
December 31, 2003, 2002 and 2001, respectively. These costs
are amortized over the greater of the ratio

42



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies  (Continued)


that current revenues are to total and anticipated future
revenues for the applicable product or the straight-line method
over three years. Amortization of capitalized software
development costs, which is included in costs of systems and
services revenues, was approximately $8.2 million,
$6.3 million and $4.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Accumulated
amortization of capitalized software development costs was
$28.6 million and $20.4 million as of
December 31, 2003 and 2002, respectively.

Write-down of Capitalized Software Development Costs

On October 20, 2003, Eclipsys announced that it had
identified a response time issue with some components of
SunriseXA, the newest version of Eclipsys Sunrise suite of
software. To address the issue, Eclipsys developed a strategy
designed to allow SunriseXA customers to continue their
deployment of SunriseXA, and to enable Eclipsys to continue its
development of planned advanced SunriseXA components. The
strategy is to replace the affected SunriseXA components with
certain components of the SCM product. In connection with the
strategy, Eclipsys recorded a $1.2 million write-down of
capitalized software development costs for certain SunriseXA
components to net realizable value. The write-down is included
in the cost of systems and services revenues.

Acquired Technology and Intangible Assets

Acquired technology and intangible assets are amortized on a
straight-line basis over their estimated useful lives. The
carrying values of acquired technology and intangible assets are
reviewed if the facts and circumstances suggest that they may be
impaired and goodwill is reviewed at least annually. This review
indicates whether assets will be recoverable based on future
expected cash flows. The gross and net amounts for acquired
technology, goodwill, and intangible assets consisted of the
following as of December 31, (in thousands):

|                                     |                                |                  |     |          |         |   |     |          |         |  |             | 
|------------------------------------ | ------------------------------ | ---------------- | --- | -------- | ------- | - | --- | -------- | ------- |  | ----------- | 
|                                     |                                | 2003             |     | 2002     |         |  
|                                     |                                |                  |     |          |         |  
|Amounts subject to amortization:     |                                |                  |     |          |         |   |     |          |         | 
|                                    
|                                    
|                                    
|                                    
|                                     | Acquired technology            |                  | $   | 95,795   |         |   | $   | 95,795   |         |  | 3 - 7 years
|                                    
|                                    
|                                    
|                                    
|                                     | Ongoing customer relationships |                  |     | 10,690   |         |   |     | 10,690   |         |  | 5 years    
|                                    
|                                    
|                                    
|                                    
|                                     | Network services               |                  |     | 5,764    |         |   |     | 5,764    |         |  | 3 years    
|                                     |                                |                  |     |          |         |   |     |          |         | 
|                                     |                                | Gross Intagibles |     |          | 112,249 |   |     |          | 112,249 |  |             | 
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated Amortization       |                  |     | (112,249 | )       |   |     | (111,982 | )       |  |            
|                                     |                                |                  |     |          |         |   |     |          |         | 
|                                     | Net Acquired Technology        |                  |     |         |         |   |     | 267      |         |  |            
|                                    
|                                    
|                                    
|                                    
|Amounts not subject to amortization: |                                |                  |     |          |         |   |     |          |         | 
|                                    
|                                    
|                                    
|                                    
|                                     | Goodwill                       |                  |     | 454      |         |   |     | 454      |         |  |            
|                                     |                                |                  |     |          |         |   |     |          |         | 
|                                     |                                | $                | 454 |          |         | $ | 721 |          |         | 
|                                     |                                |                  |     |          |         |   |     |          |         | 

Amortization of acquired technology was $267,000 and $3,078,000
for the years ended December 31, 2003 and 2002
respectively. The ongoing customer relationships became fully
amortized during the first quarter of 2002.

Amortization of the acquired technology and network services
assets is included in the cost of systems and services revenues.

In June 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets. Under this new standard, the FASB
eliminated amortization of goodwill and created indefinite life
intangible assets and established new

43



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies  (Continued)

impairment measurement procedures for goodwill. In accordance
with SFAS 142, goodwill is no longer amortized, but instead is
tested for impairment at least once annually. There was no
impairment of goodwill upon adoption of SFAS 142, and
amortization ceased as of January 1, 2002, leaving a
recorded balance of $454,000 for goodwill as of
December 31, 2003 and 2002. The effect of adopting SFAS 142
was to reduce depreciation and amortization expense by $454,000
for the year ended December 31, 2002. Net income and
earnings per share adjusted to exclude amortization expense is
as follows for the year ended December 31, 2001 (in
thousands, except earnings per share):

|                                        |                                       |                                       |   |       |       | 
|--------------------------------------- | ------------------------------------- | ------------------------------------- | - | ----- | ----- | 
|                                       
|                                       
|                                       
|                                       
|Net income:                             |                                       |                                       |   |      
|                                       
|                                       
|                                       
|                                       
|                                        | Reported net income                   |                                       | $ | 4,408 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Goodwill amortization                 |                                       |   | 4,636 |      
|                                        |                                       |                                       |   |      
|                                        |                                       | Adjusted net income                   |   | $     | 9,044 | 
|                                        |                                       |                                       |   |      
|Basic and diluted net income per share: |                                       |                                       |   |      
|                                       
|                                       
|                                       
|                                       
|                                        | Reported basic net income per share   |                                       | $ | 0.10  |      
|                                       
|                                       
|                                       
|                                       
|                                        | Goodwill amortization                 |                                       |   | 0.11  |      
|                                        |                                       |                                       |   |      
|                                        |                                       | Adjusted basic net income per share   |   | $     | 0.21  | 
|                                        |                                       |                                       |   |      
|                                        | Reported diluted net income per share |                                       | $ | 0.09  |      
|                                       
|                                       
|                                       
|                                       
|                                        | Goodwill amortization                 |                                       |   | 0.10  |      
|                                        |                                       |                                       |   |      
|                                        |                                       | Adjusted diluted net income per share |   | $     | 0.19  | 
|                                        |                                       |                                       |   |      

Fair Value of Financial Instruments

The carrying amounts of Eclipsys financial instruments,
including cash and cash equivalents, accounts receivable, and
other current liabilities, approximate fair value.

Income Taxes

Eclipsys accounts for income taxes utilizing the liability
method, and deferred income taxes are determined based on the
estimated future tax effects of differences between the
financial reporting and income tax basis of assets and
liabilities and tax carry-forwards given the provisions of the
enacted tax laws.

Stock-Based Compensation

Eclipsys accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion, (APB) No. 25, Accounting for
Stock Issued to Employees, and related Interpretations.
Under this method, compensation costs for stock options is
measured as the excess, if any, of the estimated market price of
Eclipsys stock at the date of the grant over the amount an
employee must pay to acquire the stock. Accordingly, Eclipsys
provides the additional disclosures required under SFAS
No. 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148
Accounting for Stock-Based Compensation 
Transition and Disclosure.

Eclipsys has adopted the disclosure only provision of
SFAS 123. Had compensation costs for Eclipsys stock
option grants described above been determined based on the fair
value at the grant date for awards in 2001, 2002 and 2003,
consistent with the provisions of SFAS 123, Eclipsys
net loss and loss per share would

