##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549





Form 10-K/A







|  |  |                                                                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------
|þ |  | AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                   
| 
|  |  | For the fiscal year ended December 31,
    2003                                                                




Commission file number 000-29273

Quovadx, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                    |  |                                         
|------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                            |  | 85-0373486                              
|(State or other jurisdiction of
    incorporation or organization)  |  | (I.R.S. Employer
    Identification No.)
|                                                                   
|6400 S. Fiddlers Green Circle,
    Suite 1000, Englewood, Colorado |  | 80111                                   
|(Address of principal executive
    offices)                        |  | (Zip Code)                              

Registrants telephone number, including
area code:

(303) 488-2019


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

None


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

|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|                                        |  |                                          
|Common Stock, par value $0.01 per share |  | NASDAQ                                   

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 and 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 filings for the past
90 days.     Yes þ          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 the 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.     þ

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

The aggregate
market value of the voting and non-voting equity held by
non-affiliates of the registrant as of June 30, 2003 was
$81.5 million, based on the last sale price reported for
such date on the Nasdaq National Market. This determination is
not necessarily conclusive for other purposes.

As of
March 12, 2004, there were 39,446,873 shares of Common
Stock of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
proxy statement, to be delivered to stockholders in connection
with the Registrants 2004 Annual Meeting of Stockholders,
are incorporated by reference into Part III of this
Form 10-K.



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EXPLANATORY NOTE







This Amendment No. 2 to Quovadx, Inc.s
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 is being filed solely for the purpose of
refiling corrected Exhibits 31.1, 31.2, 32.1 and 32.2
together with the full Annual Report on Form 10-K. No other
changes are being made by means of this filing.






---










QUOVADX, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2003


TABLE OF CONTENTS

|                                                    |  |                                                                                                        |     |      |    |  |  | 
|--------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | --- | ---- | -- |  |  | 
|Item                                                |  |                                                                                                        |     |     
|Number                                              |  |                                                                                                        |     | Page
|                                                    |  |                                                                                                        |     |     
|PART I                                             
|1.                                                  |  | Business                                                                                               |     |      | 3  | 
|2.                                                  |  | Properties                                                                                             |     |      | 14 | 
|3.                                                  |  | Legal Proceedings                                                                                      |     |      | 15 | 
|4.                                                  |  | Submission of Matters to a
    Vote of Security Holders                                                |     |      | 16 | 
|PART II                                            
|5.                                                  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |     |      | 16 | 
|6.                                                  |  | Selected Financial Data                                                                                |     |      | 16 | 
|7.                                                  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |     |      | 19 | 
|7A.                                                 |  | Qualitative and Quantitative
    Disclosures About Market Risk                                         |     |      | 33 | 
|8.                                                  |  | Consolidated Financial
    Statements and Supplementary Data                                           |     |      | 33 | 
|9.                                                  |  | Changes In and Disagreements
    With Accountants on Accounting and Financial Disclosure               |     |      | 34 | 
|9A.                                                 |  | Controls and Procedures                                                                                |     |      | 34 | 
|PART III                                           
|10.                                                 |  | Directors and Executive
    Officers of the Registrant                                                 |     |      | 34 | 
|11.                                                 |  | Executive Compensation                                                                                 |     |      | 34 | 
|12.                                                 |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |     |      | 34 | 
|13.                                                 |  | Certain Relationships and
    Related Transactions                                                     |     |      | 34 | 
|14.                                                 |  | Principal Accountant Fees an
    Services                                                              |     |      | 35 | 
|PART IV                                            
|15.                                                 |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |     |      | 35 | 
|Signatures                                          |  |                                                                                                        | 38  |     
|Consolidated Financial
    Statements               |  |                                                                                                        | F-1 |     
|Schedule II 
    Valuation and Qualifying Accounts |  |                                                                                                        | S-1 |     
|License Agreement                                  
|Consent of Assignment                              
|Subsidiaries of the Registrant                     
|Consent of Ernst & Young LLP                       
|Certification of Chief Executive Officer           
|Certification of Chief Financial Officer           
|Certification of Chief Executive Officer           
|Certification of Chief Financial Officer           
|Code of Business Conduct and Ethics                



FORWARD-LOOKING STATEMENTS

All statements, trend analysis and other
information contained in this Annual Report on Form 10-K
(Annual Report) of Quovadx, Inc.
(Quovadx, the Company, the
Registrant, we or us) and
the information incorporated by reference which are not
historical in nature are forward-looking statements within the
meaning of the Private-Securities Litigation Reform Act of 1995.
These forward-looking statements include, without limitation,
discussion relative to markets for our products and trends in
revenue, gross margins and anticipated expense levels, as well
as other statements including words such as
anticipate, believe, plan,
estimate, expect and intend
and other similar expressions. All statements regarding the
Companys expected financial position and operating
results, business strategy, financing plans, and forecast trends
relating to our industry are forward-looking statements. These
forward-looking statements are subject to business and economic
risks and uncertainties, and our actual results of operations
may differ materially from those contained in the
forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to,
those discussed in Risk Factors below.

1



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Trademarks

Rogue Wave, SourcePro, Stingray, Cloverleaf,
HostAccess, WebAccel and INSURENET are registered trademarks of
Quovadx, Inc. in the United States and/or select foreign
countries; and QDX and QUOVADX are trademarks of Quovadx, Inc.
The absence of a trademark from this list does not constitute a
waiver of Quovadx, Inc.s intellectual property rights
concerning that trademark. Care Data Exchange is a registered
trademark of the California Health Care Foundation in the United
States. This document may contain references to other companies,
brand and product names. These companies, brand and product
names are used herein for identification purposes only and may
be the trademarks of their respective owners.

2



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PART I






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

Overview

Quovadx is a global software and services firm
that helps more than 20,000 enterprise customers worldwide
develop, extend and integrate applications based on open
standards. Our software and service offerings include an
integrated suite of application development tools and vertical
enterprise applications for companies in healthcare, financial
services, software, telecommunications, public sector,
manufacturing, and life sciences.

Quovadx strategically uses technology to help our
clients automate and streamline their manual processes and
integrate their legacy systems. Through a series of acquisitions
and organic product development we have compiled a set of
strategic software tools based on eXtensible Markup Language
(XML) technology.

These software tools allow applications, products
and services to communicate and interoperate using an extendable
technology, XML, as the mechanism. An application created with
QUOVADXTM development tools, is a composite of
functions from an organizations existing systems and
processes, preserving the value of the underlying legacy
systems. Unlike packaged applications that force companies to
sacrifice their processes or workflows, QUOVADX technology
allows our customers to build on their unique strengths and
capitalize on their competitive strategies.

Our integrated software tool suite is called
QDXTM Platform V. QDX Platform V allows our customers
to leverage processes and data in existing legacy applications
and databases while they develop new composite applications. QDX
Platform V software speeds the development and deployment of our
customers process and integration application to improve
their business processes. Quovadx also develops vertical
application solutions using QDX Platform V that are sold
primarily to the healthcare industry. Quovadx adds extensive
professional service capabilities, including consulting,
implementation, hosting, transaction services and operations
management. We believe our model creates value for our customers
by allowing them to automate and extend valuable business
processes and transact business in real-time with their trading
partners (customers, suppliers, business partners), while
preserving the significant investments they have made in their
legacy systems.

Our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
all amendments to such reports filed pursuant to
Section 13(a) or 15(d) of the Exchange Act are available,
free of charge, on or through our Internet website located at
www.quovadx.com, as soon as reasonably practicable after they
are filed with or furnished to the SEC.

Industry Background

Since the 1970s, organizations have made
investments in business-critical information technologies. In
many cases, they have deployed multiple generations of
best-of-breed technologies from different vendors that
successfully address their fundamental business requirements.
Often the resulting heterogeneous computing environment is
complex, consists of incompatible systems, is inflexible and
inefficient and cannot be accessed by users across the global
enterprise. This legacy computing environment frequently limits
the ability of these organizations to grow and remain
competitive. In addition, these mission-critical legacy systems
represent enormous investments by the organization in terms of
time, money, training and management resources.

In the 1990s, some of these organizations
attempted to solve this problem by replacing their heterogeneous
computing environments with next generation integrated systems.
Despite the promise of single-vendor solutions to offer an
integrated, more accessible computing environment, these new
systems often failed to replicate the functionality of the
legacy system they replaced, or in other cases, deployment was
never completed. We believe high-profile failures of this nature
have led to reluctance to attempt replacement of legacy systems
due to significant business risks.

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Today, despite recognizing the limitations of
legacy computing environments, we believe organizations are
reluctant to abandon their investment in their information
technology, putting their mission-critical business processes at
risk and expending significant financial and management
resources. Instead, we believe organizations are increasingly
seeking technology that will:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | leverage existing investment in legacy systems,
    without disrupting operations;        
|
| |  | allow simultaneous access across multiple
    locations around the world;                 
|
| |  | improve the look and feel of applications and
    user interfaces to enhance productivity;
|
| |  | increase efficiency with new functionality and
    streamlined business processes; and    
|
| |  | provide an attractive return on investment.                                               

Organizations facing this dilemma are common
within the healthcare, financial services, telecommunications,
pharmaceutical, biotechnology, defense, public sector and media
and entertainment industries.

The QUOVADXTM Solution

Our product and service offerings allow our
customers to:

Preserve investment in legacy
systems.By using our products, our
customers can continue to use their legacy applications,
preserving existing information and data, as well as the
underlying business logic. By preserving the legacy system, our
customers maintain the same functionality, speed and fault
tolerance without exposure to the substantial risks of
installing a replacement system.

Extend access to applications globally through
Web services.Our products allow our
customers to use their legacy applications in a standardized,
consistent and reusable format through a standard Web browser
interface. This offers a relatively low-cost way to connect
internal applications and share data, and allows applications to
be deployed worldwide.

Expand efficiency and productivity by
streamlining workflow.By deploying
our products as Web services, our customers can automate
time-consuming manual processes, eliminate manual data entry,
reduce errors and enhance customer service.

Reduce training time and support by improving
user interfaces.By providing a single
Web-based interface to legacy applications, our products
eliminate the need for employees to use several different
interfaces to complete a single task, reducing training costs
and support needs. Our customers have reported that the enhanced
look and feel of Web deployed legacy applications leads to
increased ease of use and higher productivity.

Our customers have reported that by preserving
their legacy systems using our products, they have experienced
reduced expenses, increased sales and enhanced customer
satisfaction. For example, a wireless services provider
implemented a QUOVADX-based Web services wireless activation
system to automate its customer activation process. The service
provider was activating as many as 5,000 new customers per month
by filling out forms by hand and faxing the forms to in-house
activators. Activators would then manually enter the customer
information into a legacy billing system database. The service
provider implemented a QUOVADX-based Web services solution to
automate this process. Our products enabled access into the
service providers legacy systems and data and
implementation of new business processes to ensure smoother
activations. The service provider can now access legacy
information on its customers, register new customers and
activate service simultaneously via Web browser-based consoles.
Employees no longer need to manually re-enter information to
activate a new customer, and customers leave the store with an
active wireless phone. The wireless service provider has advised
us that it saved significant manual data entry time in 2002 and
experienced enhanced customer satisfaction.

4



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Products

Since January 2004, Quovadx is comprised of two
primary divisions: the Rogue Wave Software division, which
provides reusable software components and integrated software
tools that facilitate application development; and the
Enterprise Application Software division, which offers
vertical-specific solutions to improve business processes and
create value from existing systems.

The Rogue Wave Software division now serves as
the technology hub for Quovadx and its customers, housing a set
of integrated software tools we market as QDXTM
Platform V, as well as the Rogue Wave® C++ toolkit
components used by technologists and developers.

QDX Platform V is an integrated suite of software
tools providing a flexible, service-oriented architecture for
building composite applications. QUOVADX software allows
enterprises to reuse key information and data from existing
software applications, including the applications business
logic, which is resident in and often restrained by legacy
processes.

To quickly develop portals and applications,
organizations need a technology platform that can create and
reuse services. For example, by creating one service to retrieve
a customer name and then reusing that service across several
applications, enterprises can quickly assemble new portals and
applications to meet changing needs.

QDX Platform V contains three components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application Development
    Tools:To facilitate rapid and
    composite application development, QDX Platform V allows
    developers to call on a set of common tools, frameworks,
    engines, interfaces and other internal or external services to
    leverage existing applications. These tools are used for
    application development, platform configuration, and portal
    development. The tools include WebAccel® Presentation
    Services, Advanced Security, Enterprise Monitor, Debugger, and
    Portal Generator.                                                                                                                                                                                                                                                                                                                                             
|
| |  | Business Process Management
    Tools:With the QDX Platform V
    business process management tools, companies can manage business
    processes, handle exceptions and respond to changing
    regulations. Our business process management system can route
    data in a business process involving manual and/or computerized
    interactions. Using our patented, built-in rules engine,
    enterprises can modify processes to change routing instructions
    based on data or exceptions. Enterprises can also configure the
    rules engine to automatically adapt to changing business or
    regulatory requirements. By allowing end-users to configure
    rules based on a variety of attributes, QDX Platform V
    enables powerful control over business processes.                                                                                            
|
| |  | Integration Tools:One of the keys to streamlining business processes is to
    leverage all of the information in existing applications,
    including legacy applications. QDX Platform V provides
    integration tools that offer connectivity to any application,
    which prevents errors associated with re-keying information and
    maintaining duplicative information. QDX Platform V Integration
    Services integrate applications and replace costly,
    point-to-point interface development by providing a flexible,
    reliable, messaging platform that connects a host of application
    programs, databases, objects and protocols. The underlying
    infrastructure of the QDX Platform V Integration Services
    component provides integration management, data integration and
    security. The integration tools include the following components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legacy Screen
    Rejuvenation:The QDXTM
    Platform V Screen Rejuvenation tool facilitates rapid
    re-engineering by exposing character-based applications as a
    service-oriented data source. This allows developers to
    seamlessly incorporate legacy systems into new applications,
    providing easy access for use in advanced business processes and
    Web-based graphical user interfaces. With this component, the
    developers do not need to make code changes to the host system
    and are provided with the information and interfaces they need
    to quickly add functionality to any web portal in a variety of
    programming environments.
|
| |  | Light Weight Enterprise Integration Framework
    (LEIF):This product is designed to
    integrate C++ applications with XML data and Web services,
    enabling C++ applications to communicate with applications
    created in other languages, both within an enterprise and with
    external partners                                                                                                                                                                                                                                                                                                                                                                   

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | or customers. LEIF employs industry-standard
    networking, XML and Web services technologies to expose the
    functionality of business-critical C++ applications to other
    disparate application and business processes. By easing the
    integration of XML with C++ applications, LEIF allows legacy
    software to work seamlessly with XML documents and to bridge
    platforms and languages. Our LEIF product is the link between
    C++ applications and QDXTM Platform V.

Our C++ development tools for technologists
include the SourcePro® C++ Suite and the Stingray®
product line. Rogue Wave® SourcePro® C++ Suite
increases developer productivity and their ability to deliver
projects on schedule. The software supports technology
environments that use multiple platforms at once, through tested
and standardized C++ libraries that work with industry-leading
operating systems. SourcePro C++ handles the intricacies of
complex software development tasks like threading, string
handling and internationalization and helps development teams
build critical enterprise applications for a global market.
Ultimately, SourcePro C++ helps reduce development and
maintenance costs, accelerates project deployment, and enables
applications to grow and evolve with changing business needs.

The key benefits SourcePro C++ Suite delivers
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Multiplatform
    Support.Cross-platform support allows
    technologists to develop applications and deploy software
    systems in a wide variety of environments with minimal
    development modification. Source Pro C++ tools incorporate
    basic and routine operations, allowing developers to focus on
    creating the business logic in an application, rather than the
    low-level details of their development environments.
|
| |  | Support for Distributed
    Applications.Programmers who develop
    complicated, large and distributed applications can use the
    SourcePro C++ products to make their applications work in
    concert, across multiple systems, interfacing seamlessly.                                                                                                                                                                                 
|
| |  | Enterprise
    Scalability.SourcePro C++ tools help
    programmers develop flexible, modular applications that can be
    easily extended and enhanced.                                                                                                                                                                                                                                                                                     
|
| |  | Highly Customizable.SourcePro C++ enables developers to customize the components for
    their own specialized applications. Developers can use the
    standard application programming interfaces and avoid granular
    programming details, or can drill down to the native code, if
    necessary.                                                                                                                                      

The SourcePro C++ Suite consists of four modules,
each tailored for a specific area of C++ application development:



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | Source®Pro Core
    handles the low-level intricacies of the C++ language, which
    enhances developer productivity.
|
| |  | Source®Pro DB
    provides a consistent, high-level C++ interface to work with
    relational databases.             
|
| |  | Source®Pro Net
    supplies components for building network and Internet-enabled
    applications.                   
|
| |  | Source®Pro
    Analysis delivers components for solving mathematical problems
    in business and research.          

Rogue Wave® Stingray® products help
companies create scalable, distributed graphical user interface
(GUI) applications that can be easily integrated with
current enterprise systems and applications. By providing the
graphical components required to mimic the look and feel of
Microsoft® applications, Stingray products help companies
quickly create GUIs with functionality that is consistent with a
Microsoft standard, thereby increasing end-user acceptance and
use.

The Stingray products include:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stingray Studiois a
    comprehensive set of integrated components for developing GUIs
    with the latest Microsoft look and feel.          
|
| |  | Objective Gridis an
    advanced grid component that mimics many of the features of
    Microsoft® Excel® and provides database connectivity.

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| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Objective Toolkitis
    a broad library of drop-in components that address areas not
    covered by Microsoft Foundation Classes (MFC) and ActiveX
    libraries, which contain a set of basic C++ building blocks for
    creating Windows based applications.

Stingray products greatly reduce the overall
development cycle by leveraging existing application code,
enabling developers to focus on creating and updating business
logic rather than the low-level details of MFC and Active X GUI
functionality. The flexible Stingray components are easy to use,
shortening development time and making it easier to maintain and
evolve GUI applications as needs change.