44



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##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies  (Continued)


have been increased to the pro forma amounts indicated below for
the years ended December 31, (in thousands, except per
share data), as follows:

|                                     |                                                                                                                                            |      |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------ | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                     |                                                                                                                                            | 2003 |   | 2002    |   | 2001
|                                     |                                                                                                                                            |      |   |         |   |     
|Net (loss) income:                   |                                                                                                                                            |      |   |         |   |      |   |         |   |  |   |        
|                                    
|                                    
|                                    
|                                    
|                                     | As reported                                                                                                                                |      | $ | (55,964 | ) |      | $ | (29,763 | ) |  | $ | 4,408   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Add: Stock-based employee compensation expense
    included in Net loss, net of related tax effects                                        |      |   | 224     |   |      |   | 134     |   |  |   | 144     |  
|                                    
|                                    
|                                    
|                                    
|                                     | Deduct: Total stock-based compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |      |   | (16,162 | ) |      |   | (24,182 | ) |  |   | (26,036 | )
|                                     |                                                                                                                                            |      |   |         |   |      |   |         |   |  |   |        
|                                     | Pro forma                                                                                                                                  |      | $ | (71,902 | ) |      | $ | (53,811 | ) |  | $ | (21,484 | )
|                                    
|                                    
|                                    
|                                    
|Basic net (loss) income per share:   |                                                                                                                                            |      |   |         |   |      |   |         |   |  |   |        
|                                    
|                                    
|                                    
|                                    
|                                     | As reported                                                                                                                                |      | $ | (1.23   | ) |      | $ | (0.67   | ) |  | $ | 0.10    |  
|                                    
|                                    
|                                    
|                                    
|                                     | Pro forma                                                                                                                                  |      | $ | (1.58   | ) |      | $ | (1.20   | ) |  | $ | (0.50   | )
|                                    
|                                    
|                                    
|                                    
|Diluted net (loss) income per share: |                                                                                                                                            |      |   |         |   |      |   |         |   |  |   |        
|                                    
|                                    
|                                    
|                                    
|                                     | As reported                                                                                                                                |      | $ | (1.23   | ) |      | $ | (0.67   | ) |  | $ | 0.09    |  
|                                    
|                                    
|                                    
|                                    
|                                     | Pro forma                                                                                                                                  |      | $ | (1.58   | ) |      | $ | (1.20   | ) |  | $ | (0.50   | )

The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2003,
2002 and 2001: dividend yield of 0% for all years, risk-free
interest rate 2.63% for 2003; 3.11% for 2002; and 4.27% for
2001; expected life of 4.88, 4.84 and 6.81 years, based on the
plan and volatility of 92% for 2003, 92% for 2002 and 93% for
2001.

Basic and Diluted Net (Loss) Income Per Share

For all periods presented, basic and diluted net
(loss) income per common share is presented in accordance
with SFAS 128, Earnings per Share, which provides
for the accounting principles used in the calculation of
earnings per share. Basic net (loss) income per common
share is based on the weighted average number of shares of
common stock outstanding during the period. Diluted net income
per share reflects the potential dilution from assumed
conversion of all dilutive securities such as stock option
warrants and unvested restricted stock. Stock options to acquire
9,268,674, 9,020,711 and 8,006,072 shares of common stock at
December 31, 2003, 2002 and 2001, respectively; warrants to
acquire up to 5,160 shares of common stock at December 31,
2003, 2002 and 2001; and unvested restricted stock of 136,250
and 150,000 at December 31, 2003 and 2002, respectively,
were the only securities issued which would be included in the
diluted earnings per share calculation, if dilutive. In 2003 and
2002, the inclusion of stock options and warrants would have
been antidilutive due to the net loss reported by Eclipsys, and
therefore excluded from the calculation. The

45



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##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


2.     Summary of Significant
Accounting Policies  (Continued)

computations of the basic and diluted per share amounts were as
follows for the years ended December 31 (in thousands,
except share and per share data):

|                                    |                                  |      |            |            |  |      |            |            |  |   |            |            | 
|----------------------------------- | -------------------------------- | ---- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                    |                                  | 2003 |            | 2002       |  | 2001
|                                    |                                  |      |            |            |  |     
|Basic Earnings Per Share:           |                                  |      |            |            |  |      |            |            |  |   |            |           
|                                   
|                                   
|                                   
|                                   
|Net (loss) income (in thousands)    |                                  | $    | (55,964    | )          |  | $    | (29,763    | )          |  | $ | 4,408      |           
|                                   
|                                   
|                                   
|                                   
|Weighted average shares outstanding |                                  |      | 45,404,754 |            |  |      | 44,710,754 |            |  |   | 43,243,512 |           
|                                   
|                                   
|                                   
|                                   
|Basic (loss) earnings per share     |                                  | $    | (1.23      | )          |  | $    | (0.67      | )          |  | $ | 0.10       |           
|                                   
|                                   
|                                   
|                                   
|Diluted Earnings Per Share:         |                                  |      |            |            |  |      |            |            |  |   |            |           
|                                   
|                                   
|                                   
|                                   
|Net (loss) income (in thousands)    |                                  | $    | (55,964    | )          |  | $    | (29,763    | )          |  | $ | 4,408      |           
|                                   
|                                   
|                                   
|                                   
|Weighted average shares:            |                                  |      |            |            |  |      |            |            |  |   |            |           
|                                   
|                                   
|                                   
|                                   
|                                    | Outstanding                      |      |            | 45,404,754 |  |      |            | 44,710,754 |  |   |            | 43,243,512 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Effect of dilutive stock options |      |            |           |  |      |            |           |  |   |            | 3,551,849  | 
|                                    |                                  |      |            |            |  |      |            |            |  |   |            |           
|                                    | Total shares                     |      |            | 45,404,754 |  |      |            | 44,710,754 |  |   |            | 46,795,361 | 
|                                    |                                  |      |            |            |  |      |            |            |  |   |            |           
|Diluted (loss) earnings per share   |                                  | $    | (1.23      | )          |  | $    | (0.67      | )          |  | $ | 0.09       |           

Concentration of Credit Risk

Our customers operate primarily in the healthcare industry. We
sell our products and services under contracts with varying
terms. The accounts receivable amounts are unsecured. We believe
that the allowance for doubtful accounts is sufficient to cover
credit losses. We do not believe that the loss of any one
customer would have a material effect on our financial position.

Foreign Currency

Our financial position and results of operations of foreign
subsidiaries are measured using the currency of the respective
countries as the functional currency. Assets and liabilities are
translated at the foreign exchange rate in effect at the balance
sheet date, while revenue and expenses for the year are
translated at the average exchange rate in effect during the
year. Translation gains and losses are not included in
determining net income or loss but are accumulated and reported
as a separate component of stockholders equity. We have
not entered into any hedging contracts during the three-year
period ended December 31, 2003.

Comprehensive Income

Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income
requires that the total changes in equity resulting from
revenue, expenses, and gains and losses, including those that do
not affect the accumulated deficit, be reported. Accordingly,
those amounts, which are comprised solely of foreign currency
translation adjustments, are included in other comprehensive
income in the consolidated statement of changes in
stockholders equity.

New Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation 46,
Consolidation of Variable Interest Entities. This
interpretation of Accounting Research Bulletin 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities (VIE) which possess certain
characteristics. The interpretation requires that if a business
enterprise has a controlling financial interest in a VIE, the
assets, liabilities, and results of operations of the VIE must
be included in the consolidated financial

46



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##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




2.     Summary of Significant
Accounting Policies  (Continued)


statements with those of the business enterprise. This
interpretation applies immediately to each VIE created after
January 31, 2003, and to each VIE in which an enterprise
obtains an interest after that date. In December 2003, the
FASB published a revision to FIN 46 (FIN 46R), to
clarify some of the provisions of FIN 46 and exempt certain
entities from its requirements. Under FIN 46R, a legal entity is
generally considered a VIE, if specific criteria are met,
including whether the VIE has sufficient equity at risk to
finance its own activities without relying on financial support
from other parties. Additional criteria must be applied to
determine if this condition is met or if the equity holders, as
a group, lack any one of the three stipulated characteristics of
a controlling financial interest. If the legal entity is a VIE,
then the reporting entity determined to be the primary
beneficiary of the VIE must consolidate it. Even if the
reporting entity is not required to consolidate a VIE, then
certain disclosures must be made about the VIE if the reporting
entity has a significant variable interest. The effective date
of the interpretation was modified under FIN 46R. A reporting
entity is required to apply the provisions of FIN 46R to all
VIEs that previously were subject to certain previously issued
special purpose entity, or SPE, accounting pronouncements for
all reporting periods after December 14, 2003. For each
VIE, a reporting entity is required to adopt the provisions of
FIN 46R for all reporting periods after March 15, 2004. We
believe FIN 46R will not impact the Eclipsys financial
position or results of operations.

In December 2003, the Staff of the Securities and Exchange
Commission (SEC) issued SAB 104, Revenue Recognition, which
supercedes SAB 101, Revenue Recognition in Financial Statements.
The primary purpose of SAB 104 is to rescind accounting guidance
contained in SAB 101 related to multiple element arrangements,
superseded as a result of the issuance of EITF 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables (EITF
00-21). The guidance contained in SAB 104 reflects the issuance
of EITF 00-21, but the revenue recognition principles remaining
largely unchanged. As Eclipsys has already incorporated EITF
00-21 and SAB 101, into its revenue recognition policies, the
adoption of SAB 104 did not have a significant impact on
Eclipsys financial statements.