The HostAccess® product line allows end
users to access character-based legacy applications through
terminal emulation from a personal computer workstation,
supporting over 35 types of legacy systems.

The Enterprise Application Software division now
develops and markets our Adaptive Applications.

Adaptive Applications for Business Process
Management.We believe one of our key
differentiators is the innovative use of our QDX Platform V to
solve real business problems. We have developed packaged
solutions, using QDX Platform V, which we call Adaptive
Applications. Our Adaptive Applications offer another option to
buying off-the-shelf software and adapting business processes to
meet the conditions of the software or to building expensive
custom applications that are antiquated by or before
implementation. Rapid flexibility is key to growing a business
and we believe our adaptive approach provides the
majority of the solutions our customers need, while allowing an
organization to customize the application to suit their business
needs on a continual basis.

Quovadxs Adaptive Applications, built on
QDX Platform V, meet specific business process needs. These
applications include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | QDXCash Accelerator is a packaged
    Electronic Data Interchange (EDI) solution for
    healthcare provider organizations to increase transaction
    success rates, decrease accounts receivables and reduce claim
    denials  while increasing cash flow and preserving
    transaction routing choices. QDXTM Cash Accelerator
    provides both strategic and tactical advantages. Strategically,
    QDX Cash Accelerator INSURENET® Direct allows healthcare
    organizations to connect directly to payers and other trading
    partners for HIPAA transactions, thereby reducing dependence on
    traditional clearinghouses altogether. Tactically, QDX Cash
    Accelerator INSURENET® Hub enables the real-time electronic
    exchange of transactions to over 1,100 unique payers by virtue
    of the multiple clearinghouse relationships Quovadx has formed.                                                                                                                                                                                                              
|
| |  | QDXEnterprise Data Exchange
    provides clinical, financial and demographic information to
    physicians and healthcare service providers. Based on QDX
    Platform V, this QUOVADXTM Adaptive Application
    seamlessly collects and exposes a comprehensive set of current
    patient information, regardless of the resident systems or
    storage formats. Due to its XML foundation, QDX Enterprise Data
    Exchange delivers a flexible structure that healthcare provider
    organizations can quickly and easily modify to meet specific
    business requirements. QDX Enterprise Data Exchange also offers
    an easy-to-maintain, light-weight design which is easily branded
    to customer-specific environments. Implementation of QDX
    Enterprise Data Exchange is often an important first step in
    establishing the Care Data Exchange® solution, a regional
    clinical data-sharing solution that is designed to provide a
    patient-centric view of clinical information from multiple,
    disparate data sources using a peer-to-peer data-sharing model.
|
| |  | QDXCare Management System applies
    cutting-edge analysis methods to clinical data in order to help
    health care provider organizations improve their clinical
    performance by allowing users to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |   |                                                         
| | - | --------------------------------------------------------
| |  | improve patient throughput,                             
|
| |  | reduce medical errors and complications,                
|
| |  | improve compliance with evidence-based
    medicine, and
|
| |  | improve documentation and information handling.         

7



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The QDX Care Management System helps health care
    provider organizations take advantage of the vast data resources
    that often remain trapped or underused within organizations
    through an Internet-based interface which enables remote access
    by medical officers, clinical analysts, physicians and health
    care professionals to perform their jobs more effectively.                                         
|
| | The QDX Care Management System is typically sold
    pursuant to three- to five-year contracts. Contract pricing is
    based on a per-encounter basis with services, staffing, or
    outsourcing priced on an as configured basis. Customers
    typically have unlimited access to data and are supported by an
    array of telephone and email help, data validation and
    management, training classes and ad-hoc services.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | QDXTM Phoenix Solution Sourcing
    empowers payer and third-party administrator organizations to
    achieve the right balance between cost, service and strategic
    advantage. Through the provision of an application service
    provider-model, administrative applications and business process
    outsourcing services for functions including claims processing,
    customer relationship management and medical management,
    customers of QDX Phoenix Solution Sourcing can achieve marked
    improvements. Such improvements include higher auto-adjudication
    rates, fewer errors, shorter cycle times and improved service,
    all translating into measurable bottom-line results.
|
| |  | QDXTM Medical Management tools provide
    industry standard core business processes that are adaptable to
    a healthcare organizations unique needs. By adapting web
    technology to the unique challenges of the healthcare industry,
    QDX Medical Management tools automate and integrate all aspects
    of the care management process. QDX Medical Management tools
    include QDXTM Case Management, QDXTM
    Utilization Management, QDXTM Disease Management and
    QDXTM CustomerFocus.                                                                                                                                                                                               
|
| |  | QUOVADXTM Life Sciences Adaptive
    Framework contains a set of reusable, interoperating components,
    including role-based access control, support for Title 21
    Code of Federal Regulations (21 CFR
    Part 11) and Health Insurance Portability and
    Accountability Act of 1996 (HIPAA) compliance,
    automated process escalations, leveraged staff activities and
    language and form factor independence, that Life Sciences
    organizations can use to quickly create custom solutions to
    their unique business problems.                                                                                                                                                   
|
| |  | QDXTM Quick Trials is an adaptive
    application for performing automated clinical trial management,
    offering life sciences organizations a highly customizable
    solution for managing the various complexities associated with
    the drug approval process. QDX Quick Trials helps optimize
    clinical trial processes from site enrollment to trial closeout
    by combining proactive escalation with features that support
    21 CFR Part 11 and HIPAA compliance, including
    automation of tasks such as mailings, communications, faxes,
    e-mail notifications, documentation and report circulations.                                                                           

Quovadx also offers a wide range of services to
support our customers in the implementation, support,
maintenance and extension of the Quovadx software solutions.

Professional
Services.Our service offerings range
from software implementation, to project-related consulting, to
full IT outsourcing. We have developed a proprietary
methodology, the eXtensible Development Discipline, a
methodology used to address problem definition, strategic
opportunity and operational efficiency. This methodology
produces a plan of action, or a strategy from which our
architects design and build a solution and integrate the
appropriate components.

Recurring Services.Recurring services include software maintenance and support,
transaction-based services, a multi-year IT outsourcing
arrangement and hosting services. We provide a remote, fully
managed and maintained information technology shop, centralized
database and application servers, in support of the following
three principal areas of our recurring service operation:



| |   |                                
| | - | -------------------------------
| |  | Data Hosting and Storage       
|
| |  | Data Movement and Normalization

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Data Access, Analysis and Reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Data Hosting and Storage.Our data centers are organized for
    managing and storing terabytes of data entrusted to us from our
    clients. These data are usually utilized with the business logic
    from our client organizations so the data processing and storage
    strategy must be precise, yet flexible. Our approach to this
    challenge has two primary thrusts, centralized hosting and
    storage of data and distributed storage of data in clinical data
    repositories.                                                                                                                                                                                                                          
|
| |   | Our central hosting environment is scalable to
    handle growth in data volume as our business environment
    evolves. Additionally, we employ a number of security measures
    to protect data, including protecting against unauthorized
    discovery, corruption, access disruption, and loss as well as
    adhere to national regulations and standards such as HIPAA.                                                                                                                                                                                                                                                                                                                                           
|
| |   | Our technology offers extreme flexibility in the
    distributed model. For example, we have a standard clinical data
    repository, which allows us to aggregate data remotely, with an
    indexing service for performing remote queries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Data Movement and Normalization.Quovadx technology and processes
    enable the acquisition of data from different source systems and
    customization to fit a particular organizations
    infrastructure. Data validation technology is also provided to
    validate incoming data as well as allows the customer to correct
    data errors using a browser-based interface. In addition, we
    apply standard vocabularies across clinical organizations to
    standardize data for comparative and analytic reasons.                                                                                                                                                                                           
|
| |  | Data Access, Analysis and Reporting.Ultimately, clients use our tools to
    improve their business processes, with information supplied via
    reports, alerts and other means. To that end, we have developed
    a combination of methods to make information accessible to our
    customers. For example, retrospective analytic reports deliver
    clinical insight for populations of patients to support the
    hospital quality measurement, monitoring and improvement
    functions. We also integrate an ad-hoc query function that makes
    use of an industry-leading business-intelligence engine to
    provide full-client application capabilities against our
    centrally-hosted data repository.

Technology

QDX Platform V. QDX
Platform V offers a comprehensive solution for rapid application
development and deployment. QDX Platform V supports
service-oriented applications, enabling organizations to perform
seamless integration between enterprise systems and all commerce
touch points including customers, partners, and exchanges within
intranet, extranet and Internet environments.

QDX Platform Vs architecture contains a
complete suite of services-oriented application development
capabilities:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Presentation layer,
    supporting industry-standard user interface development
    technologies.                                                                                                                                                                  
|
| |  | Web services
    support, allowing developers to easily
    fabricate and deploy a consistent XML-based interface to
    Platform V applications.                                                                                                                  
|
| |  | Business process management
    layer, allowing developers to
    orchestrate the logic of the workflow between the users and
    systems, to distribute transaction management across systems and
    to maintain business logic separate from presentation logic.
|
| |  | Integration layer,
    allowing developers to connect and communicate to different Web
    services or legacy systems and industry standards-based adapters                                                                                                        

The Platform V suite of development tools
provides a flexible foundation for the companys vertical
industry Adaptive Applications, allowing these applications to
support a wide variety of specific business requirements.

Rogue Wave® Platform
X. In the first half of 2004, we
expect to release Rogue Wave Platform X, however, in our sole
discretion, the release schedule may change. The technology
behind Rogue Wave

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Platform X is based on the components of QDX
Platform V, which have been reorganized into a new
lightweight architecture and intuitive user interface to
facilitate the development, assembly, orchestration, monitoring
and management of service-oriented applications.


With a pure XML-based foundation, the core
technologies in Rogue Wave Platform X enable organizations to
create composite applications from newly created Web services,
rejuvenated legacy applications and enterprise systems written
in any programming language and residing on any intranet,
extranet or Internet environments.

In addition, the Companys suite of C++
development components offer industry leading support for
development of high-performance mission-critical business
applications.

Strategy

Over the past several years, Quovadx has taken a
measured approach to execute on its business plan to evolve into
a higher margin software company. Key goals inherent in this
plan are the continual expansion of our technology base to
supplement and strengthen our product offering, and the
achievement of a critical mass of customers, that derive
ongoing, measurable success from our platform tools and
enterprise application solutions. To that end, we are pursuing
the following strategic initiatives:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage the value of our customer
    base.As of December 31, 2003, we
    had sold our products to over 20,000 customers, including
    enterprise information technology departments, software
    developers, independent software vendors and individual users.
    We believe that we have the opportunity to sell additional
    products into this customer base.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Strategically and opportunistically
    acquire.As part of our growth
    strategy we will continue to assess potential acquisitions. We
    have made several acquisitions of complementary products and
    technologies that extend our solutions platform. Most recently,
    in December 2003 we acquired Rogue Wave Software, a provider of
    C++ programming tools and an integration framework that has
    broad penetration across several vertical markets including the
    financial services industry. We expect to continue to pursue
    acquisitions of additional companies and technologies that will
    extend the reach of our platform and accelerate our expansion
    into other vertical markets; however, our ability to do so will
    depend on market conditions and the availability of cash among
    other things.
|
| |  | Continue to Introduce Innovative Technology
    Solutions.We believe that continuing
    the development of state-of-the-art technology is necessary to
    remain competitive in the marketplace. We will continue to
    devote significant resources to develop new products and
    solutions. We expect to continue to consider the licensing and
    acquisition of complementary software technologies and
    businesses where appropriate, integrate acquired technologies
    and products, and enhance the proprietary technology to increase
    our software product sales.                                                                                                                                                                                                                                                             

Competition

The marketplace for application development
tools, systems integration and business process management
software is highly competitive. Competition, when coupled with
the rapid evolution of technology and business practices,
presents us with a challenging environment.

Competitive factors affecting us include:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Brand recognition and market awareness                                           
|
| |  | Product and features, functionality and quality                                  
|
| |  | Service offering levels and quality                                              
|
| |  | Internal development operations with the
    Companys customer and prospect base
|
| |  | Ease and timeliness of implementation                                            
|
| |  | Adequate infrastructure                                                          

10



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| |   |                                                 
| | - | ------------------------------------------------
| |  | Technical and industry-specific domain expertise
|
| |  | Financial resources                             

Any one of these factors may contribute to our
loss of market share, reduced profit margins, increased
operating expense or discounted offerings.

The integrated set of software tools within the
Rogue Wave® Software division competes with other
integration software and tools companies such as SeeBeyond
Technology Corporation, Tibco
Software, Inc., ILOG, Inc., Borland Software
Corporation, Vitria Technology, Inc. and
webMethods, Inc. Our Adaptive Applications within the
Enterprise Application Software division sometimes compete with
offerings from these same vendors, as well as with products
offered by vendors such as Landacorp, Inc.,
MedDecisions, Inc., Siebel Systems, Inc. and Oracle
Corporation. Though competition in the application development
market and the healthcare market is strong, our software and
service offerings are competitive and our infrastructure is
adequate to continue to enhance our products. However, many of
these competitors have greater financial and organizational
resources than we do.

Customers

We have over 20,000 customers in the healthcare,
financial services, independent software vendors,
telecommunications, pharmaceutical, biotechnology, media and
entertainment, and defense industries.

One of our customers accounted for 17% of revenue
for the year ended December 31, 2003.

Sales, Marketing and Strategic
Alliances

Our sales are conducted through direct sales
representatives, strategic alliances, and distributors. As of
December 31, 2003, our sales and marketing organization
included 115 employees. Our sales force is divided into
product-specific markets that include technical and professional
resources and primarily cover the 48 contiguous United States,
Hawaii, Canada, France, Germany, Italy, and the United Kingdom.
We also have distribution relationships covering Australia, New
Zealand, and Asia. Our sales in the United Kingdom and Europe
are performed by a combination of direct sales and distributors.
The sales cycle varies depending on the size and scope of the
engagement and can range from 90 to 360 days.

We focus our marketing efforts on brand
awareness, educational and collateral development supporting our
product and service offerings, creative visualization of our
offerings, management of joint marketing programs with alliance
partnerships and out-reach through public relations, investor
relations, and industry-analyst relations. Our marketing
activities include: advertising, direct mail campaigns, email
campaigns, tradeshows, seminars, sponsorships, memberships,
industry conferences, contributing industry opinions and
articles, annual user group conference programs, continuing
education and innovative solution award distribution.

The Company has strategic alliances and
partnerships with a number of leading hardware and software
vendors, system integrators, software developers and
distributors. These relationships include technology licensing
agreements and cooperative marketing relationships, as well as
exchange of development plans and strategic direction. Our
partners include leading hardware and software vendors, system
integrators, software developers and distributors such as
Microsoft Corporation, Intel Corporation, Hewlett-Packard
Company, McKesson Corporation, Per-Se Technologies, Inc.,
Quadramed Corporation, and GE Medical Systems. In addition,
leading software vendors use our development tools to develop
their own products. Our products are deployed as these vendors
sell their own products.

In March, 2002, Rogue Wave Software, Inc
(Rogue Wave, now our wholly owned subsidiary) and
Microsoft Corporation (Microsoft) entered into a
Joint Engineering and Promotion Agreement, whereby Rogue Wave
agreed to develop, release and market to customers new versions
of Rogue Wave® SourcePro® software products designed
to optimize the performance of such products on Microsofts
Windows-based servers. Rogue Wave and Hewlett-Packard Company
(HP) have entered into a number of agreements dating
back to 1995. Most recently, in May 2003, Rogue Wave entered
into a porting agreement with HP, to

11



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port and certify Rogue Wave® SourcePro®
Edition 5 and 6 products to the
Tru 64 5.1b operating system and the
Compaq C++ 6.5 compiler. Other agreements include an April
2002 agreement whereby Rogue Wave products would be ported to
the HP-UX Itanium Processor platform and made available to HP
customers. Additionally, in January 2002, Rogue Wave became a
member of HPs Extend and Enhance program
giving Rogue Wave the right to link to HPs website,
inclusion on HPs partner lists and technical marketing
assistance.


Research and Development

At December 31, 2003, our research and
development group included approximately 115 employees located
in the United States and United Kingdom. We have made
substantial investments in advanced new technology development
and acquisitions. For the years ended December 31, 2003,
2002 and 2001, we incurred $13,552,000, $10,942,000 and
$6,695,000, respectively, in research and development expenses.
$3,557,000, $3,733,000, and $1,903,000 of these amounts have
been capitalized in 2003, 2002, and 2001, respectively and are
amortized to cost of revenue over three years. The
QUOVADXTM product suite consists of internally
developed products and products acquired through the
Companys business acquisitions. We intend to continue to
consider the licensing and acquisition of complementary software
technologies and businesses where appropriate, integrate
acquired technologies and products, and enhance our proprietary
technology to increase our software product sales, process
management services, and consulting services. Software products
are directly derived from the QUOVADX developed standard-based,
but proprietary, technology.

Intellectual Property

We consider the core technology we own and
license to be fundamental to the success of our operations. In
addition to our proprietary technology, we license technology
from various third party vendors. We have licensed intellectual
property from the University of Pennsylvania. The University of
Pennsylvania exclusively licenses the intellectual property
underlying our online CareScience analytic processing software
to us in a 30-year agreement.

Our success and ability to compete depend in part
on our proprietary technology. We seek to protect our software,
documentation and other written materials primarily through a
combination of trade secrets, trademark and copyright laws,
confidentiality procedures and contractual provisions. In
addition, we seek to avoid disclosure of our trade secrets, by,
among other things, requiring those persons with access to our
proprietary information to execute confidentiality agreements
with us and restricting access to our source code. We have been
issued eight U.S. patents, and have seven additional
patents pending.

Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is
difficult. While we are unable to determine the extent to which
piracy of our products exists, software piracy can be expected
to be a persistent problem, particularly in foreign countries
where the laws may not protect our proprietary rights as fully
as in the United States. Furthermore, third parties might
independently develop competing technologies that are
substantially equivalent or superior to our technologies. Any of
these developments could seriously harm our business.

Government Regulation

The healthcare industry, where we currently do
most of our business, is highly regulated and is subject to
changing political, regulatory and other influences. These
factors affect the purchasing practices and operation of
healthcare organizations. Federal and state legislatures and
agencies periodically consider programs to reform or revise the
United States healthcare system. These programs may contain
proposals to increase governmental involvement in healthcare,
lower reimbursement rates or otherwise change the environment in
which healthcare industry participants operate. Healthcare
industry participants may respond by reducing their investments
or postponing investment decisions, including investments in our
applications and services.

12



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We are unable to predict future proposals with
any certainty or to predict the effect they would have on our
business.




| |                                        
| | ---------------------------------------
| | HIPAA Administrative
    Simplification

Under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, Congress mandated a
package of interlocking administrative simplification rules to
establish standards and requirements for electronic transmission
of certain health information. Five of these rules were
published in proposed form in 1998, with four of the five now
published in final form. As discussed below, these rules apply
to certain of our operations as well as the operations of many
of our customers. We designed the QDXTM Platform V
and our applications, services and product offerings to enable
compliance with the proposed regulations. However, compliance
with the final rules could be costly and could require changes
in our systems. In addition, the success of our compliance
efforts may be dependent on the success of healthcare
participants in dealing with the standards.



| |                
| | ---------------
| | Confidentiality

Privacy of patient records and the circumstances
under which these records may be released are subject to
substantial regulation under the HIPAA Standards for Privacy of
Individually Identifiable Health Information, and other state
laws and regulations. These laws and regulations govern both the
disclosure and the use of confidential patient medical record
information. Although compliance is principally the
responsibility of the hospital, physician or other healthcare
provider, such laws and regulations will apply to the portions
of our business that process healthcare transactions and provide
technical services to participants in the healthcare industry.
Other state and federal laws and regulations govern the
electronic transmission of healthcare information and common
healthcare transactions such as health claims, health plan
enrollment, payment and benefit eligibility. These laws are
applicable to that portion of our business involving the
processing of healthcare transactions among physicians, payers,
patient and other healthcare industry participants. We are
designing our products and services to enable compliance with
HIPAA and applicable corresponding state laws and regulations.
Compliance with these laws and regulations will be costly and
could require complex changes in our systems and services.
Additionally, the success of our compliance efforts may be
dependent on the success of healthcare participants in dealing
with the laws, regulations and standards.



| |                                        
| | ---------------------------------------
| | Regulation of Transactions
    Services

The HIPAA Standards for Electronic Transactions
Rule establishes format standards for eight of the most common
healthcare transactions, using technical standards, promulgated
by recognized standards publishing organizations. These
transactions include health claim, enrollment, payment and
eligibility. Under the new standards, any party transmitting or
receiving any of these health transactions electronically will
send and receive data in a single format, rather than the large
number of different data formats currently used.

The transaction standards apply to that portion
of our business involving the processing of healthcare
transactions among physicians, payers, patients, and other
healthcare industry participants. The transaction standards also
are applicable to many of our customers and to our relationships
with those customers. We have designed and certified our systems
to meet the standards, but changes in the standards could
require costly modifications to some of our systems, products,
and services.

Other state and federal statutes and regulations
governing transmission of healthcare information may affect our
operations. These laws, though, are complex and changing, and
the courts and other governmental authorities may take positions
that are inconsistent with our practices.



| |                                           
| | ------------------------------------------
| | Regulation of Healthcare
    Relationships

We currently process health claims between payers
and providers and therefore may be subject to the federal False
Claims Act and other state and federal laws that govern the
submission of claims for medical expense reimbursement. These
laws generally prohibit an individual or entity from knowingly
presenting or causing to be presented any claim for payment from
Medicare, Medicaid or other third party payers that is

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false or fraudulent, or is for an item or service
that was not provided as claimed. These laws also provide civil
and criminal penalties for noncompliance. We have designed our
current transaction services and will design any future services
to place responsibility for compliance with these laws on
provider customers. However, we cannot guarantee that state and
federal agencies will regard billing errors processed by us as
inadvertent and not in violation of these laws. In addition,
changes in current healthcare financing and reimbursement
systems could cause us to make unplanned modifications of
applications or services, or result in delays or cancellations
of orders or in the revocation of endorsement of our
applications and services by healthcare participants.




| |                                                                                 
| | --------------------------------------------------------------------------------
| | Third Party Administration and Utilization
    Review Licensure and Registration

Certain of the administrative services we provide
to health plans, payers and providers, including our third-party
administration and utilization review operations, are regulated
by the statutes and regulations of various states and require
that we obtain appropriate licensure or registration.



| |                    
| | -------------------
| | Prompt Payment Laws

Various states have passed laws regarding the
prompt payment of medical claims by health plans. If a claim is
brought against us and we are found to have violated a law
regarding the prompt processing of claims for payment, we may
incur civil or other penalties.



| |                          
| | -------------------------
| | Government Investigations

There is increasing scrutiny by law enforcement
authorities, the U.S. Department of Health and Human
Services Office of Inspector General, the courts, and the
U.S. Congress of agreements between healthcare providers
and suppliers or other contractors which have a potential to
increase utilization of government healthcare resources. In
particular, scrutiny has been placed on the coding of claims for
payment and contracted billing arrangements. Investigators have
demonstrated a willingness to look beyond the formalities of
business arrangements to determine the underlying purposes of
payments between healthcare participants. Although, to our
knowledge, we are not the subject of any investigation, we
cannot tell whether we or our customers will be the targets of
governmental investigations in the future or how any
investigation would affect our business prospects.

Employees

As of December 31, 2003, we had a total of
628 employees, of whom 324 are engaged in professional services
and customer support functions, 115 in sales and marketing, 74
in management, finance and administration and 115 in research
and development. None of our employees are represented by a
labor union. We have not experienced any work stoppages, and we
consider our relations with our employees to be good.

Our future success also depends on our continued
ability to attract, integrate, retain and motivate highly
qualified sales, technical and managerial personnel. Competition
for such qualified personnel is intense. If our executive
officers and key personnel do not remain with us in the future,
we may experience difficulty in attracting and retaining
qualified personnel.






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

Our principal executive and corporate offices are
located in Englewood, Colorado, where we lease approximately
24,960 square feet of office space. The lease on this
facility expires in August 2005. We also lease
191,698 square feet of office space, primarily for
operations and research and development, in various locations in
the United States and Europe under agreements that expire at
dates ranging from January 2004 through May 2012. As of
December 31, 2003, the Company occupied 77% of the office
space it leased. We believe that our current facilities will be
sufficient to meet our needs for at least the next twelve months.

14



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

On November 14, 2001, a shareholder class
action complaint was filed in the United States District Court,
Southern District of New York. On April 19, 2002,
plaintiffs filed an amended complaint. The amended complaint
asserts that the prospectus from the Companys
February 10, 2000 initial public offering (IPO)
failed to disclose certain alleged improper actions by various
underwriters for the offering in the allocation of the IPO
shares. The amended complaint alleges claims against certain
underwriters, the Company and certain officers and directors
under the Securities Act of 1933 and the Securities Exchange Act
of 1934 (Bartula v. XCare.net, Inc., et al., Case
No. 01-CV-10075). Similar complaints have been filed concerning
more than 300 other IPOs; all of these cases have been
coordinated as In re Initial Public Offering Securities
Litigation, 21 MC 92. In a negotiated agreement, individual
defendants, including all of the individuals named in the
complaint filed against the Company, were dismissed without
prejudice, subject to a tolling agreement. Issuer and
underwriter defendants in these cases filed motions to dismiss
and, on February 19, 2003, the Court issued an opinion and
order on those motions that dismissed selected claims against
certain defendants, including the Rule 10b-5 fraud claims
against the Company, leaving only the Section 11 strict
liability claims under the Securities Act of 1933 against the
Company. A committee of our Board of Directors has approved a
settlement proposal made by the plaintiffs, which as proposed
would require no contribution from the Company. The settlement
is subject to a number of conditions. If the settlement is not
achieved, the Company will continue to aggressively defend the
claims. The Company believes it has meritorious defenses. We do
not believe that the outcome of this action will have a material
adverse effect on our financial position, results of operations
or liquidity; however, litigation is inherently uncertain and we
can make no assurance as to the ultimate outcome or effect.

CareScience, which was acquired by Quovadx on
September 19, 2003, and certain of its former officers are
defendants in a shareholder class action litigation pending in
the United States District Court for the Eastern District of
Pennsylvania for alleged violations of federal securities laws.
The actions seek compensatory and other damages, and costs and
expenses associated with litigation. Although we cannot predict
the ultimate outcome of the case or estimate the range of any
potential loss that may be incurred in the litigation, we
believe the lawsuits are without merit, CareScience denies all
allegations or wrongdoing asserted by plaintiffs, and we believe
CareScience has meritorious defenses to plaintiffs claims.
CareScience intends to vigorously defend the lawsuits. The class
action litigation is the result of several complaints filed with
the court beginning on October 17, 2001. These actions were
consolidated on November 16, 2001. The court approved the
election of the lead plaintiff in the litigation on
March 12, 2002. CareScience filed a motion to dismiss the
consolidated complaint on August 7, 2002. These complaints
purport to bring claims on behalf of all persons who allegedly
purchased CareScience common stock between June 29, 2000
and November 1, 2000, for alleged violation of the federal
securities laws, including Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 by issuing a materially false and
misleading Prospectus and Registration Statement with respect to
the initial public offering of CareScience common stock.
Specifically, the complaints allege, among other things, that
the CareScience Prospectus and Registration Statement
misrepresented and omitted to disclose material facts concerning
its competitors, two of its prospective products and its
contract with the California HealthCare Foundation. On
July 25, 2003, the Judge granted CareSciences motion
to dismiss the claims under Section 12(a)(2) of the
Securities Act, but denied its motion to dismiss the claims
under Sections 11 and 15 of the Securities Act. CareScience
has filed an answer denying all allegations of wrongdoing.
Discovery has not yet commenced. In February 2004, an agreement
was reached to settle this case, subject to court approval after
notice to the former shareholders. If the settlement is
achieved, the entire settlement amount will be paid by
insurance, without any contribution from the Company. If the
settlement is not achieved, the Company will continue to
aggressively defend the claims. The Company believes it has
meritorious defenses. We do not believe that the outcome of this
action will have a material adverse effect on our financial
position, results of operations or liquidity; however,
litigation is inherently uncertain and we can make no assurance
as to the ultimate outcome or effect.

In connection with the Companys March 15,
2004 announcement that it would restate 3rd quarter 2003
earnings, at least one law firm has announced that it intends to
seek shareholder plaintiffs to file claims against the company
and certain officers and directors for alleged securities law
violations. If any such claims are filed,

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the Company intends to vigorously defend them,
however, since litigation is inherently uncertain, the Company
can provide no assurance as to the ultimate outcome or effect.


The Company and its subsidiaries are engaged from
time to time in routine litigation that arises in the ordinary
course of our business.






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

During the fourth quarter of 2003, no matters
were submitted to a vote of our security holders.




PART II






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

Our common stock is listed for trading on the
Nasdaq National Market under the symbol QVDX. The
following table sets forth, for the period indicated, the range
of high and low closing sales prices per share of our common
stock, as reported on the Nasdaq National Market.

|                                                      |  |      |      |     |  |   |      | 
|----------------------------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                                      |  | High |      | Low
|                                                      |  |      |      |    
|2002                                                  |  |      |      |     |  |   |      | 
|First Quarter                                         |  | $    | 8.95 |     |  | $ | 5.79 | 
|Second Quarter                                        |  |      | 8.50 |     |  |   | 5.59 | 
|Third Quarter                                         |  |      | 5.71 |     |  |   | 1.40 | 
|Fourth Quarter                                        |  |      | 2.95 |     |  |   | 1.23 | 
|2003                                                  |  |      |      |     |  |   |      | 
|First Quarter                                         |  | $    | 2.68 |     |  | $ | 1.53 | 
|Second Quarter                                        |  |      | 3.40 |     |  |   | 1.88 | 
|Third Quarter                                         |  |      | 4.82 |     |  |   | 3.00 | 
|Fourth Quarter                                        |  |      | 5.36 |     |  |   | 3.79 | 
|2004                                                  |  |      |      |     |  |   |      | 
|First Quarter (January 1, 2004 to
    March 12, 2004) |  | $    | 6.70 |     |  | $ | 4.93 | 

On March 12, 2004, the last reported sale
price of the common stock was $5.24 per share, and the
number of registered holders of record of the common stock was
approximately 632. Because many of the Companys shares of
common stock are held by brokers and other institutions on
behalf of stockholders, the Company is unable to estimate the
total number of stockholders represented by these non-record
holders.

We have not declared or paid any cash dividends
on our common stock or other securities since January 1996 when
we were an S corporation. Pursuant to our loan agreement
entered into in 2003, we are restricted from paying dividends.
We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business
and do not anticipate paying any cash dividends in the
foreseeable future.






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

The consolidated statements of operations data
below for the years ended December 31, 2003, 2002 and 2001
and the consolidated balance sheet data as of December 31,
2003 and 2002, are derived from and are qualified by reference
to the Companys consolidated financial statements which
are included elsewhere in this Annual Report. The consolidated
statements of operations data for the years ended
December 31, 2000 and 1999 and the consolidated balance
sheet data as of December 31, 2001, 2000 and 1999 are
derived from the

16



---



##### Table of Contents



Companys consolidated financial statements,
which are not included in this Annual Report, but can be derived
from other filings with the Securities and Exchange Commission.


|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | ---- |  | ---- | -------- | ---- |  | ---- | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                   |  |                                      
|                                                                   |  | Year Ended December 31,              
|                                                                   |  |                                      
|                                                                   |  | 2003                                  |         | 2002 |  | 2001 |          | 2000 |  | 1999
|                                                                   |  |                                       |         |      |  |      |          |      |  |     
|                                                                   |  |                                      
|                                                                   |  | (In thousands, except per share data)
|Statement of Operations Data:                                      |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Total revenue                                                      |  | $                                     | 71,595  |      |  | $    | 63,658   |      |  | $    | 52,180 |   |  | $ | 10,834  |   |  | $ | 4,853  |  
|Total costs and expenses                                           |  |                                       | 86,983  |      |  |      | 75,807   |      |  |      | 59,550 |   |  |   | 33,178  |   |  |   | 7,974  |  
|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Loss from operations                                               |  |                                       | (15,388 | )    |  |      | (12,149  | )    |  |      | (7,370 | ) |  |   | (22,344 | ) |  |   | (3,121 | )
|Gain on sale of assets                                             |  |                                       |        |      |  |      | 87       |      |  |      |       |   |  |   |        |   |  |   |       |  
|Goodwill impairment                                                |  |                                       |        |      |  |      | (93,085  | )    |  |      |       |   |  |   |        |   |  |   |       |  
|Interest income, net                                               |  |                                       | 694     |      |  |      | 1,035    |      |  |      | 3,101  |   |  |   | 5,027   |   |  |   | (67    | )
|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Net loss                                                           |  | $                                     | (14,694 | )    |  | $    | (104,112 | )    |  | $    | (4,269 | ) |  | $ | (17,317 | ) |  | $ | (3,188 | )
|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Net loss per common share  basic and
    diluted                  |  | $                                     | (0.47   | )    |  | $    | (3.47    | )    |  | $    | (0.20  | ) |  | $ | (1.20   | ) |  | $ | (6.91  | )
|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Weighted average common shares
    outstanding  basic and diluted |  |                                       | 31,407  |      |  |      | 29,987   |      |  |      | 21,308 |   |  |   | 14,399  |   |  |   | 472    |  
|                                                                   |  |                                       |         |      |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  

|                                                   |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |         |  
|-------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------- | -
|                                                   |  |               
|                                                   |  | December 31,  
|                                                   |  |               
|                                                   |  | 2003           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                   |  |                |         |      |  |      |         |      |  |     
|                                                   |  |               
|                                                   |  | (In thousands)
|Balance Sheet Data:                                |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |         |  
|Cash, cash equivalents and short-term investments  |  | $              | 23,688  |      |  | $    | 47,621  |      |  | $    | 63,486  |  |  | $ | 78,319 |  |  | $ | 7,455   |  
|Working capital                                    |  |                | 7,928   |      |  |      | 50,540  |      |  |      | 62,659  |  |  |   | 82,759 |  |  |   | 8,138   |  
|Total assets                                       |  |                | 156,335 |      |  |      | 104,609 |      |  |      | 214,704 |  |  |   | 96,908 |  |  |   | 13,183  |  
|Mandatorily redeemable convertible preferred stock |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   | 23,842  |  
|Stockholders equity (deficit)                     |  |                | 114,413 |      |  |      | 86,948  |      |  |      | 188,887 |  |  |   | 92,839 |  |  |   | (13,172 | )

In reviewing the above data, you should consider
the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 1999, we completed a sale of Series B
    convertible preferred stock with net proceeds totaling
    $13.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Our registration statement on Form S-1
    covering our initial public offering (the Offering)
    of 5,750,000 shares of common stock (including the
    underwriters over-allotment option of 750,000 shares
    of common stock) at $18.00 per share was declared effective
    on February 9, 2000. The net proceeds to us from the sale
    of shares of our common stock in the offering after deducting
    expenses of $2.1 million and underwriting discounts and
    commissions of $7.2 million, were $94.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In October 2000, the Company entered into a
    Software License and Services Agreement (the
    Agreement) with MedUnite, Inc.
    (MedUnite) to provide software development services
    related to a pilot program. In connection with the Agreement,
    the Company issued to MedUnite warrants to purchase
    1,350,000 shares of Quovadxs common stock at an
    exercise price of $4.06. The warrants were immediately vested,
    exercisable and non-forfeitable for a period of eighteen months
    from the date of grant. The fair value of the warrants was
    calculated to be $3.1 million and was determined using the
    Black-Scholes option pricing model utilizing a volatility factor
    of 120%, risk-free interest rate of 6.0% and an expected life of
    18 months. The amounts billed and billable to MedUnite up
    to the date that the first pilot was delivered (March 2001) were
    reduced by the fair value attributed to the warrants. For the
    year ended December 31, 2000, the Company allocated
    $2.2 million of the warrant charge to