3.     Property and Equipment

Property and equipment are stated at cost. Depreciation and
amortization are provided for using the straight-line method
over the estimated useful lives, which generally range from 2 to
7 years. Computer equipment is depreciated over 2 to 5 years.
Office equipment is depreciated over two to seven years.
Purchased software for internal use is amortized over 3 years.
Leasehold improvements are amortized over the shorter of the
useful lives of the assets or the remaining term of the lease.
When assets are retired or otherwise disposed of, the related
costs and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income.
Expenditures for repairs and maintenance not considered to
substantially lengthen the property and equipment lives are
charged to expense as incurred. The balances for property and
equipment were as follows as of December 31, (in thousands):

|                                                    |  |      |         |      |  |   |         |  
|--------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                    |  | 2003 |         | 2002
|                                                    |  |      |         |     
|Computer equipment                                  |  | $    | 34,835  |      |  | $ | 25,702  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Office equipment and other                          |  |      | 6,935   |      |  |   | 6,561   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Purchased software                                  |  |      | 11,338  |      |  |   | 11,084  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Leasehold improvements                              |  |      | 9,022   |      |  |   | 7,972   |  
|                                                    |  |      |         |      |  |   |         |  
|                                                    |  |      | 62,130  |      |  |   | 51,319  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Less: Accumulated depreciation
    and amortization |  |      | (29,826 | )    |  |   | (24,519 | )
|                                                    |  |      |         |      |  |   |         |  
|                                                    |  | $    | 32,304  |      |  | $ | 26,800  |  
|                                                    |  |      |         |      |  |   |         |  

Depreciation and amortization expense of property and equipment
totaled approximately $10.5 million, $8.4 million, and
$6.7 million in 2003, 2002 and 2001, respectively.

47



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




4.     Stockholders Equity

Restricted Stock Grant

On July 15, 2002, Mr. Paul L. Ruflin joined
Eclipsys as its Chief Executive Officer and President. Under his
employment arrangement with Eclipsys, Mr. Ruflin received a
restricted stock grant effective July 15, 2002 of 150,000
shares of Eclipsys common stock, subject to a five-year
vesting schedule, plus an option to purchase 850,000 shares of
Eclipsys common stock at a price of $7.50, with vesting
over a five-year period. Stock compensation related to this
restricted stock grant amounted to $225,000 in 2003 and $103,000
in 2002. As of December 31, 2003 and 2002, respectively,
Eclipsys had unearned stock compensation of $795,000 and
$1,021,000 recorded as a component of stockholders equity.

Undesignated Preferred Stock

Eclipsys has available for issuance, 5,000,000 shares of
preferred stock. As discussed below under Shareholder
Rights Plan, the Board has designated 100,000 of the
5,000,000 authorized shares of preferred stock as Series A
Junior Participating Preferred Stock. Eclipsys has a balance of
4,900,000 authorized shares of undesignated preferred stock (the
Undesignated Preferred). The liquidation, voting,
conversion and other related provisions of the Undesignated
Preferred will be determined by the Board of Directors at the
time of issuance. Currently, there are no outstanding preferred
shares.

Shareholder Rights Plan

On July 26, 2000, our Board of Directors declared a
dividend of one Right for each outstanding share of
Eclipsys Common Stock to stockholders of record at the
close of business on August 9, 2000. Each Right entitles
the registered holder to purchase from Eclipsys one
one-thousandth of a share of Series A Junior Participating
Preferred Stock, $.01 par value per share, at a Purchase Price
of $65.00 in cash, subject to adjustment. The Rights will
initially trade together with Eclipsys Common Stock, and
will not be exercisable. If a person or group (other than an
exempt person) acquires 15% or more of the outstanding shares of
Eclipsys Common Stock, the Rights generally will become
exercisable and allow the holder (other than the 15% purchaser)
to purchase shares of Eclipsys Common Stock at a 50%
discount to the market price. The effect will be to discourage
acquisitions of 15% or more of Eclipsys Common Stock
without negotiations with the Board of Directors. The terms of
the Rights are set forth in a Rights Agreement dated as of
July 26, 2000 (the Rights Agreement) between
Eclipsys and Fleet National Bank, as Rights Agent. The Board has
designated 100,000 of the 5,000,000 authorized shares of
preferred stock as Series A Junior Participating Preferred
Stock.

Secondary Offering of Common Stock

On January 23, 2001, Eclipsys completed a follow-on public
offering for 5,750,000 shares of its common stock. Net proceeds
from the offering were approximately $123.2 million.

48



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


5.     Income Taxes

The income tax provision (benefit) is calculated as follows
for the years ended December 31, (in thousands):

|                              |                     |      |   |         |   |      |     |         |   |   |   |      |  
|----------------------------- | ------------------- | ---- | - | ------- | - | ---- | --- | ------- | - | - | - | ---- | -
|                              |                     | 2003 |   | 2002    |   | 2001
|                              |                     |      |   |         |   |     
|Current Tax Provision:        |                     |      |   |         |   |      |     |         |   |   |   |     
|                             
|                             
|                             
|                             
|                              | Federal             |      | $ |        |   |      | $   |        |   |   | $ |     |  
|                             
|                             
|                             
|                             
|                              | State               |      |   |         |   |      |     | 165     |   |   |   |     |  
|                              |                     |      |   |         |   |      |     |         |   |   |   |     
|                              |                     | $    |  |         |   | $    | 165 |         |   | $ |  |     
|                              |                     |      |   |         |   |      |     |         |   |   |   |     
|Deferred Provision (Benefit): |                     |      |   |         |   |      |     |         |   |   |   |     
|                             
|                             
|                             
|                             
|                              | Federal             |      | $ | (18,859 | ) |      | $   | (10,076 | ) |   | $ | (171 | )
|                             
|                             
|                             
|                             
|                              | State               |      |   | (2,197  | ) |      |     | (1,180  | ) |   |   | (20  | )
|                             
|                             
|                             
|                             
|                              | Valuation allowance |      |   | 21,056  |   |      |     | 11,256  |   |   |   | 191  |  
|                              |                     |      |   |         |   |      |     |         |   |   |   |     
|                              |                     | $    |  |         |   | $    |    |         |   | $ |  |     
|                              |                     |      |   |         |   |      |     |         |   |   |   |     
|Total Provision               |                     | $    |  |         |   | $    | 165 |         |   | $ |  |     
|                              |                     |      |   |         |   |      |     |         |   |   |   |     

A reconciliation of the effect of applying the federal statutory
rate and the effective income tax rate on Eclipsys income
tax provision is as follows for the years ended
December 31, (in thousands):

|                                                         |  |      |         |      |  |      |         |   |  |   |        |  
|-------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                         |  | 2003 |         | 2002 |  | 2001
|                                                         |  |      |         |      |  |     
|Statutory federal income tax rate                        |  | $    | (19,028 | )    |  | $    | (10,119 | ) |  | $ | 1,499  |  
|                                                        
|                                                        
|                                                        
|                                                        
|State income taxes                                       |  |      | (2,216  | )    |  |      | (1,013  | ) |  |   | 175    |  
|                                                        
|                                                        
|                                                        
|                                                        
|Non-deductible amortization                              |  |      |        |      |  |      |        |   |  |   | 1,943  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Other                                                    |  |      | 604     |      |  |      | 479     |   |  |   | 344    |  
|                                                        
|                                                        
|                                                        
|                                                        
|Valuation allowance, includes effect
    of acquisitions |  |      | 20,640  |      |  |      | 10,818  |   |  |   | (3,961 | )
|                                                         |  |      |         |      |  |      |         |   |  |   |        |  
|Income tax provision                                     |  | $    |        |      |  | $    | 165     |   |  | $ |       |  
|                                                         |  |      |         |      |  |      |         |   |  |   |        |  