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | billings and amounts billable. The remaining
    value of the warrants of $0.9 million was allocated to
    billings in the first quarter of 2001. In 2001, MedUnite
    exercised all the warrants and purchased 1,012,167 million
    shares of the Companys common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In 2000, the Company purchased all the
    outstanding stock of Advica Health Resources
    (Advica) for 70,000 shares of common stock in a
    transaction accounted for as a purchase. The total purchase
    price of Advica was $2.2 million. We also acquired all of
    the outstanding stock of Integrated Media Inc. (Integrated
    Media) for $2.1 million in a transaction accounted
    for as a purchase. The 2000 acquisitions generated goodwill and
    intangible assets totaling $3.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | In June 2001, the Company acquired the
    outstanding common stock of Confer Software, Inc.,
    (Confer) by merger of a wholly owned subsidiary of
    Quovadx with Confer. The purchase price, totaling
    $6.6 million, included 592,453 shares of Quovadx
    common stock in exchange for the outstanding shares of Confer
    capital stock, the assumption of a $461,250 employee bonus plan
    that was paid in cash and $1.8 million in merger-related
    fees. In August 2001, the Company consummated the acquisition of
    Healthcare.com Corporation (Healthcare.com). The
    purchase price, totaling $93.1 million, included
    10,702,043 shares of Quovadx common stock issued in
    exchange for all outstanding shares of Healthcare.com capital
    stock and $4.5 million in merger-related fees. In December
    2001, the Company consummated the acquisition of the Pixel Group
    (Pixel). The purchase price, totaling
    $7.3 million, included $5.0 million in cash and
    201,794 shares of Quovadx common stock in exchange for the
    outstanding shares of Pixel capital stock. The aforementioned
    business acquisitions were accounted for under the purchase
    method of accounting. The 2001 acquisitions generated goodwill
    and intangible assets totaling $118.8 million.
|
| |  | In March 2002, the Company completed the sale of
    certain assets of its Advica subsidiary to Royal Health Care of
    Long Island, LLC, d/b/a Royal Health Care (Royal)
    for $475,000 in cash and 4.6% of the outstanding equity in
    Royal. In conjunction with the sale, Quovadx is providing ASP
    services to Royal under a seven year contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On March 27, 2002, the Company purchased all
    of the outstanding capital stock of Outlaw
    Technologies, Inc. (Outlaw). The purchase
    price, totaling $2.7 million, included 138,575 shares
    of Quovadx common stock and $1.8 million in cash and
    professional fees directly related to the acquisition. Assets
    acquired included $1.7 million in goodwill, $0.8 in
    software and $0.7 million in other intangible assets. The
    transaction was accounted for as a purchase. Outlaws
    balance sheet included $0.3 million in current assets and
    $0.6 million in liabilities upon acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In the third quarter of 2002, the Company
    performed an assessment of the carrying value of the
    Companys goodwill recorded in connection with its various
    acquisitions. The assessment was performed pursuant to
    SFAS 142 because of the significant negative Company,
    industry and economic trends affecting the market value of the
    Companys common stock. As a result, the Company recorded a
    charge of $93.1 million to reduce goodwill during the third
    quarter of 2002, based on the amount by which the carrying
    amount of these assets exceeded their estimated fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In the third quarter of 2003, Quovadx acquired
    the outstanding stock of CareScience, Inc.
    (CareScience) by merger of a wholly owned subsidiary
    of Quovadx with CareScience. CareScience, Inc. is primarily
    a provider of care management services to hospitals and health
    systems. CareScience stockholders received a fixed exchange rate
    of $1.40 cash and 0.1818 shares of Quovadxs common
    stock for each share of CareScience common stock they owned. The
    purchase price totaling $30.1 million, included
    2,415,900 shares of Quovadx common stock and
    $4.7 million in cash, net of acquired cash, in exchange for
    all outstanding shares of CareScience and $2.3 million in
    merger-related fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | In the fourth quarter of 2003, Quovadx acquired
    the outstanding stock of Rogue Wave Software, Inc.
    (Rogue Wave) by merger of a wholly owned subsidiary
    of Quovadx with Rogue Wave. Rogue Wave develops, markets and
    supports object-oriented and infrastructure software technology.
    Rogue Wave stockholders received a fixed exchange rate of $4.09
    in cash and 0.5292 shares of Quovadx common                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

18



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| |  |                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | stock for each share of Rogue Wave Common Stock
    they owned. The purchase price totaling $79.1 million,
    included 5,656,670 million shares of Quovadx common stock
    and $8.0 million in cash, net of acquired cash, in exchange
    for all outstanding shares of Rogue Wave and $3.9 million
    in merger-related fees.






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

Overview

Quovadx is a global software and services firm
that helps more than 20,000 enterprise customers worldwide
develop, extend and integrate applications based on open
standards. Quovadx serves companies in healthcare, financial
services, telecommunications, the public sector, manufacturing,
and life sciences. We believe that we have the opportunity to
sell additional products into this large customer base.

We generate revenue from three segments: software
licenses, professional services, and recurring revenue. The
software license segment includes revenue from perpetual
software license sales and from software subscriptions. The
professional services segment includes revenue generated from
software implementation, development, and integration. The
recurring revenue segment includes revenue generated from
hosting, maintenance, transaction, and other recurring services.

Acquisitions have historically been part of our
growth strategy and we completed two acquisitions in 2003.

On September 19, 2003, Quovadx acquired the
outstanding stock of CareScience, Inc.
(CareScience). CareScience, Inc. is primarily a
provider of care management services to hospitals and health
systems. CareScience stockholders received a fixed exchange rate
of $1.40 cash and 0.1818 shares of Quovadxs common
stock for each share of CareScience common stock they owned. The
total purchase price for this acquisition was
$30.1 million, including 2,415,900 shares of Quovadx
common stock, cash of $4.7 million, net of cash acquired,
and $2.3 million in merger-related costs.

On December 19, 2003, Quovadx acquired the
outstanding stock of Rogue Wave Software, Inc. (Rogue
Wave). Rogue Wave develops, markets and supports
object-oriented and infrastructure software technology. The
acquisition, structured as an exchange offer, resulted in
Quovadx acquiring all of the outstanding stock of Rogue Wave for
$4.09 in cash and 0.5292 of a share of Quovadx common stock for
each share of Rogue Wave Common Stock. The total purchase price
for this acquisition was $79.1 million, including
5,656,670 shares of Quovadx common stock, exchange of stock
options valued at $3.4 million, cash of $8.0 million
net of cash acquired and $3.9 million in merger-related
costs.

On March 15, 2004, we issued a press release
announcing material revisions to our previously announced
unaudited financial results for the third and fourth quarters of
2003. These revisions concern shipments to Infotech Network
Group (Infotech), a consortium of Indian information
technology companies, in the third and fourth quarters of 2003.
We believed at the time of the shipments that collection of the
receivable was probable due to the establishment of a credit
line by Infotech that could be used for payment. Since the
shipments of software product, however, we have encountered
unanticipated delays in obtaining payment from Infotech. Based
on further analysis of Infotechs ability to pay for the
software purchased, the accounting for the revenue recognized
has been revised from an accrual to a cash basis. As a result,
we have materially restated our previously announced financial
results for the third and fourth quarters of 2003 by the
deletion of all revenue and commissions that had been recorded
related to Infotech.

Critical Accounting Policies and
Estimates

The consolidated financial statements are
prepared in conformity with accounting principles generally
accepted in the United States which require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. The Company relied on significant estimates in preparing
the financial statements in allocating the purchase price of its
acquisitions to the assets and liabilities acquired and to
evaluate the adequacy of the allowance for bad

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##### Table of Contents



debt, the percentage of completion of fixed
priced professional service contracts, the recoverability of
deferred tax assets and the recoverability of capitalized
software costs. Actual results could differ from those
estimates. The Company believes that the following accounting
policies involve a higher degree of judgment and complexity.




| |        
| | -------
| | Revenue

The Company recognizes revenue in accordance with
the provisions of Statement of Position (SOP) 97-2,
Software Revenue Recognition,as amended, and
SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.

Our License agreements generally provide that
customers pay a license fee based on a specified number of
instances of the software and the type of software modules
licensed. Customers that purchase licenses generally enter into
renewable one-year maintenance agreements that entitle the
customer to receive unspecified updates on the licensed
software, error corrections and telephone support, generally for
a fixed fee.

The methodology the Company uses to recognize
software license and related services revenue is dependent on
whether the Company has established vendor-specific objective
evidence (VSOE) of fair value for the separate
elements of a multiple-element agreement. If an agreement
includes both license and service elements, the license fee is
recognized on delivery of the software if the remaining services
are not essential to the functionality of the software, the
collection of the fees is probable, the fees are fixed and
determinable, an agreement is signed and the Company has
established VSOE of fair value for the remaining services.
Revenue from the related services is recognized as the services
are provided. When the related services are essential to the
functionality of the base product, or when the Company has not
established VSOE of fair value for the remaining services, the
software license fees are deferred and the entire contract is
recognized as the services are provided. Utilizing the criteria
provided in SOP 97-2, we evaluate the vendor specific
objective evidence for contracts to determine the fair value of
elements delivered in situations where multiple element
arrangements exist.

Professional services revenue represents software
development, implementation and consulting services. When
derived from a fixed price contract, and collection of fees is
probable, the Company recognizes professional services revenue
using the percentage-of-completion method of accounting. When
derived from a time-and-materials contract, and the collection
of fees is probable, the Company recognizes professional
services revenue as the services are provided.

When revenue is recognized using the
percentage-of-completion basis of accounting, the Companys
management estimates the costs to complete the services to be
provided under the contract. Because the
percentage-of-completion method is an estimation process, it has
risks and uncertainties. The Company may encounter budget and
schedule overruns caused by external factors beyond our control
such as the utilization and efficiency of our consultants and
the complexity of our customers IT environment.
Adjustments to cost estimates are made in the period in which
the facts requiring such revisions become known. Estimated
losses, if any, are recorded in the period in which the current
estimates of the costs to complete the services exceed the
revenue to be recognized under the contract.

Maintenance revenue is derived from agreements
for providing unspecified software updates, error corrections
and telephone support. Maintenance revenue is recognized ratably
over the maintenance period, which is generally 12 months.

Process management and services revenue represent
application hosting, transaction processing and other services.
When the fees are fixed and determinable, and collection of the
fees is probable, revenue is recognized over the service period.
When the fees are charged on a per-transaction basis and
collection of the fees is probable, revenue is recognized as the
transactions are processed.

When collection of fees is not probable, revenue
is recognized as cash is collected. The Company does not require
collateral from its customers.

20



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##### Table of Contents





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

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
certain customers to pay their accounts receivable balances. The
Company assesses financial condition of its customers to
determine if there is an impairment of their ability to make
payments and additional allowances may be required if the
financial condition of the Companys customers
deteriorates. A considerable amount of judgment is required in
order to determine the realization of our receivables, including
assessing the likelihood of collection and the creditworthiness
of each customer.



| |                    
| | -------------------
| | Purchase Accounting

In connection with acquisitions, we assess the
fair value of assets acquired and liabilities assumed. Items
such as accounts receivable, property and equipment, other
intangible assets, certain accrued liabilities, and other
reserves require a high degree of management judgment.

The Company recorded $48.0 million of
goodwill resulting from its 2003 acquisitions. Effective
January 1, 2002, SFAS No. 142 requires that
goodwill be tested annually for impairment and more frequently
if events or changes in circumstances indicate assets might be
impaired. A significant decline in our stock price, projected
revenue, projected earnings growth or projected cash flows are
examples of such circumstances. The impairment test involves the
use of estimates related to the fair value of the reporting
units with which the goodwill is associated. The estimate of
fair value requires significant judgment, including future cash
flows and discount rates. Any loss resulting from an impairment
test would be reflected in our statements of operations.

In connection with our acquisitions, we are
required to recognize other intangible assets separate and apart
from goodwill if such assets arise from contractual or other
legal rights or if such assets are separable from the acquired
businesses. Other intangible assets include, developed
technology, customer-related assets such as order backlog, and
trade name. Determining a fair value for such items requires a
high degree of judgment, assumptions, and estimates, including
future cash flows generated from the assets and discount rates.
In certain situations, where deemed necessary, we may use third
parties to assist us with such valuations. In addition, these
intangible assets are to be amortized over the best estimate of
their useful life. At December 31, 2003, we had intangible
assets of $17.7, net of amortization.

We have estimated amounts for direct costs of our
acquisitions, merger-related expenses, and liabilities related
to our business combinations in accordance with Emerging Issues
Task Force Issue 95-3, Recognition of Liabilities in
Connection with a Purchase Combination. We also
recorded significant acquisition-related restructuring charges,
in connection with our abandonment of certain leased facilities
through our business combinations. The lease abandonment costs
were estimated to include remaining lease liabilities offset by
an estimate of sublease income. Estimates related to sublease
costs and income are based on the assumptions regarding the
period required to sublease the facilities and the likely
sublease rates. Materially different reported results would be
likely if any of the stated costs or expenses were different
from our estimations.



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

Software development costs are required to be
expensed until the point that technological feasibility of the
product is established. Once technological feasibility is
established, such costs are capitalized until the product has
reached general availability. The establishment of technological
feasibility and continuing evaluation of the recoverability of
the capitalized software development costs requires
managements judgment with respect to the impact of
external factors such as future revenue, estimated economic life
and changes in software and hardware technologies. Capitalized
software development costs are amortized on a straight-line
basis over an estimated life, which is generally three years.
The Company capitalizes internal and external labor costs
incurred in developing the software once technological
feasibility is attained. At December 31, 2003, the Company
had $6.0 million of capitalized software development costs,
net of amortization.

21



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##### Table of Contents



Results of Operations

The following table sets forth financial data for
the periods indicated as a percentage of revenue.

|                      |                                            |                          |       |      |      |      |        |        |      |  |       |      |      | 
|--------------------- | ------------------------------------------ | ------------------------ | ----- | ---- | ---- | ---- | ------ | ------ | ---- |  | ----- | ---- | ---- | 
|                      |                                            |                         
|                      |                                            | Year Ended December 31, 
|                      |                                            |                         
|                      |                                            | 2003                     |       | 2002 |      | 2001
|                      |                                            |                          |       |      |      |     
|Revenue:              |                                            |                          |       |      |      |      |        |        |      |  |       |     
|                      | Software license                           |                          |       | 29.7 | %    |      |        | 18.6   | %    |  |       | 12.3 | %   
|                      | Professional services                      |                          |       | 25.4 |      |      |        | 35.3   |      |  |       | 54.5 |     
|                      | Recurring services                         |                          |       | 44.9 |      |      |        | 46.1   |      |  |       | 33.2 |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Total revenue         |                                            |                          | 100.0 |      |      |      | 100.0  |        |      |  | 100.0 |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Cost of revenue:      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|                      | Software license                           |                          |       | 13.9 |      |      |        | 8.6    |      |  |       | 4.6  |     
|                      | Professional services                      |                          |       | 19.3 |      |      |        | 23.2   |      |  |       | 32.4 |     
|                      | Recurring services                         |                          |       | 29.3 |      |      |        | 30.0   |      |  |       | 27.9 |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Total cost of revenue |                                            |                          | 62.5  |      |      |      | 61.8   |        |      |  | 64.9  |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|                      | Gross profit                               |                          |       | 37.5 |      |      |        | 38.2   |      |  |       | 35.1 |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Operating expenses:   |                                            |                          |       |      |      |      |        |        |      |  |       |     
|                      | Sales and marketing                        |                          |       | 24.8 |      |      |        | 21.0   |      |  |       | 17.0 |     
|                      | General and administrative                 |                          |       | 17.8 |      |      |        | 21.5   |      |  |       | 19.9 |     
|                      | Research and development                   |                          |       | 14.0 |      |      |        | 11.3   |      |  |       | 9.2  |     
|                      | Amortization of acquired intangible assets |                          |       | 2.4  |      |      |        | 3.6    |      |  |       | 3.0  |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|                      |                                            | Total operating expenses |       |      | 59.0 |      |        |        | 57.4 |  |       |      | 49.1 | 
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Loss from operations  |                                            |                          | (21.5 | )    |      |      | (19.2  | )      |      |  | (14.0 | )   
|                      | Gain on sale of assets                     |                          |       |     |      |      |        | 0.1    |      |  |       |     |     
|                      | Goodwill impairment                        |                          |       |     |      |      |        | (146.2 | )    |  |       |     |     
|                      | Interest income, net                       |                          |       | 1.0  |      |      |        | 1.6    |      |  |       | 5.9  |     
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     
|Net loss              |                                            |                          | (20.5 | )%   |      |      | (163.7 | )%     |      |  | (8.1  | )%  
|                      |                                            |                          |       |      |      |      |        |        |      |  |       |     



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to Year Ended December 31, 2002

Total Revenue.Total
revenue increased $7.9 million, or 12%, to
$71.6 million for the year ended December 31, 2003
from $63.7 million for the year ended December 31,
2002. The Company experienced an increase of $9.4 million,
or 79%, in revenue generated from its license segment to
$21.2 million primarily due to the Companys planned
focus on software license revenue. The addition of CareScience
and Rogue Wave in 2003 increased license revenue by
$1.4 million and $1.9 million, respectively. We expect
our license revenue to increase with our continued focus on the
license segment and penetration into new vertical markets.
Revenue derived from the recurring revenue segment increased
$2.8 million, or 10%, to $32.2 million primarily due
to the acquisitions of CareScience and Rogue Wave, which added
$1.0 million and $0.5 million, respectively, for the
twelve months ended December 31, 2003. Additionally,
increased license sales in 2003 led to increased maintenance
revenue in 2003. Revenue from the professional services segment
decreased $4.2 million, or 19%, in the year ended
December 31, 2003. As we complete existing contracts, we
are shifting away from large, highly competitive, stand alone
professional services engagements, and are concentrating on
services that are associated with software license sales.
Partially offsetting this decrease was the addition of
CareScience, which added $1.8 million of services revenue
in the year ended December 31, 2003. We expect our revenue
mix to continue to shift to the higher margin software revenue.

Cost of revenue.Cost of revenue increased $5.5 million, or 14%, to
$44.7 million for the year ended December 31, 2003
from $39.3 million in 2002. Cost of revenue for the license
segment increased 82% or $4.5 million to $9.9 million
for the year ended December 31, 2003 from $5.5 million
for the year ended December 31, 2002 due to an increase in
software amortization of $1.5 million in 2003 over 2002 and
increased royalty expenses of $3.2 million. The addition of
CareScience and Rogue Wave added $667,000 and

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$94,000, respectively, of license-related costs
in 2003. Recurring revenue costs increased 10% to
$21.0 million primarily due to increased royalty expense on
maintenance revenue which, increased $900,000 from 2002 to 2003.
The addition of Rogue Wave for $92,000 and CareScience for
$722,000 increased costs related to recurring revenue in the
year ended December 31, 2003. Cost of revenue from the
professional services segment decreased $0.9 million due to
a decline in headcount in the Companys professional
services segment from 78 in 2002 to 66 in 2003. Offsetting this
decrease was the addition of CareScience and its services cost
of revenue of $985,000 in 2003. We expect to experience
improvement in services margins over the next year as we
outsource services work and benefit from the lower cost
structure we will experience versus our existing cost structure.


Sales and marketing.Sales and marketing expense increased $4.4 million, or 33%,
to $17.8 million for the year ended December 31, 2003
from $13.3 million for the year ended December 31,
2002. Sales and marketing expenses increased due to an increase
in the size of the Companys sales force and marketing
professionals from 62 at December 31, 2002 to 115 at
December 31, 2003 resulting from an increase in the number
of product offerings and increased penetration into the software
market. The acquisition of CareScience and Rogue Wave increased
the 2003 headcount by 14 and 17, respectively. Commission
expense was also higher for the twelve months ended
December 31, 2003 due to an increase in software sales and
changes in the commission plan in 2003. As a percentage of
revenue, sales and marketing expense increased 4% to 25% for the
twelve months ended December 31, 2003 from 21% for the
twelve months ended December 31, 2002.

General and
administrative.General and
administrative expense decreased $0.9 million, or 7%, to
$12.7 million for the year ended December 31, 2003
from $13.7 million for the prior year. The decrease in
general and administrative expense was primarily due to a
decline in legal expenses from $1.8 million in 2002 to
$1.2 million in 2003. Additionally, bad debt expense
decreased $392,000 from 2002 to 2003. Partially offsetting this
decrease was the addition of CareScience and Rogue Wave, which
added $206,000 and $236,000, respectively, of general and
administrative costs for the year ended December 31, 2003.
As a percentage of revenue, general and administrative expense
decreased 4% to 18% for the twelve months ended
December 31, 2003 compared to 22% for the twelve months
ended December 31, 2002.

Research and
development.Research and development
expense increased $2.8 million, or 39%, to $10 million
for the year ended December 31, 2003 from $7.2 million
for the year ended December 31, 2002. The increase in
research and development expense is mainly due to the
acquisitions of CareScience and Rogue Wave, which increased the
headcount from 71 at December 31, 2002 to 115 at
December 31, 2003 and added $0.9 million in research
and development costs for the year ended December 31, 2003.
The Company capitalized $3.6 million of software
development costs in 2003. As a percentage of revenue, research
and development expenses increased 3% to 14% for the twelve
months ended December 31, 2002 to 11% for the twelve months
ended December 31, 2003.

Amortization of acquired
intangibles.The amortization of
acquired intangibles results from assets purchased through our
business acquisitions. Intangible assets amortization for the
twelve months ended December 31, 2003 and 2002 was
$1.7 million and $2.3 million, respectively. The
decrease is due to the full amortization of an intangible asset
acquired in the Healthcare.com purchase.

Interest income.Interest income includes interest income on cash, cash
equivalents and short-term investment balances. Interest income
decreased $0.3 million to $0.7 million for the year
ended December 31, 2003 from $1.0 million for the
prior year period. The decrease in interest income is due to the
decrease in the Companys cash and short-term investments
balance used to fund operations, acquisitions, and a shift in
the companys short-term investments to investments with
shorter maturities to have funds available for the acquisitions.

Income tax benefit.A provision for federal and state income taxes has not been
recorded for the twelve months ended December 31, 2003 and
2002, as we have incurred a net operating loss for 2003 and
2002. We believe that, based on the history of losses and other
factors, the weight of available evidence indicates that it is
more likely than not that we will not be able to realize our
deferred tax assets, and thus a full valuation allowance has
been recorded against such assets as of December 31, 2003
and December 31, 2002.

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| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Total Revenue.Total
revenue increased $11.5 million, or 22%, to
$63.7 million for the year ended December 31, 2002
from $52.2 million for the year ended December 31,
2001. The Company experienced an increase of $5.4 million,
or 85%, in revenue generated from its software license segment
to $11.9 million due to the Companys focus of its
sales and marketing efforts on increased software sales. Revenue
derived from the recurring revenue segment increased
$12.0 million, or 69%, to $29.3 million primarily due
to an increase in the Companys outsourcing revenue, which
was acquired in the Healthcare.com acquisition. Additionally,
revenue from the transaction processing and maintenance
businesses increased in 2002 over 2001. Revenue from the
professional services segment decreased $6.0 million, or
21%, due to certain professional services projects winding down
in 2002. Professional services revenue in 2001 was offset by a
$0.9 million charge from the amortization of a deferred
warrant charge, which relates to the fair value of the warrants
issued to MedUnite in connection with a software license and
services agreement signed in the fourth quarter of 2000.

Cost of revenue.Cost of revenue, including software amortization, increased
$5.4 million, or 16%, to $39.3 million for the year
ended December 31, 2002 from $33.9 million in 2001.
Software amortization increased $3.4 million over the
twelve months ended December 31, 2002 primarily due to an
increase in the Companys capitalized software balance from
the continued development of the Companys software
products and a full year of amortization in 2002 compared to a
partial year in 2001 related to software acquired in the
Healthcare.com and Confer acquisitions. Partially offsetting the
2002 increase in cost of revenue expense was a decrease in
expenses related to Advica. Certain assets of the subsidiary
were sold in March 2002. As a percentage of revenue, cost of
revenue decreased from 65% for the twelve months ended
December 31, 2001 to 62% for the twelve months ended
December 31, 2002. Gross margins may increase over time
based on the shift in revenue to higher margin software license
revenue.

Sales and marketing.Sales and marketing expense increased $4.5 million, or 51%,
to $13.3 million for the year ended December 31, 2002
from $8.9 million for the year ended December 31,
2001. Sales and marketing expenses increased due to an increase
in the size of the Companys sales force and product
marketing professionals. The Company also expanded its marketing
efforts to introduce its new software products. As a percentage
of revenue, sales and marketing expense increased 4% from 17%
for the twelve months ended December 31, 2001 compared to
21% for the twelve months ended December 31, 2002.

General and
administrative.General and
administrative expense increased $3.3 million, or 31%, to
$13.7 million for the year ended December 31, 2002
from $10.4 million for the prior year. The increase in
general and administrative expense was primarily due to
personnel increases in the areas of human resources, accounting,
legal and administration. Increased directors and officers
insurance expense and outside legal services also added to the
overall increase in general and administrative expense. As a
percentage of revenue, general and administrative expense
increased 2% from 20% for the twelve months ended
December 31, 2001 compared to 22% for the twelve months
ended December 31, 2002.

Research and
development.Research and development
expense increased $2.4 million, or 50%, to
$7.2 million for the year ended December 31, 2002 from
$4.8 million for the year ended December 31, 2001. The
increase in research and development expense reflects an
increase in headcount to support the continued development of
our software and adaptive applications. As a percentage of
revenue, research and development expenses increased 2% from 9%
for the twelve months ended December 31, 2001 to 11% for
the twelve months ended December 31, 2002. The Company
capitalized $3.7 million of software development costs in
2002.

Amortization of acquired
intangibles.In accordance with the
adoption of Financial Accounting Standard
(SFAS) No. 142 Goodwill and Other Intangible Assets,
the Company did not record amortization expense related to
goodwill for acquisitions entered into after July 1, 2001
and for all acquisitions as of January 1, 2002. The
adoption of SFAS No. 142 had the effect of reducing
amortization expense in 2002 from 2001 by $722,000. This
decrease was more than offset by an increase in the amortization
of intangible assets as a result of a full year of amortization
for the Companys 2001 acquisitions and additional
intangible assets recorded in the acquisition of Outlaw in 2002.

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Stock compensation
expense.During 1999 and through
February 10, 2000, the effective date of the Companys
initial public offering, in connection with stock options
granted to certain employees and a consultant under the stock
plan, we have recorded unearned stock compensation representing
the difference between the exercise price of the options and the
deemed fair value of our common stock at the date of grant. We
recorded aggregate unearned compensation of $2.8 million in
connection with these stock options. This stock compensation was
amortized to expense over the period during which the options or
common stock subject to repurchase vest, generally four years,
using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28. Amortization of
stock compensation expense was $231,000 for the twelve months
ended December 31, 2002 compared to $460,000 for the twelve
months ended December 31, 2001. As of December 31,
2002, the unearned compensation balance was fully amortized.

Gain on sale of
assets.The gain on the sale of assets
resulted from the sale of certain assets of the Advica
subsidiary to Royal for $475,000 in cash and 4.6% of the
outstanding equity in Royal. The Company recorded a gain on the
sale of assets of $87,000 in the first quarter of 2002.

Goodwill impairment.SFAS No. 142, requires that goodwill be tested
annually for impairment and more frequently if events or changes
in circumstances indicate assets might be impaired. The Company
performed a transitional impairment test upon the adoption of
SFAS No. 142 on January 1, 2002 and recorded no
impairment as a result of this test. The Company had identified
the fourth quarter as the period for its annual impairment test.
However, due to significant negative Company, industry and
economic trends affecting the market value of the Companys
common stock, the Company performed an interim test of goodwill
impairment in the third quarter of 2002. As a result of this
interim test, the Company recorded an impairment charge of
$93.1 million to reduce goodwill based on the amount that
the carrying value of the goodwill exceeded its fair value. This
impairment charge eliminated goodwill associated with all
previous acquisitions and related to each of the Companys
reportable segments.

Interest income,
net.Interest income includes interest
income on cash, cash equivalents and short-term investment
balances. Interest income decreased $2.1 million, to
$1.0 million for the year ended December 31, 2002 from
$3.1 million for the prior year period. The decrease in
interest income is due to a decrease in interest rates from the
prior comparable period and a decrease in cash, cash equivalents
and short-term investment balances to fund operations and
acquisitions.

Income tax benefit.A provision for federal and state income taxes has not been
recorded for the years ended December 31, 2002 and 2001,
because the Company has incurred net operating losses for the
year ended December 31, 2002 and 2001. We believe that,
based on the history of losses and other factors, the weight of
available evidence indicates that it is more likely than not
that we will not be able to realize our deferred tax assets, and
thus a full valuation allowance has been recorded against such
assets as of December 31, 2002 and 2001.

Liquidity and Capital Resources

We have historically financed our operations
through a combination of cash flows from operations, private
sales of common and convertible preferred stock, issuances of
convertible promissory notes and public sales of common stock.
Since our IPO in February 2000, we have financed our operations
and acquisitions with the proceeds of that offering, cash flows
from operations and cash obtained in acquisitions.

We expect to use our cash, cash equivalents and
short-term investments for general corporate purposes, working
capital and capital expenditures, to fund our operations and to
continue expanding our product offerings. The amounts and timing
of our actual expenditures will depend upon numerous factors,
including the status of our product development efforts,
marketing and sales activities and the amount of cash generated
by our operations, and competition. We may find it necessary or
advisable to use portions of our cash and cash equivalents for
other purposes. A portion of our cash, cash equivalents and
short-term investments may also be used to acquire or invest in
complementary businesses or products or to obtain the right to
use synergistic technologies. Pending use of our cash, cash
equivalents and short-term investments for the above purposes,
we intend to invest such funds in short-term, interest-bearing,
investment-grade securities.

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Net cash used in operating activities was
$7.1 million in 2003, $10.1 million in 2002 and
$4.6 million in 2001. The decrease in net cash used in
operating activities in 2003 compared to 2002 is mainly due to
an increase in the accounts payable balance from
December 31, 2002 to December 31, 2003. The increase
in net cash used in operating activities in 2002 compared to
2001 is primarily attributable to the increase in net losses.

Net cash provided by (used in) investing
activities was ($1.9) million in 2003, ($14.7) million
in 2002 and $20.7 million in 2001. Net cash used in
investing activities in 2003 is primarily due to the
acquisitions of CareScience and Rogue Wave partially offset by
net sales of short-term investments. Net cash used in investing
activities in 2002 was primarily related to net short-term
securities purchases of $7.9 million and the purchase and
capitalization of software of $3.7 million. The net cash
provided by investing activities in 2001 is primarily
attributable to the net sales of short-term investments of
$32.5 million.

Net cash provided by financing activities was
$1.3 million in 2003 and $1.0 million in 2002 from the
exercise of stock options and the sale of stock through our
employee stock purchase plan. Net cash provided by financing
activities was $1.7 million in 2001 from the exercise of
stock options and the sale of stock through our employee stock
purchase plan totaling $4.6 million, which was partially
offset by a $3.0 million payment to extinguish a
Healthcare.com line of credit.

Commitments.In
August 2003, the Company established a line of credit with a
commercial bank thereby allowing the Company to borrow up to
$4.0 million. The line of credit is secured by all of our
assets except our intellectual property, and is guaranteed by
two of our subsidiaries. At December 31, 2003, the Company
had no outstanding borrowings under the revolving line of
credit. The line of credit is subject to financial covenants.
The Company is currently in compliance with the covenants.

The following table highlights, as of
December 31, 2003, our contractual obligations and
commitments to make future payments by type and period:

|                    |  |                        |        |      |  |             |       |             |  |                   |       |  |  |   |       |  |  |   |       | 
|------------------- |  | ---------------------- | ------ | ---- |  | ----------- | ----- | ----------- |  | ----------------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  | Total                  |        | 2004 |  | 2005 & 2006 |       | 2007 & 2008 |  | 2009 & thereafter
|                    |  |                        |        |      |  |             |       |             |  |                  
|                    |  |                       
|                    |  | (Dollars in thousands)
|Operating leases    |  | $                      | 13,141 |      |  | $           | 5,059 |             |  | $                 | 5,253 |  |  | $ | 1,374 |  |  | $ | 1,455 | 
|Royalty payments(1) |  |                        | 416    |      |  |             | 250   |             |  |                   | 166   |  |  |   |      |  |  |   |      | 
|                    |  |                        |        |      |  |             |       |             |  |                   |       |  |  |   |       |  |  |   |       | 
|                    |  | $                      | 13,557 |      |  | $           | 5,309 |             |  | $                 | 5,419 |  |  | $ | 1,374 |  |  | $ | 1,455 | 
|                    |  |                        |        |      |  |             |       |             |  |                   |       |  |  |   |       |  |  |   |       | 



---



|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | In connection with a software purchase in
    September 2003, the company has minimum royalty payments of
    $500,000 over two years.

On December 31, 2003, the Company had
$2.1 million in open purchase commitments.

We believe that our cash, cash equivalents and
investment balances will be sufficient to meet our anticipated
liquidity needs for working capital and capital expenditures for
at least 12 months. If we require additional capital
resources for working capital to grow our business internally or
to acquire complementary technologies and businesses at any time
in the future, we may issue additional equity or expand our bank
line of credit. The sale of additional equity could result in
additional dilution to our stockholders. We cannot assure you
that any financing arrangements will be available in amounts or
on terms acceptable to us in the future.

Recently Issued Accounting
Pronouncements

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities.
This interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities that possess certain characteristics. FIN 46
requires that if a business enterprise has a controlling
financial interest in a variable interest entity
(VIE), the assets, liabilities, and results of the
activities of the variable interest entity must be included in
the consolidated financial statements with those of the business
enterprise. The consolidation requirements of FIN 46 are
effective immediately for VIEs created after
January 31, 2003. The consolidation requirements for older
VIEs are effective for financial statements of interim or
annual periods beginning after

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June 15, 2003, however in October of 2003
the FASB deferred the effective date of FIN 46 for older
VIEs to the end of the first interim or annual period
ending after December 15, 2003. Certain disclosure
requirements are effective for all financial statements issued
after January 31, 2003, regardless of when the VIE was
established. We do not have any ownership in any variable
interest entities as of December 31, 2003. We will apply
the consolidation requirements of FIN 46 in future periods
should an interest in a variable interest entity be acquired.


Risk Factors

The following risk factors could materially and
adversely affect our operating results and could cause actual
events to differ materially from those predicted in any
forward-looking statements related to our business.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We have historically incurred losses and we
    may not be able to sustain profitability.

Although we have had profitable quarters, we
incurred losses for the years ended December 31, 2003, 2002
and 2001. As of December 31, 2003, we had an accumulated
deficit of $155 million. Since our IPO in February of 2000,
we have funded our business primarily from the cash generated
from the sale of our stock and cash flow from operations. We
expect to continue to incur significant sales and marketing,
research and development and general and administrative expenses
that may exceed our revenue. As a result, we may experience
losses and negative cash flows in the future. Failure to achieve
and maintain profitability may cause our stock price to decline
and impair our business and financial prospects.



| |                                                                          
| | -------------------------------------------------------------------------
| | We have recently restated our financial
    results for portions of 2003.

On March 15, 2004, we announced that we were
restating our 2003 third quarter financial results and revising
previously announced 2003 fourth quarter and full year financial
results. These changes remove all revenue associated with
Infotech Network Group from our published financial reports,
resulting in an $11.3 million reduction in revenue from the
total revenue previously announced for 2003.