49



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




5.     Income Taxes 
(Continued)


The significant components of Eclipsys net deferred tax
assets (liabilities) were as follows as of
December 31, (in thousands):

|                          |                                              |      |         |          |   |   |         |         |  
|------------------------- | -------------------------------------------- | ---- | ------- | -------- | - | - | ------- | ------- | -
|                          |                                              | 2003 |         | 2002    
|                          |                                              |      |         |         
|Deferred tax assets:      |                                              |      |         |          |   |   |         |        
|                         
|                         
|                         
|                         
|                          | Intangible assets                            |      | $       | 33,673   |   |   | $       | 37,804  |  
|                         
|                         
|                         
|                         
|                          | Allowance for doubtful accounts              |      |         | 3,085    |   |   |         | 2,725   |  
|                         
|                         
|                         
|                         
|                          | Accrued expenses                             |      |         | 3,363    |   |   |         | 2,442   |  
|                         
|                         
|                         
|                         
|                          | Other                                        |      |         | 2,547    |   |   |         | 2,274   |  
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforwards             |      |         | 88,696   |   |   |         | 60,396  |  
|                          |                                              |      |         |          |   |   |         |        
|                          |                                              | $    | 131,364 |          |   | $ | 105,641 |        
|                          |                                              |      |         |          |   |   |         |        
|Deferred tax liabilities: |                                              |      |         |          |   |   |         |        
|                         
|                         
|                         
|                         
|                          | Unbilled accounts receivable                 |      | $       | (3,898   | ) |   | $       | (3,798  | )
|                         
|                         
|                         
|                         
|                          | Depreciation                                 |      |         | (2,557   | ) |   |         | (1,362  | )
|                         
|                         
|                         
|                         
|                          | Capitalization of software development costs |      |         | (9,589   | ) |   |         | (6,217  | )
|                          |                                              |      |         |          |   |   |         |        
|                          | Net deferred tax asset                       |      |         | 115,320  |   |   |         | 94,264  |  
|                         
|                         
|                         
|                         
|                          | Valuation allowance                          |      |         | (115,320 | ) |   |         | (94,264 | )
|                          |                                              |      |         |          |   |   |         |        
|                          |                                              | $    |        |          |   | $ |        |        
|                          |                                              |      |         |          |   |   |         |        

At December 31, 2003, Eclipsys had net operating loss
carryforwards for federal income tax purposes of approximately
$226.5 million. The carryforwards expire in varying amounts
through 2023. Of this amount, $42.5 million relate to stock
option tax deductions, which will be tax-effected and the
benefit credited as additional paid-in-capital when realized.
Additionally, Eclipsys has Canadian net operating loss
carryovers of approximately $7.1 million that expire in
varying amounts through 2010.

Under the Tax Reform Act of 1986, the amounts of, and the
benefits from, net operating loss carryforwards may be impaired
or limited in certain circumstances. Eclipsys experienced an
ownership change as defined under Section 382 of the Internal
Revenue Code in November 1998. As a result of the ownership
change, net operating loss carryforwards of approximately
$16 million at November 1998, which were incurred
prior to the date of the change, are subject to annual
limitations on their future use. As of December 31, 2003,
net operating loss carryforwards of approximately
$7.5 million remain subject to the annual limitation. As of
December 31, 2003, a valuation allowance has been
established against the deferred tax assets that management does
not believe are more likely than not to be realized.

6.     Employee Benefit Plans

1996 Stock Option Plan

In April 1996, Eclipsys Board of Directors adopted
the 1996 Stock Plan (the 1999 Stock Plan). The 1996
Stock Plan, as amended, provided for grants of stock options,
awards of Eclipsys stock free of any restrictions and
opportunities to make direct purchases of restricted stock of
Eclipsys. The 1996 Stock Plan allowed for the issuance of
options or other awards to purchase up to 2,500,000 shares of
Common Stock. Pursuant to the terms of the 1996 Stock Plan, a
committee of the Board was authorized to grant awards to
employees and non-employees and establish vesting terms. The
options expire ten years from the date of grant. No additional
options or other awards may be granted under the 1996 Stock Plan.

50



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




6.     Employee Benefit
Plans  (Continued)




1998 Stock Incentive Plan

In January 1998, the Board adopted the 1998 Stock Incentive
Plan (the Incentive Plan). The Incentive Plan
provided for the granting of stock options, stock appreciation
rights, restricted stock awards or unrestricted stock awards. No
additional options or other awards may be granted under the
Incentive Plan.

1999 Stock Incentive Plan

In February 1999, the Board adopted the 1999 Stock
Incentive Plan (the 1999 Plan). The 1999 Plan
provided for the granting of stock options, restricted stock, or
other stock-based awards. No additional options or other awards
may be granted under the 1999 Plan.

2000 Stock Incentive Plan

At Eclipsys Annual Meeting of Stockholders held on
May 8, 2002, the shareholders voted to approve the
amendment and restatement of Eclipsys 2000 Stock Incentive
Plan, 1999 Stock Incentive Plan, 1998 Stock Incentive Plan and
Amended and Restated 1998 Employee Stock Purchase Plan and the
1996 Stock Plan, to reflect an increase in the number of shares
of common stock authorized for issuance under all of the
Companys stock plans (the 2000 Stock Incentive Plan, the
1999 Stock Incentive Plan, the Amended and Restated Employee
Stock Purchase Plan, the 1998 Stock Incentive Plan and the 1996
Stock Plan) from 12,000,000 to 15,000,000. There were 1,109,099
shares available for future issuance under all of Eclipsys
stock plans as of December 31, 2003. A summary of stock
option transactions is as follows during the years ended
December 31,:

|                                     |           |         |           |           |   |         |       |          |  |         |           |           |   |   |       |       |  |  |           |            |   |   |       |       | 
|------------------------------------ | --------- | ------- | --------- | --------- | - | ------- | ----- | -------- |  | ------- | --------- | --------- | - | - | ----- | ----- |  |  | --------- | ---------- | - | - | ----- | ----- | 
|                                     |           |         |           |           |   |        
|                                     |           | 2003    |           | 2002      |   | 2001   
|                                     |           |         |           |           |   |        
|                                     |           |         |           | Weighted  |   |         |       | Weighted |  |         |           | Weighted 
|                                     |           |         |           | Average   |   |         |       | Average  |  |         |           | Average  
|                                     |           |         |           | Exercise  |   |         |       | Exercise |  |         |           | Exercise 
|                                     |           | Options |           | Price     |   | Options |       | Price    |  | Options |           | Price    
|                                     |           |         |           |           |   |         |       |          |  |         |           |          
|Outstanding at beginning of the year |           |         | 9,020,711 |           |   | $       | 11.24 |          |  |         | 8,006,072 |           |   | $ | 12.22 |       |  |  | 9,148,878 |            |   | $ | 12.87 |      
|                                    
|                                    
|                                    
|                                    
|                                     | Granted   |         |           | 1,539,500 |   |         |       | 9.08     |  |         |           | 1,922,925 |   |   |       | 8.20  |  |  |           | 1,196,284  |   |   |       | 14.70 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Exercised |         |           | (430,132  | ) |         |       | 8.26     |  |         |           | (195,277  | ) |   |       | 7.53  |  |  |           | (1,342,619 | ) |   |       | 10.96 | 
|                                    
|                                    
|                                    
|                                    
|                                     | Forfeited |         |           | (861,405  | ) |         |       | 10.90    |  |         |           | (713,009  | ) |   |       | 15.14 |  |  |           | (996,471   | ) |   |       | 22.89 | 
|                                     |           |         |           |           |   |         |       |          |  |         |           |           |   |   |       |       |  |  |           |            |   |   |       |      
|Outstanding at end of year           |           |         | 9,268,674 |           |   |         | 11.05 |          |  |         | 9,020,711 |           |   |   | 11.23 |       |  |  | 8,006,072 |            |   |   | 12.22 |      
|                                     |           |         |           |           |   |         |       |          |  |         |           |           |   |   |       |       |  |  |           |            |   |   |       |      
|Exercisable at end of the year       |           |         | 5,714,566 |           |   |         |       |          |  |         | 4,960,438 |           |   |   |       |       |  |  | 3,425,434 |            |   |   |       |      
|                                     |           |         |           |           |   |         |       |          |  |         |           |           |   |   |       |       |  |  |           |            |   |   |       |      

|                                   |  |          |      |          |  |          |      |          |  |          |      |          |  |   |      |  |  |   |       |  |  |   |       | 
|---------------------------------- |  | -------- | ---- | -------- |  | -------- | ---- | -------- |  | -------- | ---- | -------- |  | - | ---- |  |  | - | ----- |  |  | - | ----- | 
|                                   |  |          |      |          |  |         
|                                   |  | 2003     |      | 2002     |  | 2001    
|                                   |  |          |      |          |  |         
|                                   |  | Weighted |      | Weighted |  | Weighted |      | Weighted |  | Weighted |      | Weighted
|                                   |  | Average  |      | Fair     |  | Average  |      | Fair     |  | Average  |      | Fair    
|                                   |  | Exercise |      | Market   |  | Exercise |      | Market   |  | Exercise |      | Market  
|Option Granted During the Year     |  | Price    |      | Value    |  | Price    |      | Value    |  | Price    |      | Value   
|                                   |  |          |      |          |  |          |      |          |  |          |      |         
|Option price G Fair market value   |  |          |     |          |  |          |      |          |  |          |     |          |  |   |      |  |  |   |      |  |  |   |       | 
|                                  
|                                  
|                                  
|                                  
|Option price = Fair market value   |  | $        | 9.08 |          |  |          |      |          |  | $        | 8.20 |          |  |   |      |  |  | $ | 14.70 |  |  |   |       | 
|                                  
|                                  
|                                  
|                                  
|Option price G Fair market value   |  |          |     |          |  |          |      |          |  |          |     |          |  |   |      |  |  |   |      |  |  |   |       | 
|                                  
|                                  
|                                  
|                                  
|Weighted Fair Market Value Options |  |          |      |          |  | $        | 6.44 |          |  |          |      |          |  | $ | 6.59 |  |  |   |       |  |  | $ | 10.70 | 

51



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




6.     Employee Benefit
Plans  (Continued)


The following table summarizes information about stock options
outstanding at December 31, 2003:

|                        |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|----------------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                        |  |                     |           |                     |  |         
|                        |  | Options Outstanding |           |                    
|                        |  |                     |           | Options Exercisable
|                        |  |                     |           | Weighted            |  |          |      |            
|                        |  |                     |           | Average             |  | Weighted |      |             |  | Weighted
|                        |  | Number              |           | Remaining           |  | Average  |      | Number      |  | Average 
|                        |  | Outstanding at      |           | Contractual         |  | Exercise |      | Exercisable |  | Exercise
|Range of Exercise Price |  | 12/31/03            |           | Life (in years)     |  | Price    |      | at 12/31/03 |  | Price   
|                        |  |                     |           |                     |  |          |      |             |  |         
|$ 0.10 - $ 6.44         |  |                     | 1,025,280 |                     |  |          | 7.52 |             |  | $        | 5.88  |  |  |  | 563,154   |  |  | $ | 5.93  | 
|$ 6.50 - $ 7.50         |  |                     | 1,445,926 |                     |  |          | 7.02 |             |  |          | 7.11  |  |  |  | 385,786   |  |  |   | 7.19  | 
|$ 8.25 - $ 8.25         |  |                     | 2,179,824 |                     |  |          | 6.53 |             |  |          | 8.25  |  |  |  | 2,009,045 |  |  |   | 8.25  | 
|$ 8.88 - $ 9.13         |  |                     | 1,057,938 |                     |  |          | 9.10 |             |  |          | 8.94  |  |  |  | 65,272    |  |  |   | 9.06  | 
|$ 9.53 - $13.20         |  |                     | 967,579   |                     |  |          | 7.60 |             |  |          | 11.75 |  |  |  | 529,135   |  |  |   | 11.38 | 
|$13.21 - $15.13         |  |                     | 1,235,578 |                     |  |          | 6.46 |             |  |          | 14.59 |  |  |  | 969,045   |  |  |   | 14.68 | 
|$15.63 - $23.38         |  |                     | 1,256,277 |                     |  |          | 5.97 |             |  |          | 20.35 |  |  |  | 1,096,007 |  |  |   | 20.61 | 
|$25.71 - $25.71         |  |                     | 22,049    |                     |  |          | 3.11 |             |  |          | 25.71 |  |  |  | 20,999    |  |  |   | 25.71 | 
|$35.83 - $35.83         |  |                     | 39,374    |                     |  |          | 3.58 |             |  |          | 35.83 |  |  |  | 39,374    |  |  |   | 35.83 | 
|$43.57 - $43.57         |  |                     | 38,849    |                     |  |          | 3.88 |             |  |          | 43.57 |  |  |  | 36,749    |  |  |   | 43.57 | 
|                        |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|                        |  |                     | 9,268,674 |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|                        |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 

Employee Savings Plan

During 1997, Eclipsys established a Savings Plan (the
Plan) pursuant to Section 401(k) of the
Internal Revenue Code (the Code), whereby employees
may contribute a percentage of their compensation, not to exceed
the maximum amount allowable under the Code. At the discretion
of the Board of Directors, Eclipsys may elect to make matching
contributions, as defined in the Plan. For the years ended
December 31, 2003, 2002 and 2001, the Board authorized
matching contributions totaling $750,000, $750,000 and $532,000,
respectively.

1998 Employee Stock Purchase Plan

Under Eclipsys 1998 Employee Stock Purchase Plan (the
Purchase Plan) (implemented in April 1998),
Eclipsys employees, including directors of Eclipsys who are
employees, are eligible to participate in quarterly plan
offerings in which payroll deductions may be used to purchase
shares of Common Stock. The purchase price of such shares is the
lower of 85% of the fair market value of the Common Stock on the
day the offering commences and 85% of the fair market value of
the Common Stock on the day the offering terminates.

7.     Commitments and
Contingencies

Noncancelable Operating Leases

Eclipsys leases its office space and certain equipment under
noncancelable operating leases. Rental expense under operating
leases was approximately $12.5 million, $11.8 million
and $11.4 million for the years

52



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




7.     Commitments and
Contingencies  (Continued)


ended December 31, 2003, 2002 and 2001, respectively.
Future minimum rental payments under noncancelable operating
leases as of December 31, 2003 are as follows (in
thousands):

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|Year Ending December 31, |  |  
|                         |  |  
|2004                     |  | $ | 10,632 | 
|                        
|                        
|                        
|                        
|2005                     |  |   | 7,801  | 
|                        
|                        
|                        
|                        
|2006                     |  |   | 6,210  | 
|                        
|                        
|                        
|                        
|2007                     |  |   | 4,083  | 
|                        
|                        
|                        
|                        
|2008                     |  |   | 2,574  | 
|                        
|                        
|                        
|                        
|Thereafter               |  |   | 5,394  | 
|                         |  |   |        | 
|                         |  | $ | 36,694 | 
|                         |  |   |        | 

Subsequent to December 31, 2003, Eclipsys contracted for a
minimum number of hours for airplane charters with a related
party (note 9). The minimum commitment amounts to $776,000 per
year for 2004 and 2005.

Indemnification clauses

Eclipsys standard software license agreements contain
indemnification clauses that are limited in amount. Pursuant to
these clauses, Eclipsys indemnifies, holds harmless, and agrees
to reimburse the indemnified party for losses suffered or
incurred by the indemnified party. Eclipsys believes the
estimated fair value of these indemnification clauses is
minimal. Accordingly, there are no liabilities recorded for
these agreements as of December 31, 2003.

8.     Legal Action

From July through September 2002, our company and three of
its then current officers (Messrs. Robert J. Colletti, John
T. Patton, Jr. and Harvey J. Wilson) were named in seven
complaints filed by purported shareholders of our company in the
United States District Court, Southern District of Florida, West
Palm Beach Division, or the District Court. Each complaint
sought certification as a class and monetary damages, and
alleged that we and the named officers violated federal
securities laws. We believe that the actions are without merit,
and are conducting a vigorous defense.

On February 4, 2003, the District Court issued an order
consolidating all seven cases into one single case and appointed
the City of Philadelphia Board of Pensions and Retirement, Louis
Giannakokas and Norman K. Mielziner to serve as lead plaintiffs.
On April 30, 2003, the plaintiffs filed with the District
Court an amended, consolidated complaint (the Amended
Complaint). On July 31, 2003, we filed a motion to
dismiss the Amended Complaint. On September 16, 2003, the
plaintiffs filed opposition to the motion to dismiss, and we
filed a reply brief on October 16, 2003. On
November 4, 2003, the District Court granted our motion to
dismiss the Amended Complaint in its entirety. In so doing, the
District Court granted the plaintiffs fifteen days to file a
further amended complaint that conforms to applicable law as
well as the District Courts ruling. The plaintiffs
subsequently obtained an extension of that fifteen day deadline.