The restatement and revision of our financial
results increases the risk that we may be subjected to
shareholder lawsuits. Such lawsuits, if filed, could seriously
harm our business and financial condition. The continued defense
of the lawsuits also could result in the diversion of our
managements time and attention away from business
operations, which could harm our business. Negative developments
or publicity with respect to such lawsuits could cause our stock
price to decline significantly. In addition, amounts we might be
required to pay in connection with the resolution of such
lawsuits by settlement or otherwise could seriously harm our
financial condition.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | An informal inquiry being conducted by the
    SEC with respect to certain matters unrelated to our restatement
    of financial results could be expanded to investigate the
    circumstances surrounding the restatement.

We have been cooperating with the SEC with
respect to an informal inquiry from the SEC regarding certain
transactions recorded as revenue for the third quarter of 2002.
While we believe that the matters currently the subject of the
SECs inquiry are not material and will not result in any
revisions to previously published financial results, the SEC may
determine to expand its inquiry to investigate the circumstances
surrounding our recently announced restatement. If this were to
occur, it would likely require significant management attention
and accounting and legal resources, which could adversely affect
our business, results of operations and cash flows. In addition,
negative developments or publicity with respect to such an
investigation could cause our stock price to decline
significantly.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results are likely to
    fluctuate significantly and may fail to meet the expectations of
    securities analysts and investors, causing our share price to
    decline.

Our operating results have fluctuated
significantly in the past and are likely to fluctuate in the
future. Moreover, our operating results in some quarters may not
meet the expectations of stock market analysts and

27



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##### Table of Contents



investors. In that event, our stock price would
likely decline. Further declines in our stock price may impair
our business prospects and our financial condition. As a result
of our limited history of profitable operations, our business
strategy, and the evolving nature of the markets in which we
compete, we may have difficulty accurately forecasting our
revenue in any given period. In addition to the factors
discussed elsewhere in this section, a number of factors may
cause our revenue to fall short of our expectations or cause
fluctuations in our operating results, including:




| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | delay in our introduction of new applications,
    services and products offerings and enhancements of our existing
    solutions;         
|
| |  | the capital and expense budgeting decisions of
    our existing and prospective customers;                                                 
|
| |  | the loss of a major customer;                                                                                                              
|
| |  | the amount and timing of operating costs and
    capital expenditures relating to the implementation of our
    business strategy;         
|
| |  | increased product development and engineering
    expenditures required to keep pace with technological changes;                           
|
| |  | overall economic conditions of the U.S. and the
    rest of the world;                                                                     
|
| |  | overall economic conditions in the software and
    information systems, telecommunications, financial services and
    defense industries;
|
| |  | the size, type and timing of individual license
    transactions;                                                                          
|
| |  | the adoption of new technologies;                                                                                                          
|
| |  | our success in expanding our direct sales force
    and indirect distribution channels;                                                    
|
| |  | levels of international sales; and                                                                                                         
|
| |  | obsolescence of our products or the programming
    languages that our products are designed to enhance.                                   



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have embarked on a strategy to
    significantly increase software sales as our principal source of
    revenue. If that strategy is not successful, our business may be
    harmed.

We have invested and continue to invest
significant financial and management resources in reorganizing
and enhancing our software sales effort. In recent months, we
have hired what we believe are top caliber sales talent, and we
have reformulated our sales materials and our presentation
strategy, all with a goal of generating an increased percentage
of our revenue from sales of our software products. These
efforts have been expensive and they have required, and we
expect will continue to require, considerable executive
management time and oversight, thus diverting resources from
other aspects of our business. If for any reason this strategy
is not successful, and we do not achieve increased software
sales as anticipated, then our stock price will decline, and our
business prospects and financial condition will be adversely
affected.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in an industry with rapidly
    changing technology and, if we do not successfully modify our
    products to incorporate new technologies or introduce new
    products, our sales will suffer.

The software market in which we compete is
characterized by (1) rapid technological change,
(2) frequent introductions of new products,
(3) changing customer needs and (4) evolving industry
standards. To keep pace with technological developments,
evolving industry standards and changing customer needs, we must
support existing products and develop new products. We have been
aggressively investigating new product development
opportunities, and we recently announced plans to create new
products and enhancements to existing products that facilitate
application development in a service-based architecture. We may
not be successful in developing, marketing and releasing new
products or new versions of our products that respond to
technological developments, evolving industry standards or
changing customer requirements. We may also experience
difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements. In
addition, these new products or enhancements may not adequately
meet the

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requirements of the marketplace and may not
achieve any significant degree of market acceptance. If release
dates of any future products or enhancements are delayed, or if
these products or enhancements fail to achieve market acceptance
when released, our business, operating results and financial
condition could be materially adversely affected. In addition,
new products or enhancements by our competitors may cause
customers to defer or forgo purchases of our products, which
could have a material adverse effect on our business, financial
condition and results of operations.




| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market for business process management
    and integration software may not grow as quickly as we
    anticipate, which would cause our revenue to fall below
    expectations.

The market for business process management and
integration software is relatively new and evolving. We earn a
substantial portion of our revenue from sales of our business
process management software, including application integration
software, and related services. We expect to earn substantially
all of our revenue in the future from sales of these products
and services. Our future financial performance will depend on
continued growth in the number of organizations demanding
software and services for business process management and
integration, requiring information delivery, and seeking outside
vendors to develop, manage and maintain this software for their
critical applications. Many of our potential customers have made
significant investments in internally developed systems and
would incur significant costs in switching to our products,
which may substantially inhibit the growth of our software. If
the market fails to grow, or grows more slowly than we expect,
our sales will be adversely affected. In addition, a weakening
global economy may lead to longer sales cycle and slower sales
growth.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Our acquisition strategy could cause
    financial or operational problems.

Our success depends on our ability to continually
enhance and broaden our product offerings in response to
changing technology, customer demands, and competitive
pressures. To this end, we may acquire new and complementary
businesses, products, or technologies. We do not know if we will
be able to complete any acquisitions or that we will be able to
successfully integrate any acquired businesses, operate them
profitably, or retain their key employees. Integrating any newly
acquired business, product or technology could be expensive and
time-consuming, could disrupt our ongoing business, and could
distract our management. We may face competition for acquisition
targets from larger and more established companies with greater
financial resources. In addition, in order to finance any
acquisitions, we might need to raise additional funds through
public or private financings. In that event, we could be forced
to obtain equity or debt financing on terms that are not
favorable to us and, in the case of equity financing, that
results in dilution to our stockholders. If we are unable to
integrate any newly acquired entity, products or technology
effectively, our business, financial condition and operating
results would suffer. In addition, the amortization of
intangible assets or other charges resulting from the cost of
acquisitions could harm our operating results.



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot execute our strategy to
    establish and maintain our relationships with established
    healthcare industry participants, our applications, services and
    products may not achieve healthcare market
    acceptance.

The healthcare industry is our most important
market. Relationships with established healthcare industry
participants are critical to our success. These relationships
include customer, vendor, distributor and co-marketer
relationships. To date, we have established a number of these
relationships. Once we have set up a relationship with an
established healthcare industry participant, we rely on that
participants ability to assist us in generating increased
acceptance and use of our applications, services, and product
offerings. We have limited experience in maintaining
relationships with healthcare industry participants.
Additionally, the other parties to these relationships may not
view these relationships with us as significant to their own
business, and they may reassess their commitment to us or decide
to compete directly with us in the future. We generally do not
have agreements that prohibit them from competing against us
directly or from contracting with our competitors. We cannot
guarantee that any such party will perform its obligations as
agreed or contemplated or that we would be able to specifically
enforce any agreement with it. Our arrangements generally do not
establish minimum performance requirements, but instead rely on
the voluntary efforts of the other party.

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Therefore, we cannot guarantee that these
relationships will be successful. If we were to lose any of
these relationships, or if the other parties were to fail to
collaborate with us to pursue additional business relationships,
we would not be able to execute our business plans and our
business would suffer significantly. Moreover, we may not
experience increased use of our applications, services and
product offerings even if we establish and maintain these
relationships.




| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | If our transaction hosting services suffer
    interruptions, our business and reputation could be
    harmed.

In the past, our customers have experienced some
interruptions with our transaction hosting services. Similar
interruptions may continue to occur from time to time. These
interruptions could be due to hardware and operating system
failures. We currently process customer transactions and data at
our facility in Albuquerque, New Mexico and Philadelphia,
Pennsylvania as well as in a third-party hosting facility in
California. Although we have safeguards for emergencies in each
location, we do not have fully operational procedures for
information processing facilities if either primary facility is
not functioning. The occurrence of a major catastrophic event or
other system failure at any of these facilities could interrupt
data processing or result in the loss of stored data. In
addition, we depend on the efficient operation of Internet
connections from customers to our systems. These connections, in
turn, depend on the efficient operation of web
browsers, Internet service providers and Internet backbone
service providers, all of which have had periodic operational
problems or experienced outages. Any system delays, failures, or
loss of data, whatever the cause, could reduce customer
satisfaction with our applications, services and product
offerings.

We expect a significant portion of our revenue to
be derived from customers who use our transaction hosting
services. As a result, our business will suffer if we experience
frequent or long system interruptions that result in the
unavailability or reduced performance of our hosting. We expect
to experience occasional temporary capacity constraints due to
sharply increased traffic, which may cause unanticipated system
disruptions, slower response times, impaired quality, and
degradation in levels of customer service. If this were to
happen on more than an occasional and temporary basis, our
business and reputation could be seriously harmed.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If security of our customer and patient
    information is compromised, patient care could suffer, we could
    be liable for damages and our reputation could
    decline.

We retain confidential customer and patient
information in our processing centers. Therefore, it is critical
that our facilities and infrastructure remain secure and that
our facilities and infrastructure are perceived by the
marketplace to be secure. Despite the implementation of security
measures, our infrastructure may be vulnerable to physical
break-ins, computer viruses, programming errors, attacks by
third parties or similar disruptive problems. If we fail to meet
our clients expectations, we could be liable for damages
and our reputation could suffer. In addition, patient care could
suffer and we could be liable if our systems fail to deliver
correct information in a timely manner. Our insurance may not
protect us from this risk.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | If we fail to meet performance standards we
    may experience a decline in revenue.

Many of our transaction and hosting service
agreements contain performance standards. If we fail to meet
these standards, our customers could terminate their agreements
with us. The loss of any of those service agreements would cause
a decline in our revenue. Additionally, we may be unable to
expand or adapt our transaction and hosting network
infrastructure to meet new demands on a timely basis and at a
commercially reasonable cost, or at all.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | If compliance with government regulation of
    healthcare becomes costly and difficult for our customers, we
    may not be able to grow our business.

Participants in the healthcare industry are
subject to extensive and frequently changing regulation under
numerous laws administered by governmental entities at the
federal, state and local levels, some of which are, and others
of which may be, applicable to our business. Furthermore, our
healthcare service provider, payer

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and plan customers are also subject to a wide
variety of laws and regulations that could affect the nature and
scope of their relationships with us.


The healthcare market itself is highly regulated
and subject to changing political, economic and regulatory
influences. These factors affect the purchasing practices and
operations of healthcare organizations. Changes in current
healthcare financing and reimbursement systems, such as
modifications which may be required by the Health Insurance
Portability and Accountability Act of 1996, may cause us to make
unplanned enhancements of software applications or services,
result in delays or cancellations of orders, or result in the
revocation of endorsement of our applications and services by
healthcare participants. The effect of HIPAA is difficult to
predict and there can be no assurances that we will adequately
address the business risks created by HIPAA and its
implementation or that we will be able to take advantage of any
resulting business opportunities.

Federal and state legislatures have periodically
considered programs to reform or amend the U.S. healthcare
system at both the federal and state level. These programs may
contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates or otherwise change the
environment in which healthcare market participants operate.
Healthcare market participants may respond by reducing their
investments or postponing investment decisions, including
investments in our applications and services. We do not know
what effect any proposals would have on our business.



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | Because we provide utilization review
    services, we may be liable for the denial of payments for
    medical claims or medical services.

One of the functions of our applications is
automatic adjudication of whether a claim for payment or service
should be denied or whether existing coverage should be
continued based upon particular plans, contracts and
industry-standard, clinical-support criteria. Our payer
customers are ultimately responsible for deciding whether to
deny claims for payment or medical services. It is possible,
however, that our customers may assert that we are liable for
denying payment of covered medical claims or medical service.
The contractual protections included in our customer contracts
and our insurance coverage may not be sufficient to protect us
against such liability.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | As we continue to build our international
    sales, we are subject to increased regulation and uncertainties
    in the international marketplace.

Among other things, our core products contain
strong encryption technology that is subject to export control
regulation. These regulations prohibit us from selling in
certain countries and to certain persons. Our inadvertent
failure to properly restrict our sales could subject us and our
management to fines and other sanctions and impair our financial
condition and our reputation. Additionally, in the international
marketplace we face increased uncertainty of enforcement of
contractual provisions and enforcement of judgments in our
dealings with non-U.S. persons. Our inability to properly
defend or enforce our contract rights could materially impair
our business prospects and financial condition.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We may face product-related liabilities
    that could force us to pay damages, which would hurt our
    reputation and financial condition.

Although both we and our customers test our
applications, services and product offerings, they may contain
defects or result in system failures. These defects or problems
could result in the loss of or delay in generating revenue, loss
of market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation or increased
insurance costs. In particular, we market software products that
are designed to assist our healthcare customers in meeting their
HIPAA compliance obligations. Failure of these products to
perform as intended could cause our customers to incur
significant fines and penalties for non-compliance, which in
turn could result in damages and claims against us. Our
contracts generally limit our liability arising from our errors;
however, these provisions may not be enforceable and may not
protect us from liability. While we have general liability
insurance that we believe is adequate, including coverage for
errors and omissions, we may not be able to maintain this
insurance on reasonable terms in the future. In

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addition, our insurance may not be sufficient to
cover large claims and our insurer could disclaim coverage on
claims. If we are liable for an uninsured or underinsured claim
or if our premiums increase significantly, our financial
condition could be materially harmed.




| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | If we do not establish and maintain our
    brand, our reputation could be adversely affected.

In order to increase our customer base and expand
our online traffic, we must establish, maintain and strengthen
our brand. For us to be successful in establishing our brand,
professionals in the healthcare and other targeted markets must
perceive us as offering quality, cost-effective, communications,
information and administrative services. Our reputation and
brand name could be harmed if we experience difficulties in
introducing new applications, services and product offerings, if
these applications, services and product offerings are not
accepted by customers, if we are required to discontinue
existing applications, services and product offerings or if our
products and services do not function properly.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | We are subjected to many risks because our
    business is dependent on our intellectual proprietary
    rights.

We are exposed to infringement
risks.Our intellectual property is
important to our business. We may be subject to intellectual
property infringement claims as the number of our competitors
grows and the functionality of our applications overlaps with
competitive offerings. These claims, whether or not meritorious,
could be expensive, divert our attention from operating our
company, result in costly litigation, cause product shipment
delays, or require us to enter into royalty or licensing
agreements, any of which could seriously harm our business,
financial condition and results of operations. If we become
liable to third parties for infringing on their intellectual
property rights, we would be required to pay a substantial
damage award and to develop non-infringing technology, obtain a
license or cease selling the applications that contain the
infringing intellectual property. We may be unable to develop
non-infringing technology or obtain a license on commercially
reasonable terms, or at all. In the event an intellectual
property claim against us was successful and we could not obtain
a license on acceptable terms, license a substitute technology
or redesign to avoid infringement, most of our contracts would
require us to refund a portion of the software license fees; our
business, financial condition and results of operations would be
seriously harmed. In addition, we may not be able to protect
against misappropriation of our intellectual property. Third
parties may infringe upon our intellectual property rights, we
may not detect this unauthorized use and we may be unable to
enforce our rights.

We rely on third parties for technology in our
products.We depend upon third-party
suppliers and licensors to provide software that is incorporated
in certain of our products and the products that we distribute.
We have no control over the scheduling and quality of work of
these third-party software suppliers and licensors.
Additionally, the third-party software may not continue to be
available to us on commercially reasonable terms, or at all. Our
agreements to license certain third-party software will
terminate after specified dates unless they are renewed. We
expect to sell multiple products to the same customers and
problems with the third party technology in one product may
adversely affect sales of other products to the same customer.

Our products may be affected by unknown
software defects.Our products depend
on complex software, both internally developed and licensed from
third parties. Complex software often contains defects,
particularly when first introduced or when enhancements or new
versions are released. Although we conduct extensive testing, we
may not discover software defects that affect our new or current
products or enhancements until after they are deployed. To date,
we have not experienced any material software defects, however
despite continued testing, defects may occur in our software.
These defects could cause performance interruptions, which could
damage our reputation with existing or potential customers,
increase our service costs, cause us to lose revenue, delay
market acceptance or divert our development resources, any of
which could cause our business to suffer.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Legislative and regulatory actions may
    cause our operating expenses to increase.

The Sarbanes-Oxley Act of 2002 and newly proposed
or enacted rules and regulations of the SEC or Nasdaq, impose
duties on the Company and its executives, directors, attorneys
and auditors. In order to comply with the Sarbanes-Oxley Act and
any new rules promulgated by the SEC or Nasdaq, we may be

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required to hire additional personnel and use
additional outside legal, accounting and advisory services in
the future. Any of these developments could materially increase
our operating expenses and, accordingly, reduce our net income.




| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | Benefits expected from our recent
    acquisitions may not be realized because of integration and
    other challenges.

The benefits of the merger may not be realized
and could have a material adverse effect on the combined
business and results of operations because of the following
challenges:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | incorporating technology and products into
    Quovadx product offerings;                                          
|
| |  | preserving the acquired technical knowledge
    within the engineering organization;                               
|
| |  | coordinating the efforts of the Rogue Wave and
    CareScience sales organizations with Quovadx sales organization;
|
| |  | maintaining momentum in the sales growth of Rogue
    Waves and CareSciences product offerings;                  
|
| |  | realizing anticipated cost savings in a timely
    manner; and                                                     
|
| |  | incurring unanticipated expenses related to the
    integration of the acquisitions and Quovadx.                   