On December 5, 2003, the plaintiffs filed with the District
Court their second amended complaint (the Second Amended
Complaint). In it, among other things, the plaintiffs
reduced the class period by a total of eight months and
eliminated numerous allegations that had been contained in their
Amended Complaint. On January 5, 2004, we filed a motion to
dismiss the Second Amended Complaint. The plaintiffs filed
opposition papers to our motion on February 20, 2004. In
March 2004, we will file a brief in further support of our

53



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




8.     Legal Action 
(Continued)


motion. At this time, our motion is pending. We do not know when
the District Court will rule on our motion or whether our motion
will be granted.

Separately, in October 2003, we were contacted by the
attorneys for the lead plaintiffs who sought our consent to
their filing of an amended complaint that would add new counts
asserting new claims and a new class period due to our announced
SunriseXA response time issues. We did not formally respond to
their request, and have not yet seen any pleadings filed in
which the lead plaintiffs have sought to add or assert claims.
Accordingly, we are unable to predict whether new claims may be
filed against us, or what effect of any new claims could have on
our pending cases. We are also unable to predict the nature of
any new claims or the damages that may be sought if any new
claims are filed.

We are involved in other litigation incidental to its business
from time to time. In the opinion of management, after
consultation with legal counsel, the ultimate outcome of such
litigation will not have a material adverse effect on our
financial position, results of operation or cash flows.

9.     Related Party Transactions

Eclipsys has a policy that all transactions between the Company
and its executive officers, directors and affiliates must be on
terms no less favorable to it than could be obtained from
unaffiliated third parties. Additionally, these transactions
must be approved by a majority of the members of the Board of
Directors, and by a majority of the disinterested members of the
Board of Directors.

Eclipsys leases office space in Boston, Massachusetts from a
former stockholder of SDK, who is a current employee. During the
years ended December 31, 2003, 2002 and 2001, Eclipsys paid
$526,000, $579,000, and $692,000 respectively, under this lease.
The lease is noncancelable and expires in 2009.

Eclipsys Chairman Emeritus, Harvey J. Wilson, owns a
company, RMSC of West Palm Beach Inc. (RMSC), which
leases an aircraft to a charter company. The charter company
provides aircraft charter services to Eclipsys as well other
outside parties. Mr. Wilson has no ownership or other
interest in the charter company. Eclipsys paid the charter
company $603,000, $885,000, and $775,000 in 2003, 2002 and 2001,
respectively, for charters using the aircraft owned by RMSC.
Eclipsys also paid the charter company $50,000, $265,000 and
$43,000 in 2003, 2002 and 2001, respectively, for charters of
other aircraft, not owned by RMSC. RMSC received $275,000,
$533,000 and $481,000 during 2003, 2002, and 2001, respectively,
from the charter company for these transactions. During
January 2003, Eclipsys contracted for a minimum number of
hours for airplane charters to extend the current pricing terms.
The minimum commitment amounts are $951,000 and $776,000 in 2004
and 2005, respectively. As part of this arrangement, Eclipsys
did not utilize $175,000 of the 2003 commitment. RMSC agreed to
allow the unused portion to be utilized in 2004 which is
reflected in the above commitment.

In July 1999, Eclipsys invested in HEALTHvision, Inc.
(HEALTHvision), a Dallas-based, privately held
internet healthcare company. Other principal investors included
VHA, Inc. and investment entities affiliated with General
Atlantic Partners, LLC. HEALTHvision provides Internet solutions
to hospital organizations to assist them in improving patient
care in the local communities they serve. We purchased 3,400,000
shares of common stock in HEALTHvision for $34,000, which at the
time represented 34% of the outstanding common stock on an
if-converted basis. As of December 31, 2003, our shares
represented approximately 28% of the common stock of
HEALTHvision on an if-converted basis. We account for our
investment in HEALTHvision using the equity method of
accounting. Due to losses recognized under the equity method,
the recorded balance of the investment in HEALTHvision was $0 as
of December 31, 2003. We entered into a joint marketing
arrangement with HEALTHvision under which both organizations
agreed to jointly market products and services to their
customers. Under this agreement, we paid HEALTHvision the sum of
$1.4 million during 2003 for the sale of products and
services, and owed HEALTHvision the sum of

54



---



##### 



ECLIPSYS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)




9.     Related Party
Transactions  (Continued)


$0.9 million as of December 31, 2003. Also, during 2003, we
earned revenues from HEALTHvision of $1.2 million for
hosting and other related services and had accounts receivable
due from HEALTHvision of $0.4 million at December 31,
2003. For the year ended December 31, 2003, HEALTHvision,
Inc. had total revenues of approximately $25.1 million
(unaudited) and a net loss of approximately $2.6 million
(unaudited) with total assets of approximately
$14.0 million (unaudited). We are not required to provide
funding to HEALTHvision, and have made no guarantees on their
behalf. In late 2003, we mutually agreed with HEALTHvision to
terminate the joint marketing arrangement of our agreement.

Eclipsys has a license agreement with Partners HealthCare
System, Inc. (Partners). Under the terms of this
license, Eclipsys may develop, commercialize, distribute and
support certain technology that it has received from Partners
throughout the world (with the exception of the Boston,
Massachusetts metropolitan area). Prior to Eclipsys
initial public offering, no sales of products incorporating the
licensed technology were made and, consequently, no royalties
were paid by Eclipsys pursuant to the license with Partners. The
royalty arrangement under the license terminated upon
Eclipsys initial public offering. After Eclipsys
initial public offering, Eclipsys sold products incorporating
the licensed technology. Eclipsys is obligated to offer to
Partners and certain of its affiliates a license for internal
use, granted on most favored customer terms, to all new software
applications developed by Eclipsys, whether or not derived from
the licensed technology, and major architectural changes to the
licensed technology. Partners and certain of its affiliates are
also entitled to receive internal use licenses, also granted on
most favored customer terms, for any changes to any module or
application included in the licensed technology requiring at
least one person-year of technical effort.

In 2001, Partners entered into a contract with Eclipsys for the
license of a new software application and related professional
services. This new software application consisted of an upgrade
to an existing software application that Partners had licensed
from Transition Systems, Inc, an entity that was acquired by
Eclipsys in December 1998. Under this new contract,
Partners paid Eclipsys the sums of $627,000, $1,032,000 and
$954,000 in 2003, 2002 and 2001, respectively. As of
December 31, 2003, Partners owed Eclipsys the sum of
$100,000 related to this contract. Mr. Jay Pieper, a
director of Eclipsys, is Vice President of Corporate Development
and Treasury Affairs for Partners. Partners was not affiliated
with Eclipsys at the time of the negotiation of the Partners
license from Transition Systems, Inc.

10.     Subsequent Events

In March 2004, the Company acquired CPM Resource Center,
LTD (CPMRC). CPMRC provides consulting services and
clinical content focused in the nursing area. The Company paid
$2.5 million in cash and issued 184,202 shares of common
stock for total consideration of $5.0 million.
Additionally, the prior owners of CPMRC may earn an additional
$12.5 million over the next 5 years based on future
operating results.

In February 2004, the Company temporarily suspended
offerings under its Employee Stock Purchase Plan (the
Purchase Plan). In the future the Company may elect
to resume offerings under the Purchase Plan but currently does
not have any plans to do so.

55



---



##### 



ECLIPSYS CORPORATION

SCHEDULE II  VALUATION OF QUALIFYING ACCOUNTS


For Each of the Three Years in the Period Ended
December 31, 2003


(in thousands)





|                  |                                            |            |   |           |  |            |   |            |  |  |   |        |   |  |   |         | 
|----------------- | ------------------------------------------ | ---------- | - | --------- |  | ---------- | - | ---------- |  |  | - | ------ | - |  | - | ------- | 
|                  |                                            | Balance at |   |           |  |            |   | Balance at
|                  |                                            | Beginning  |   |           |  |            |   | End of    
|                  |                                            | of Period  |   | Additions |  | Write-offs |   | Period    
|                 
|                 
|December 31, 2003 |                                            |            |   |           |  |            |   |            |  |  |   |        |   |  |   |        
|                 
|                 
|                 
|                 
|                  | Allowance for doubtful accounts            |            | $ | 3,412     |  |            | $ | 4,492      |  |  | $ | (3,097 | ) |  | $ | 4,807   | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance for deferred tax asset |            |   | 94,264    |  |            |   | 21,056     |  |  |   |        |   |  |   | 115,320 | 
|                 
|                 
|                 
|                 
|                 
|December 31, 2002 |                                            |            |   |           |  |            |   |            |  |  |   |        |   |  |   |        
|                 
|                 
|                 
|                 
|                  | Allowance for doubtful accounts            |            |   | 5,572     |  |            |   | 3,533      |  |  |   | (5,693 | ) |  |   | 3,412   | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance for deferred tax asset |            |   | 83,008    |  |            |   | 11,256     |  |  |   |        |   |  |   | 94,264  | 
|                 
|                 
|                 
|                 
|                 
|December 31, 2001 |                                            |            |   |           |  |            |   |            |  |  |   |        |   |  |   |        
|                 
|                 
|                 
|                 
|                  | Allowance for doubtful accounts            |            |   | 5,656     |  |            |   | 4,305      |  |  | $ | (4,389 | ) |  |   | 5,572   | 
|                 
|                 
|                 
|                 
|                  | Valuation allowance for deferred tax asset |            | $ | 82,817    |  |            | $ | 191        |  |  |   |        |   |  | $ | 83,008  | 
|                 

56



---



##### 



Quarterly Results (Unaudited)

The following table presents quarterly consolidated statement of
operations data for each of the eight quarters in the years
ended December 31, 2002 and 2003. The data in the statement
of operations is unaudited and, in the opinion of management,
includes all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the data for such
periods. Additionally, the data is derived from, and is
qualified by reference to, Eclipsys audited financial
statements, which appear elsewhere in this document.

For the Year Ended December 31, 2003

(In thousands, except per share data)


|                                    |  |         |         |         |  |         |         |         |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                    |  | First   |         | Second  |  | Third   |         | Fourth  |  |     
|                                    |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Year
|                                    |  |         |         |         |  |         |         |         |  |     
|Revenues                            |  | $       | 56,836  |         |  | $       | 63,386  |         |  | $    | 68,150  |   |  | $ | 66,307  |   |  | $ | 254,679 |  
|                                   
|                                   
|                                   
|                                   
|Gross profit margin                 |  |         | 21,348  |         |  |         | 25,323  |         |  |      | 26,744  |   |  |   | 20,250  |   |  |   | 93,665  |  
|                                   
|                                   
|                                   
|                                   
|Net (loss) income                   |  |         | (13,025 | )       |  |         | (11,019 | )       |  |      | (11,067 | ) |  |   | (20,853 | ) |  |   | (55,964 | )
|                                   
|                                   
|                                   
|                                   
|Basic net (loss) income per share   |  | $       | (0.29   | )       |  | $       | (0.24   | )       |  | $    | (0.24   | ) |  | $ | (0.46   | ) |  | $ | (1.23   | )
|                                   
|                                   
|                                   
|                                   
|Diluted net (loss) income per share |  | $       | (0.29   | )       |  | $       | (0.24   | )       |  | $    | (0.24   | ) |  | $ | (0.46   | ) |  | $ | (1.23   | )

For the Year Ended December 31, 2002

(In thousands, except per share data)


|                                    |  |         |        |         |  |         |        |         |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                    |  | First   |        | Second  |  | Third   |        | Fourth  |  |     
|                                    |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Year
|                                    |  |         |        |         |  |         |        |         |  |     
|Revenues                            |  | $       | 62,819 |         |  | $       | 54,252 |         |  | $    | 47,549  |   |  | $ | 53,448  |   |  | $ | 218,068 |  
|                                   
|                                   
|                                   
|                                   
|Gross profit margin                 |  |         | 30,507 |         |  |         | 23,626 |         |  |      | 14,146  |   |  |   | 18,474  |   |  |   | 86,754  |  
|                                   
|                                   
|                                   
|                                   
|Net income (loss)                   |  |         | 5,309  |         |  |         | (3,047 | )       |  |      | (17,174 | ) |  |   | (14,852 | ) |  |   | (29,763 | )
|                                   
|                                   
|                                   
|                                   
|Basic net (loss) income per share   |  | $       | 0.12   |         |  | $       | (0.07  | )       |  | $    | (0.38   | ) |  | $ | (0.33   | ) |  | $ | (0.67   | )
|                                   
|                                   
|                                   
|                                   
|Diluted net (loss) income per share |  | $       | 0.11   |         |  | $       | (0.07  | )       |  | $    | (0.38   | ) |  | $ | (0.33   | ) |  | $ | (0.67   | )

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

Not applicable.

Item 9A.     Controls and
Procedures

Our management, with the participation of our chief executive
officer and chief financial officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
December 31, 2003. Based on this evaluation, Eclipsys
chief executive officer and chief financial officer concluded
that, as of December 31, 2003, our disclosure controls and
procedures were (1) designed to ensure that material
information relating to us, including our consolidated
subsidiaries, is made know to our chief executive officer and
chief financial officer by others within those entities,
particularly during the period in which this report was being
prepared (2) effective, in that they provide reasonable
assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.

No change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) occurred during the fiscal quarter ended December 31,
2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

57



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##### 



Part III

Certain information required by Part III of Form 10-K will
be contained in the definitive Proxy Statement to be used in
connection with the annual meeting of stockholders for the year
2004, and is incorporated herein by reference to this
Form 10-K Annual Report:

Item 10.     Directors and
Executive Officers of the Registrant

Information regarding directors will be set forth in the proxy
statement for the annual meeting of stockholders for the year
2004 and is incorporated herein by reference. Information
regarding our executive officers is set forth under the caption
Executive Officers of the Registrant appearing at
the end of Part I, above.

Item 11.     Executive
Compensation

Information regarding executive compensation will be set forth
in the proxy statement for the annual meeting of stockholders
for the year 2004 and is incorporated herein by reference.

Item 12.     Security
Ownership of Certain Beneficial Owners and Management

Information regarding security ownership of certain beneficial
owners and management will be set forth in the proxy statement
for our 2004 annual stockholders meeting, and is
incorporated herein by reference.

The following table provides information about the Common Stock
that may be issued under our existing equity compensation plans
as of December 31, 2003.

|                                                               |       |                            |           |                              |  |                           |       |  |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------------- | --------- | ---------------------------- |  | ------------------------- | ----- |  |  |  | --------- | --------- | 
|                                                               |       | Number of securities to be |           |                              |  | Number of securities     
|                                                               |       | issued upon exercise of    |           | Weighted-average exercise    |  | remaining available for  
|                                                               |       | outstanding options,       |           | price of outstanding         |  | future issuance under    
|Plan category                                                  |       | warrants and rights        |           | options, warrants and rights |  | equity compensation plans
|                                                               |       |                            |           |                              |  |                          
|Equity compensation plans approved
    by security             |       |                            | 9,268,674 |                              |  | $                         | 11.05 |  |  |  | 1,109,099 |          
|                                                              
|                                                              
|                                                              
|                                                              
|Equity compensation plans not approved by
    security holders |       |                            |          |                              |  |                           |       |  |  |  |          |          
|                                                               |       |                            |           |                              |  |                           |       |  |  |  |           |          
|                                                               | Total |                            |           | 9,268,674                    |  |                           |       |  |  |  |           | 1,109,099 | 
|                                                               |       |                            |           |                              |  |                           |       |  |  |  |           |          

Item 13.     Certain
Relationships and Related Transactions

Information regarding certain relationships and related
transactions will be set forth in the proxy statement for the
annual meeting of stockholders for the year 2004 and is
incorporated herein by reference.

Item 14.     Principal
Accountant Fees and Services

Information regarding principal accountant fees and services
will be set forth in the proxy statement for the annual meeting
of stockholders for the year 2004 and is incorporated herein by
reference.