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Expenses related to the recent acquisitions
    could adversely affect the Companys combined financial
    results.

Quovadx has incurred direct transaction costs in
connection with the acquisitions of $6.9 million. If
Quovadx does not achieve the expected benefits of the merger,
the combined companys financial results, including
earnings per share, could be adversely affected.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | The integration process may disrupt the
    Companys business and internal resources.

The integration of acquisitions and Quovadx will
be complex, time consuming and expensive and may disrupt our
business. Some of the suppliers, distributors, customers and
licensors may be our competitors or may work with our
competitors and as a result terminate the business relationships
with the combined company as a result of the mergers. In
addition, the integration process may strain the combined
companys financial and managerial controls and reporting
systems and procedures. This may result in the diversion of
management and financial resources from the combined
companys core business objectives. There can be no
assurance that acquisitions and Quovadx will successfully
integrate or that the combined company will realize any of the
anticipated benefits of the merger.



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

We currently develop and market our products
primarily in the United States. As a majority of sales are
currently made in U.S. dollars, a strengthening of the
dollar could make our product less competitive in foreign
markets. Our interest income is sensitive to changes in the
general level of U.S. interest rates. Due to the short
term-term nature of our investments, we believe that there is no
material interest risk exposure. Based on the foregoing, no
quantitative disclosures have been provided.






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

For a discussion of the information required by
this item, you should refer to pages F-1 through F-25 and S-1.

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.






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

An evaluation of the effectiveness of our
disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934)
as of the end of the period covered by this report was carried
out under the supervision and with the participation of our
management, including our chief executive officer and chief
financial officer. Based on that evaluation, our chief executive
officer and chief financial officer have concluded that our
disclosure controls and procedures are effective to ensure that
material information relating to us, including our consolidated
subsidiaries, is made known to them by others within such
entities, particularly during the period in which this report
was prepared, in order to allow timely decisions regarding
required disclosure.

There was no change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) that occurred during our most
recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.




PART III






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

The information required by this item concerning
the Companys directors is incorporated by reference to the
information set forth in the sections entitled Information
About Nominees and Other Directors, Directors
Compensation, and Section 16(a) Beneficial
Ownership Compliance in our Proxy Statement for the 2004
Annual Meeting of Stockholders (2004 Proxy
Statement) to be filed with the Commission within
120 days after the end of the Companys fiscal year
ended December 31, 2003.

Code of Ethics

We have adopted a Code of Ethics that applies to
all of our directors, officers and employees. We publicize the
Code of Ethics by posting the code on our website,
http://www.quovadx.com. Our Code of Ethics is also included as
Exhibit 99.1 to this Annual Report on Form 10-K. We
will disclose on our website any waivers of, or amendments to
our Code of Ethics.






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

The information required by this item regarding
executive compensation is incorporated by reference to the
information set forth in the section entitled Executive
Compensation in our 2004 Proxy Statement.






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

The information required by this item regarding
security ownership of certain beneficial owners and management
and regarding the securities authorized for issuance under our
equity compensation plans is incorporated by reference to the
information set forth in the section entitled Security
Ownership of Certain Beneficial Holders and Management and
Securities Authorized for Issuance Under Equity
Compensation Plans in our 2004 Proxy Statement.






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

The information required by this item regarding
security ownership of certain relationships and related
transactions is incorporated by reference to the information set
forth in the section entitled Certain Relationships and
Related Transactions in our 2004 Proxy Statement.

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

The information required by this Item is
incorporated by reference to the information under the heading
Fees Paid to Ernst & Young LLP in our 2004
Proxy Statement.




PART IV






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

(a) The following documents are filed as
part of this Annual Report on Form 10-K:



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | 1. Consolidated Financial Statements                                                                  
|
| | The following consolidated financial statements
    of Quovadx, Inc. are filed as part of this report:

|                                                               |  |        |     | 
|-------------------------------------------------------------- |  | ------ | --- | 
|                                                               |  | Page  
|                                                               |  | Number
|                                                               |  |       
|Index to Consolidated Financial Statements                     |  |        | F-1 | 
|Report of Independent Auditors                                 |  |        | F-2 | 
|Consolidated Balance Sheets                                    |  |        | F-3 | 
|Consolidated Statements of Operations                          |  |        | F-4 | 
|Consolidated Statements of Changes in
    Stockholders Equity |  |        | F-5 | 
|Consolidated Statements of Cash Flows                          |  |        | F-6 | 
|Notes to the Consolidated Financial Statements                 |  |        | F-7 | 



| |                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. Consolidated Financial Statement
    Schedules. The following consolidated financial statement
    schedule of the Company for each of the years ended
    December 31, 2003, 2002 and 2001, is filed as part of this
    Annual Report on Form 10-K and should be read in
    conjunction with the Consolidated Financial Statements, and the
    related notes thereto, of the Company.

|                                              |  |        |     | 
|--------------------------------------------- |  | ------ | --- | 
|                                              |  | Page  
|                                              |  | Number
|                                              |  |       
|Schedule II Valuation and Qualifying Accounts |  |        | S-1 | 

Schedules other than the one listed above have
been omitted since they are either not required, not applicable,
or the information is included elsewhere in this Annual Report
on Form 10-K.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. Exhibits. The exhibits listed on
    the accompanying index to exhibits are filed as part of, or
    incorporated by reference into, this Annual Report on
    Form 10-K.

(b) Reports on Form 8-K. During
the quarterly period ended December 31, 2004, the Company
filed the following Reports on Form 8-K:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On October 22, 2003, the Company filed a
    Current Report on Form 8-K under Items 7 and 12 to furnish
    our press release announcing our financial results for the
    quarter ended September 30, 2003.                  
|
| |  | On November 4, 2003, the Company filed a
    Current Report on Form 8-K under Item 5 regarding the
    announcement of the execution of the Agreement and Plan of
    Merger with Rogue Wave Software, Inc.                   
|
| |  | On December 22, 2003, the Company filed a
    Current Report on Form 8-K under Item 2 to regarding
    consummation of the transactions contemplated under the
    Agreement and Plan of Merger with Rogue Wave Software, Inc.

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(c) Index to Exhibits

|        |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 2.1   |                         |  | Agreement and Plan of Merger, dated as of
    August 13, 2003, by and among CareScience, Inc., the
    Registrant and Carlton Acquisition Corporation (incorporated by
    reference to Annex A to the Prospectus filed by the Registrant
    under Rule 424(b)(3) on September 18, 2003).                                                                                                                                                                               
|        | 2.2   |                         |  | Agreement and Plan of Merger, dated as of
    November 3, 2003, by and among Rogue Wave Software, Inc.,
    the Registrant and Chess Acquisition Corporation (incorporated
    by reference to Annex A to the Prospectus filed by the
    Registrant under Rule 424(b)(3) on December 16, 2003).                                                                                                                                                                         
|        | 3.1   |                         |  | Restated Certificate of Incorporation of the
    Registrant (incorporated by reference to Exhibit 3.1 to the
    Quarterly Report on Form 10-Q of the Registrant for the
    quarter ended March 31, 2003, filed as of May 13,
    2003).                                                                                                                                                                                                                                
|        | 3.2   |                         |  | Bylaws of the Registrant (incorporated by
    reference to Exhibit 3.3 to the Registration Statement on
    Form S-1 of the Registrant, filed as of November 2,
    1999, Registration No. 333-90165).                                                                                                                                                                                                                                                                   
|        | 4.1   |                         |  | Specimen stock certificate representing shares of
    Common Stock of the Registrant (incorporated by reference to
    Exhibit 4.1 to the Current Report on Form 8-K of the
    Registrant, filed as of October 16, 2001).                                                                                                                                                                                                                                               
|        | 4.2   |                         |  | Preferred Stock Rights Agreement, dated as of
    July 24, 2000, between the Registrant and ChaseMellon
    Shareholder Services, L.L.C., as Rights Agent, including the
    Certificate of Designation, the form of Rights Certificate and
    the Summary of Rights attached thereto as Exhibits A, B, and C,
    respectively (incorporated by reference to Exhibit 1 to the
    Registration Statement on Form 8-A of the Registrant, filed
    as of July 28, 2000).
|        | 10.1* |                         |  | Amended and Restated 1997 Stock Plan and related
    agreements (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-8 of the Registrant, filed
    as of May 16, 2002, Registration No. 333-88408).                                                                                                                                                                                                                                    
|        | 10.2* |                         |  | Amended and Restated 1999 Employee Stock Purchase
    Plan and related agreements (incorporated by reference to
    Exhibit 10.2 to the Quarterly Report on Form 10-Q of
    the Registrant for the quarter ended September 30, 2003,
    filed as of November 3, 2003).                                                                                                                                                                                                 
|        | 10.3* |                         |  | Amended and Restated 1999 Director Option Plan
    and related agreements (incorporated by reference to
    Exhibit 4.3 to the Registration Statement on Form S-8
    of the Registrant, filed as of May 16, 2002, Registration
    No. 333-88408).                                                                                                                                                                                                                      
|        | 10.4* |                         |  | Amended and Restated 2000 Nonstatutory Stock
    Option Plan and related agreements (incorporated by reference to
    Exhibit 4.9 to the Registration Statement on Form S-8
    of the Registrant, filed as of April 1, 2003, Registration
    No. 333-104184).                                                                                                                                                                                                          
|        | 10.5* |                         |  | Amended and Restated Healthcare.com Corporation
    Non-Employee Director Stock Option Plan (filed as of
    August 13, 1999, as Exhibit 10 to the Quarterly Report
    on Form 10-Q of Healthcare.com Corporation for the quarter
    ended June 30, 1999, Commission File No. 0-27056, and
    incorporated by reference to Exhibit 10.42 to the
    Registration Statement on Form S-4 of the Registrant, filed
    as of June 29, 2001, Registration No. 333-64282). 
|        | 10.6* |                         |  | Healthcare.com Corporation Adjustment Stock
    Option Plan (filed as of October 24, 1995, as Exhibit 10.5
    to Amendment No. 1 to the Registration Statement on
    Form S-1 of Healthcare.com Corporation, Registration
    No. 33-96478, and incorporated by reference to
    Exhibit 10.43 to the Registration Statement on
    Form S-4 of the Registrant, filed as of June 29, 2001,
    Registration No. 333-64282).                                            
|        | 10.7* |                         |  | Healthcare.com Corporation Restated Stock Option
    Plan Two (filed as of May 11, 1998, as Exhibit 10.2 to the
    Quarterly Report on Form 10-Q of Healthcare.com Corporation
    for the quarter ended March 31, 1998, Commission File
    No. 0-27056, and incorporated by reference to
    Exhibit 10.44 to the Registration Statement on
    Form S-4 of the Registrant, filed as of June 29, 2001,
    Registration No. 333-64282).                               
|        | 10.8* |                         |  | Rogue Wave Software, Inc. 1996 Equity Incentive
    Plan (incorporated by reference to Exhibit 4.1 to the
    Post-Effective Amendment No. 1 to Form S-4 on
    Form S-8 Registration Statement of the Registrant, filed as
    of January 8, 2004, Registration No. 333-110388).                                                                                                                                                                                        

36



---



##### Table of Contents



|        |        |                         |  |                                                                                                                                                                                                                                                                                                                                                          
|------- | ------ | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.9*  |                         |  | Rogue Wave Software, Inc. 1997 Equity Incentive
    Plan (incorporated by reference to Exhibit 4.2 to the
    Post-Effective Amendment No. 1 to Form S-4 on
    Form S-8 Registration Statement of the Registrant, filed as
    of January 8, 2004, Registration No. 333-110388).                                                                        
|        | 10.10* |                         |  | Offer letter, dated as of February 20, 2002,
    to David E. Nesvisky from the Registrant (incorporated by
    reference to Exhibit 10.8 to the Annual Report on
    Form 10-K of the Registrant for the year ended
    December 31, 2002, filed as of March 31, 2003).                                                                                  
|        | 10.11* |                         |  | Amended and Restated Employment Agreement, dated
    as of April 11, 2003, by and between CareScience, Inc. and
    Ronald A. Paulus (filed as of April 25, 2003, as
    Exhibit 10.2 to Amendment No. 1 to the Annual Report
    on Form 10-K/ A of CareScience, Inc. and incorporated by
    reference thereto).                                       
|        | 10.12  |                         |  | Office Lease Agreement, effective as of
    November 8, 1999, between Mountain States Mutual Casualty
    Company and the Registrant (incorporated by reference to
    Amendment 1 to the Registration Statement on Form S-1 of
    the Registrant, filed as of December 17, 1999, Registration
    No. 333-90165).                                      
|        | 10.13  |                         |  | Sublease, dated as of August 24, 2001,
    between Echo Bay Management Corp. and the Registrant
    (incorporated by reference to Exhibit 12.1 to the Annual
    Report on Form 10-K of the Registrant for the year ended
    December 31, 2001, filed as of March 26, 2002).                                                                            
|        | 10.14  |                         |  | Form of Indemnification Agreement entered into by
    the Registrant with each of its directors and executive officers
    (incorporated by reference to Exhibit 11.1 to the Annual
    Report on Form 10-K of the Registrant for the year ended
    December 31, 2001, filed as of March 26, 2002).                                                     
|        | 10.15  |                         |  | Restated License Agreement, dated as of
    April 1, 1995, between the Trustees of the University of
    Pennsylvania and Care Management Science Corporation (filed as
    of March 14, 2000, as Exhibit 10.3 to the Registration
    Statement on Form S-1 of CareScience, Inc., Registration
    No. 333-32376 and incorporated by reference thereto).
|        | 10.16  |                         |  | License Agreement, dated as of July 30,
    2001, by and between 3550 University City Science Center
    Associates as licensor and Carescience, Inc. as licensee, for
    the license to use a portion of a building for a data center.                                                                                                                 
|        | 10.17  |                         |  | Consent of Assignment, dated as of
    September 18, 2003, by 3550 University City Science Center
    Associates as licensor.                                                                                                                                                                                                                            
|        | 21     |                         |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                          
|        | 23     |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                                                                                                                                                                  
|        | 31.1   |                         |  | Certification of Chief Executive Officer of the
    Registrant pursuant to Rule 13a-14(a) and
    Rule 15d-14(a), promulgated under the Securities Exchange
    Act of 1934, as amended.                                                                                                                                                                 
|        | 31.2   |                         |  | Certification of Chief Financial Officer of the
    Registrant pursuant to Rule 13a-14(a) and
    Rule 15d-14(a), promulgated under the Securities Exchange
    Act of 1934, as amended.                                                                                                                                                                 
|        | 32.1** |                         |  | Certification of Chief Executive Officer of the
    Registrant pursuant to Rule 13a-14(b) and
    Rule 15d-14(b), promulgated under the Securities Exchange
    Act of 1934, as amended, and 18 U.S.C. §1350.                                                                                                                                            
|        | 32.2** |                         |  | Certification of Chief Financial Officer of the
    Registrant pursuant to Rule 13a-14(b) and
    Rule 15d-14(b), promulgated under the Securities Exchange
    Act of 1934, as amended, and 18 U.S.C. 1350.                                                                                                                                             
|        | 99.1   |                         |  | Quovadx, Inc. Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                       



---



|  |                                                                           
|- | --------------------------------------------------------------------------
|* | Constitutes a management contract or compensatory
    plan or arrangement.



|   |                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | This certification is furnished to, but not
    filed, with the Commission. This certification shall not be
    deemed to be incorporated by reference into any filing under the
    Securities Act of 1933 or the Securities Exchange Act of 1934,
    except to the extent that the Registrant specifically
    incorporates it by reference.

(d) Financial Statement Schedule. See
Item 15(a) above.

37



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##### Table of Contents






SIGNATURES




Pursuant to the requirements of Section 13
or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Englewood, State of Colorado, on this
31st day of March 2004.






| |              
| | -------------
| | QUOVADX, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ LORINE R. SWEENEY

| |                                          
| | -----------------------------------------
| |                                          
| | Lorine R. Sweeney                        
| | President and Chief Executive
    Officer




Pursuant to the requirements of the Exchange Act,
this report has been signed by the following persons in the
capacities and on the dates indicated.







|                                       |  |                                                                                                       |  |                |  | 
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  |                                                                                                       |  |               
|Signatures                             |  | Title                                                                                                 |  | Date          
|                                       |  |                                                                                                       |  |               
|                                      
|/s/ LORINE R. SWEENEYLorine R. Sweeney |  | Director, President and Chief Executive Officer
    (Principal Executive Officer)                     |  | March 31, 2004
|                                      
|/s/ GARY T. SCHERPINGGary T. Scherping |  | Executive Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 31, 2004
|                                      
|*Jeffrey M. Krauss                     |  | Chairman of the Board                                                                                 |  |               
|                                      
|*Fred L. Brown                         |  | Director                                                                                              |  |               
|                                      
|*J. Andrew Cowherd                     |  | Director                                                                                              |  |               
|                                      
|*James B. Hoover                       |  | Director                                                                                              |  |               
|                                      
|*Charles J. Roesslein                  |  | Director                                                                                              |  |               
|                                      
|*James A. Gilbert                      |  | Director                                                                                              |  |               
|                                      
|*                                      |  | /s/ GARY T. SCHERPINGAttorney-in-fact                                                                 |  |                |  | 




38



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##### Table of Contents



QUOVADX, INC.



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                               |  |      |     | 
|-------------------------------------------------------------- |  | ---- | --- | 
|                                                               |  | Page
|                                                               |  |     
|Report of Independent Auditors                                 |  |      | F-2 | 
|Consolidated Balance Sheets                                    |  |      | F-3 | 
|Consolidated Statements of Operations                          |  |      | F-4 | 
|Consolidated Statements of Changes in
    Stockholders Equity |  |      | F-5 | 
|Consolidated Statements of Cash Flows                          |  |      | F-6 | 
|Notes to the Consolidated Financial Statements                 |  |      | F-7 | 
|Schedule II Valuation and Qualifying Accounts                  |  |      | S-1 | 

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Quovadx, Inc.