58



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##### 



Part IV

Item 15.     Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K

(a) The following documents are filed as part of this
report:



| |    |                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Consolidated Financial Statements included in Item 8 of
    this report on Form 10-K                                                          
|
| | 2. | Financial Statement Schedules included in Item 8 of this
    report on Form 10-K 
          Schedule II 
    Valuation of Qualifying Accounts

3. The following exhibits are included in this report:

| |               |  |  |                                                                                                                                                                                                                                                                         
| | ------------- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1*          |  |  | Agreement and Plan of Merger dated as of October
    29, 1998 by and among the Registrant, Exercise Acquisition Corp.
    and Transition Systems, Inc.                                                                                                                  
| | 2.2**         |  |  | Agreement of Merger among Alltel Healthcare
    Information Services, Inc., Alltel Information Services, Inc.,
    Eclipsys Corporation and Eclipsys Solutions Corp. dated as of
    January 24, 1997                                                                   
| | 2.3**         |  |  | Amended and Restated Stock Purchase Agreement
    among Eclipsys Corporation, SDK Medical Computer Services
    Corporation and the Selling Stockholders listed therein dated
    June 26, 1997                                                                         
| | 2.4**         |  |  | Asset Purchase Agreement by and among Motorola,
    Inc. Eclipsys Corporation and Emtek Healthcare Corporation dated
    January 30, 1998                                                                                                                               
| | 2.5****       |  |  | Agreement and Plan of Merger dated as of February
    5, 1999, by and among Eclipsys PCS and Sub                                                                                                                                                                        
| | 2.6****       |  |  | Escrow Agreement dated as of February 17, 1999,
    by and among Eclipsys, Sub, PCS and the PCS Stockholders and
    Noteholders                                                                                                                                        
| | 2.7*****      |  |  | Stock Purchase and Sale Agreement dated as of
    March 6, 1999 by and among Sun Gard Data Systems Inc., Sun Gard
    Investment Ventures, Inc., Med Data Systems, Inc., Intelus
    Corporation, and Eclipsys Corporation and Eclipsys Solutions Corp                  
| | 2.8******     |  |  | Agreement and Plan of Merger dated as of June 17,
    1999, by and among Eclipsys Corporation, Eclipsys Merger Corp.,
    MSI Solutions, Inc., MSI Integrated Services, Inc., Anna L.
    Bean, Michael R. Cote, Robert J. Feldman and the 1997 Feldman
    Family Trust
| | 2.9*******    |  |  | Asset Purchase Agreement by and among Quadramed
    Corporation, Eclipsys Corporation and Med Data Systems, Inc.
    dated July 1, 1999                                                                                                                                 
| | 3.1***        |  |  | Third Amended and Restated Certificate of
    Incorporation of the Registrant                                                                                                                                                                                           
| | 3.2**         |  |  | Third Amended and Restated Bylaws of the
    Registrant                                                                                                                                                                                                                 
| | 3.3********   |  |  | Certificate of Designation of Series A Junior
    Participating Preferred                                                                                                                                                                                               
| | 4.1**         |  |  | Specimen certificate for shares of Common Stock                                                                                                                                                                                                                         
| | 4.2********   |  |  | Rights Agreement, dated July 26, 2000, by and
    between Eclipsys Corporation and Fleet National Bank, as Rights
    Agent                                                                                                                                             
| | 10.1**        |  |  | Second Amended and Restated Registration Rights
    Agreement                                                                                                                                                                                                           
| | 10.2**        |  |  | Second Amended and Restated Stockholders Agreement                                                                                                                                                                                                                      
| | 10.5**+       |  |  | Information Systems Technology License Agreement,
    dated as of May 3, 1996, by and among Partners Healthcare
    System, Inc. and Integrated Healthcare Solutions, Inc.                                                                                              
| | 10.6**        |  |  | Preferred Stock Purchase Agreement by and among
    Eclipsys Corporation, General Atlantic Partners 47, L.P. and GAP
    Coinvestment Partners, L.P. dated February 4, 1998                                                                                             
| | 10.7**        |  |  | 1996 Stock Plan                                                                                                                                                                                                                                                         
| | 10.8********* |  |  | Amended and Restated 1998 Stock Incentive Plan                                                                                                                                                                                                                          

59



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##### 



| |                  |  |  |                                                                                                                                       
| | ---------------- |  |  | --------------------------------------------------------------------------------------------------------------------------------------
| | 10.9*********    |  |  | Second Amended and Restated 1998 Employee Stock
    Purchase Plan                                                                     
| | 10.10            |  |  | First Amendment to the Second Amended and
    Restated 1998 Employee Stock Purchase Plan                                              
| | 10.11            |  |  | Form of Indemnification Agreement between
    Eclipsys Corporation and each non-employee directors                                    
| | 10.12*********** |  |  | Amendment No. 1 to the Amended and Restated 2000
    Stock Incentive Plan                                                             
| | 10.13**          |  |  | Settlement of Claims Agreement, dated as of March
    13, 1998, between ALLTEL Information Services, Inc. and Eclipsys
    Corporation
| | 10.14*********   |  |  | Amended and Restated 1999 Stock Incentive Plan,
    as amended                                                                        
| | 10.15*********   |  |  | Amended and Restated 2000 Stock Incentive Plan                                                                                        
| | 10.16            |  |  | Employment Agreement for Paul L. Ruflin                                                                                               
| | 10.17*********** |  |  | Agreement with Mr. Harvey J. Wilson                                                                                                   
| | 10.18*********** |  |  | Consulting Agreement with Mr. Harvey J.
    Wilson                                                                                    
| | 10.19*********** |  |  | Agreement with Mr. John S. Cooper                                                                                                     
| | 21**********     |  |  | Subsidiaries of the Registrant                                                                                                        
| | 23               |  |  | Consent of PricewaterhouseCoopers LLP                                                                                                 
| | 31.1             |  |  | Certification of Paul L. Ruflin                                                                                                       
| | 31.2             |  |  | Certification of Robert J. Colletti                                                                                                   
| | 32               |  |  | Certification Pursuant to 18 U.S.C. Section 1350                                                                                      






|            |                                                                                                                                                                
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | Confidential treatment granted on August 6, 1998 in
    connection with the Registrants initial public offering                                               
|           
|*           | Incorporated by reference to the Joint Proxy Statement/
    Prospectus included in the Registrants Registration
    Statement on Form S-4 (File No. 333-68353)
|           
|**          | Incorporated by reference to the Registrants Registration
    Statement on Form S-1, as amended (File No. 333-50781)                                          
|           
|***         | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    1998 (File No. 000-24539)                   
|           
|****        | Incorporated by reference to the Registrants Current
    Report on Form 8-K dated March 3, 1999 (File
    No. 000-24539)                                      
|           
|*****       | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31, 1999
    (File No. 000-24539)                  
|           
|******      | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    1999 (File No. 000-24539)                   
|           
|*******     | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended September 30,
    1999 (File No. 000-24539)              
|           
|********    | Incorporated by reference to the Registrants Current
    Report on Form 8-K dated August 8, 2000 (File
    No. 000-24539)                                     
|           
|*********   | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002 (File No. 000-24539)                   
|           
|**********  | Incorporated by reference to Exhibit 21 of the
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001 (File No. 000-24539)       
|           
|*********** | Incorporated by reference to the Registrants Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2003 (File No. 000-24539)                  

(b) Reports on Form 8-K.

None.

60



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##### 



Signatures

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

|                                         |  |                                                                                                 |  |               
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Title                                                                                           |  | Date          
|                                         |  |                                                                                                 |  |               
|/s/ PAUL L. RUFLINPaul L. Ruflin         |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)               |  | March 15, 2004
|                                        
|/s/ ROBERT J. COLLETTIRobert J. Colletti |  | Senior Vice President, Chief Financial Officer
    (Principal Financial and Accounting Officer) |  | March 15, 2004
|                                        
|/s/ STEVEN A. DENNINGSteven A. Denning   |  | Director                                                                                        |  | March 15, 2004
|                                        
|/s/ G. FRED DIBONAG. Fred Dibona         |  | Director                                                                                        |  | March 15, 2004
|                                        
|/s/ EUGENE V. FIFEEugene V. Fife         |  | Director                                                                                        |  | March 15, 2004
|                                        
|/s/ BRADEN KELLYBraden Kelly             |  | Director                                                                                        |  | March 15, 2004
|                                        
|/s/ JAY B. PIEPERJay B. Pieper           |  | Director                                                                                        |  | March 15, 2004

61