We have audited the accompanying consolidated
balance sheets of Quovadx, Inc. (the Company)
as of December 31, 2003 and 2002, and the related
consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. Our audits
also included the financial statement schedule listed in the
index at Item 15(a)2. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company at
December 31, 2003 and 2002, and the consolidated results of
its operations and its 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.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the financial
statements, on January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets and changed its
method of accounting for goodwill.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Denver, Colorado

February 10, 2004,


except for Note 9, as to which the date is


March 11, 2004


F-2



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |          |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | -------- | ------- | ------- | ------ | -------- | ------- | ------- | 
|                                         |                                                                                                                                             |                                           
|                                         |                                                                                                                                             | December 31,                              
|                                         |                                                                                                                                             |                                           
|                                         |                                                                                                                                             | 2003                                       |                      | 2002    
|                                         |                                                                                                                                             |                                            |                      |         
|                                         |                                                                                                                                             |                                           
|                                         |                                                                                                                                             | (In thousands, except                     
|                                         |                                                                                                                                             | share and per share                       
|                                         |                                                                                                                                             | amounts)                                  
|ASSETS                                  
|Current assets:                          |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         | Cash and cash equivalents                                                                                                                   |                                            | $                    | 23,688   |         |         | $      | 31,244   |        
|                                         | Short-term investments                                                                                                                      |                                            |                      |         |         |         |        | 16,377   |        
|                                         | Accounts receivable, net of allowance of $2,765
    and $2,370, respectively                                                                |                                            |                      | 18,465   |         |         |        | 10,980   |        
|                                         | Unbilled accounts receivable                                                                                                                |                                            |                      | 3,393    |         |         |        | 5,571    |        
|                                         | Other current assets                                                                                                                        |                                            |                      | 4,304    |         |         |        | 1,904    |        
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             |                                            | Total current assets |          |         | 49,850  |        |          |         | 66,076  | 
|Property and equipment, net              |                                                                                                                                             |                                            | 6,291                |          |         |         | 5,326  |         
|Software, net                            |                                                                                                                                             |                                            | 29,221               |          |         |         | 20,465 |         
|Other intangible assets, net             |                                                                                                                                             |                                            | 17,735               |          |         |         | 6,266  |         
|Goodwill                                 |                                                                                                                                             |                                            | 48,015               |          |         |         |       |         
|Other assets                             |                                                                                                                                             |                                            | 5,223                |          |         |         | 6,476  |         
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             |                                            | Total assets         |          | $       | 156,335 |        |          | $       | 104,609 | 
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         | Accounts payable                                                                                                                            |                                            | $                    | 7,953    |         |         | $      | 1,288    |        
|                                         | Accrued liabilities                                                                                                                         |                                            |                      | 15,881   |         |         |        | 6,007    |        
|                                         | Unearned revenue                                                                                                                            |                                            |                      | 18,088   |         |         |        | 8,241    |        
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             | Total current liabilities                  |                      |          | 41,922  |         |        |          | 15,536  |        
|Deferred revenue                         |                                                                                                                                             |                                            |                     |          |         |         | 2,125  |         
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             | Total liabilities                          |                      |          | 41,922  |         |        |          | 17,661  |        
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|Commitments and contingencies            |                                                                                                                                             |                                            |                      |          |         |         |        |         
|Stockholders equity:                    |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         | Preferred stock, $0.01 par value;
    5,000,000 shares authorized; no shares issued and
    outstanding                                     |                                            |                      |         |         |         |        |         |        
|                                         | Common stock, $0.01 par value;
    100,000,000 shares authorized; 38,938,134 and
    30,176,159 shares issued and outstanding, respectively |                                            |                      | 389      |         |         |        | 302      |        
|                                         | Additional paid-in capital                                                                                                                  |                                            |                      | 269,011  |         |         |        | 226,685  |        
|                                         | Unearned compensation                                                                                                                       |                                            |                      | (385     | )       |         |        |         |        
|                                         | Accumulated other comprehensive income                                                                                                      |                                            |                      | 131      |         |         |        |         |        
|                                         | Accumulated deficit                                                                                                                         |                                            |                      | (154,733 | )       |         |        | (140,039 | )      
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             | Total stockholders equity                 |                      |          | 114,413 |         |        |          | 86,948  |        
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         
|                                         |                                                                                                                                             | Total liabilities and stockholders equity |                      | $        | 156,335 |         |        | $        | 104,609 |        
|                                         |                                                                                                                                             |                                            |                      |          |         |         |        |         

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

F-3



---



##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | ------------------------- | ------- | ------ | ------ | ---- | -------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                   |                                            |                          
|                                                                   |                                            | Year Ended December 31,  
|                                                                   |                                            |                          
|                                                                   |                                            | 2003                      |         | 2002   |        | 2001
|                                                                   |                                            |                           |         |        |        |     
|                                                                   |                                            |                          
|                                                                   |                                            | (In thousands,           
|                                                                   |                                            | except per share amounts)
|Revenue:                                                           |                                            |                           |         |        |        |      |          |        |        |   |        |       
|                                                                   | Software license                           |                           | $       | 21,228 |        |      | $        | 11,854 |        |   | $      | 6,416  |       
|                                                                   | Professional services                      |                           |         | 18,217 |        |      |          | 22,459 |        |   |        | 28,449 |       
|                                                                   | Recurring services                         |                           |         | 32,150 |        |      |          | 29,345 |        |   |        | 17,315 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Total revenue                                                      |                                            |                           | 71,595  |        |        |      | 63,658   |        |        |   | 52,180 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Cost of revenue:                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|                                                                   | Software license                           |                           |         | 9,941  |        |      |          | 5,458  |        |   |        | 2,415  |       
|                                                                   | Professional services                      |                           |         | 13,811 |        |      |          | 14,743 |        |   |        | 16,930 |       
|                                                                   | Recurring services                         |                           |         | 20,989 |        |      |          | 19,087 |        |   |        | 14,579 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Total cost of revenue                                              |                                            |                           | 44,741  |        |        |      | 39,288   |        |        |   | 33,924 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|                                                                   | Gross profit                               |                           |         | 26,854 |        |      |          | 24,370 |        |   |        | 18,256 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Operating expenses:                                                |                                            |                           |         |        |        |      |          |        |        |   |        |       
|                                                                   | Sales and marketing                        |                           |         | 17,785 |        |      |          | 13,343 |        |   |        | 8,850  |       
|                                                                   | General and administrative                 |                           |         | 12,742 |        |      |          | 13,660 |        |   |        | 10,399 |       
|                                                                   | Research and development                   |                           |         | 9,995  |        |      |          | 7,209  |        |   |        | 4,792  |       
|                                                                   | Amortization of acquired intangible assets |                           |         | 1,720  |        |      |          | 2,307  |        |   |        | 1,585  |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|                                                                   |                                            | Total operating expenses  |         |        | 42,242 |      |          |        | 36,519 |   |        |        | 25,626 | 
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Loss from operations                                               |                                            |                           | (15,388 | )      |        |      | (12,149  | )      |        |   | (7,370 | )     
|Gain on sale of assets                                             |                                            |                           |        |        |        |      | 87       |        |        |   |       |       
|Goodwill impairment                                                |                                            |                           |        |        |        |      | (93,085  | )      |        |   |       |       
|Interest income, net                                               |                                            |                           | 694     |        |        |      | 1,035    |        |        |   | 3,101  |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Net loss                                                           |                                            | $                         | (14,694 | )      |        | $    | (104,112 | )      |        | $ | (4,269 | )     
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Net loss per common share  basic and
    diluted                  |                                            | $                         | (0.47   | )      |        | $    | (3.47    | )      |        | $ | (0.20  | )=    
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                           | 31,407  |        |        |      | 29,987   |        |        |   | 21,308 |       
|                                                                   |                                            |                           |         |        |        |      |          |        |        |   |        |       

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

F-4



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------- |  | -------------- | ------ | ---------- |  | -------- | --- | ------------- |  | ----------- | ------- | ------- |  | ----- | ---- | - |  | - | --- |  |  | - | -------- | - |  | - | -------- | -
|                                                                            |  |                |        |            |  |          |     | Accumulated   |  |             |         |        
|                                                                            |  | Common Stock   |        | Additional |  |          |     | Other         |  |             |         |        
|                                                                            |  |                |        | Paid-in    |  | Unearned |     | Comprehensive |  | Accumulated |         |        
|                                                                            |  | Shares         |        | Amount     |  | Capital  |     | Compensation  |  | Income      |         | Deficit |  | Total
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |      
|                                                                            |  |               
|                                                                            |  | (In thousands)
|Balance at January 1, 2001                                                  |  |                | 16,408 |            |  | $        | 164 |               |  | $           | 124,990 |         |  | $     | (657 | ) |  | $ |    |  |  | $ | (31,658  | ) |  | $ | 92,839   |  
|Net loss and comprehensive loss                                             |  |                |       |            |  |          |    |               |  |             |        |         |  |       |     |   |  |   |    |  |  |   | (4,269   | ) |  |   | (4,269   | )
|Common stock warrant exercises                                              |  |                | 1,023  |            |  |          | 10  |               |  |             | (10     | )       |  |       |     |   |  |   |    |  |  |   |         |   |  |   |         |  
|Shares issued for acquisitions                                              |  |                | 11,496 |            |  |          | 115 |               |  |             | 95,191  |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 95,306   |  
|Stock option exercises and issuances under
    employee stock purchase plan |  |                | 761    |            |  |          | 8   |               |  |             | 4,543   |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 4,551    |  
|Stock compensation                                                          |  |                |       |            |  |          |    |               |  |             | 34      |         |  |       | 426  |   |  |   |    |  |  |   |         |   |  |   | 460      |  
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|Balance at December 31, 2001                                                |  |                | 29,688 |            |  |          | 297 |               |  |             | 224,748 |         |  |       | (231 | ) |  |   |    |  |  |   | (35,927  | ) |  |   | 188,887  |  
|Net loss and comprehensive loss                                             |  |                |       |            |  |          |    |               |  |             |        |         |  |       |     |   |  |   |    |  |  |   | (104,112 | ) |  |   | (104,112 | )
|Shares issued for acquisitions                                              |  |                | 139    |            |  |          | 1   |               |  |             | 919     |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 920      |  
|Stock option exercises and issuances under
    employee stock purchase plan |  |                | 349    |            |  |          | 4   |               |  |             | 1,018   |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 1,022    |  
|Stock compensation                                                          |  |                |       |            |  |          |    |               |  |             |        |         |  |       | 231  |   |  |   |    |  |  |   |         |   |  |   | 231      |  
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|Balance at December 31, 2002                                                |  |                | 30,176 |            |  |          | 302 |               |  |             | 226,685 |         |  |       |     |   |  |   |    |  |  |   | (140,039 | ) |  |   | 86,948   |  
|Net loss                                                                    |  |                |       |            |  |          |    |               |  |             |        |         |  |       |     |   |  |   |    |  |  |   | (14,694  | ) |  |   | (14,694  | )
|Currency translation adjustment                                             |  |                |       |            |  |          |    |               |  |             |        |         |  |       |     |   |  |   | 131 |  |  |   |         |   |  |   | 131      |  
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|Comprehensive loss                                                          |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   | (14,563  | )
|Shares issued for acquisitions                                              |  |                | 8,072  |            |  |          | 81  |               |  |             | 41,014  |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 41,095   |  
|Stock option exercises and issuances under
    employee stock purchase plan |  |                | 690    |            |  |          | 6   |               |  |             | 1,312   |         |  |       |     |   |  |   |    |  |  |   |         |   |  |   | 1,318    |  
|Deferred compensation from options exchanged in
    acquisition             |  |                |       |            |  |          |    |               |  |             |        |         |  |       | (385 | ) |  |   |    |  |  |   |         |   |  |   | (385     | )
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|Balance at December 31, 2003                                                |  |                | 38,938 |            |  | $        | 389 |               |  | $           | 269,011 |         |  | $     | (385 | ) |  | $ | 131 |  |  | $ | (154,733 | ) |  | $ | 114,413  |  
|                                                                            |  |                |        |            |  |          |     |               |  |             |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  

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

F-5



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |       |        |       | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ----- | ------ | ----- | -------- | ------ | ------- | ----- | ------ | ----- | ------ | ----- | 
|                                                                               |                                                                               |                                      
|                                                                               |                                                                               | Year Ended December 31,              
|                                                                               |                                                                               |                                      
|                                                                               |                                                                               | 2003                                  |                                           | 2002  |        | 2001 
|                                                                               |                                                                               |                                       |                                           |       |        |      
|                                                                               |                                                                               |                                      
|                                                                               |                                                                               | (In thousands)                       
|CASH FLOWS FROM OPERATING ACTIVITIES                                           |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Net loss                                                                       |                                                                               | $                                     | (14,694                                   | )     |        | $     | (104,112 | )      |         | $     | (4,269 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|                                                                               | Depreciation and amortization                                                 |                                       |                                           | 9,806 |        |       |          | 8,673  |         |       |        | 6,099 |       
|                                                                               | Amortization of acquired intangible assets                                    |                                       |                                           | 1,720 |        |       |          | 2,307  |         |       |        | 1,585 |       
|                                                                               | Goodwill impairment                                                           |                                       |                                           |      |        |       |          | 93,085 |         |       |        |      |       
|                                                                               | Gain on sale of assets                                                        |                                       |                                           |      |        |       |          | (87    | )       |       |        |      |       
|                                                                               | Charge related to issuance of warrants                                        |                                       |                                           |      |        |       |          |       |         |       |        | 876   |       
|                                                                               | Provision for losses on accounts receivable                                   |                                       |                                           | 82    |        |       |          | 474    |         |       |        | 97    |       
|                                                                               | Loss on impairment and disposal of assets                                     |                                       |                                           |      |        |       |          |       |         |       |        | 503   |       
|                                                                               | Stock compensation expense                                                    |                                       |                                           |      |        |       |          | 231    |         |       |        | 460   |       
|                                                                               | Other operating activities                                                    |                                       |                                           |      |        |       |          |       |         |       |        | 386   |       
|                                                                               | Change in assets and liabilities (net of assets
    and liabilities acquired) |                                       |                                           |       |        |       |          |        |         |       |        |       |       
|                                                                               |                                                                               | Accounts receivable                   |                                           |       | (2,625 | )     |          |        | (4,456  | )     |        |       | 1,234  |      
|                                                                               |                                                                               | Unbilled accounts receivable          |                                           |       | 2,179  |       |          |        | 2,245   |       |        |       | (4,167 | )    
|                                                                               |                                                                               | Other assets                          |                                           |       | 618    |       |          |        | 204     |       |        |       | (609   | )    
|                                                                               |                                                                               | Accounts payable                      |                                           |       | 5,525  |       |          |        | (477    | )     |        |       | (1,995 | )    
|                                                                               |                                                                               | Accrued liabilities                   |                                           |       | (6,046 | )     |          |        | (6,445  | )     |        |       | (7,629 | )    
|                                                                               |                                                                               | Deferred and unearned revenue         |                                           |       | (3,629 | )     |          |        | (1,715  | )     |        |       | 2,821  |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|                                                                               |                                                                               | Net cash used in operating activities |                                           |       | (7,064 | )     |          |        | (10,073 | )     |        |       | (4,608 | )    
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                           |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Purchase of property and equipment                                             |                                                                               |                                       | (1,971                                    | )     |        |       | (1,457   | )      |         |       | (2,892 | )    
|Purchased and capitalized software                                             |                                                                               |                                       | (3,557                                    | )     |        |       | (3,733   | )      |         |       | (1,903 | )    
|Business acquisitions, net of cash acquired                                    |                                                                               |                                       | (12,796                                   | )     |        |       | (1,633   | )      |         |       | (6,784 | )    
|Purchase of short-term investments                                             |                                                                               |                                       | (33,720                                   | )     |        |       | (63,805  | )      |         |       | (8,000 | )    
|Sale of short-term investments                                                 |                                                                               |                                       | 50,097                                    |       |        |       | 55,884   |        |         |       | 40,544 |      
|Other investing activities                                                     |                                                                               |                                       |                                          |       |        |       | 9        |        |         |       | (300   | )    
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Net cash (used in) provided by investing
    activities                        |                                                                               |                                       | (1,947                                    | )     |        |       | (14,735  | )      |         |       | 20,665 |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|CASH FLOW FROM FINANCING ACTIVITIES                                            |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Principal payments on debt and capital leases                                  |                                                                               |                                       |                                          |       |        |       |         |        |         |       | (2,960 | )    
|Proceeds from issuance of common stock                                         |                                                                               |                                       | 1,318                                     |       |        |       | 1,022    |        |         |       | 4,551  |      
|Other financing activities                                                     |                                                                               |                                       |                                          |       |        |       |         |        |         |       | 63     |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|                                                                               |                                                                               |                                       | Net cash provided by financing activities |       |        | 1,318 |          |        |         | 1,022 |        |       |        | 1,654 | 
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH                                |                                                                               |                                       | 137                                       |       |        |       |         |        |         |       |       |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Net (decrease) increase in cash and cash
    equivalents                       |                                                                               |                                       | (7,556                                    | )     |        |       | (23,786  | )      |         |       | 17,711 |      
|Cash and cash equivalents at beginning of period                               |                                                                               |                                       | 31,244                                    |       |        |       | 55,030   |        |         |       | 37,319 |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Cash and cash equivalents at end of period                                     |                                                                               | $                                     | 23,688                                    |       |        | $     | 31,244   |        |         | $     | 55,030 |      
|                                                                               |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    FINANCING TRANSACTIONS   |                                                                               |                                       |                                           |       |        |       |          |        |         |       |        |      
|Issuance of common stock in business acquisitions                              |                                                                               | $                                     | 41,095                                    |       |        | $     | 920      |        |         | $     | 95,306 |      

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

F-6



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##### Table of Contents



QUOVADX, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Organization and Summary of Significant
    Accounting Policies



| |         
| | --------
| | Overview

Founded in 1989, Quovadx, Inc., (the
Company or Quovadx) is a provider of
software and services. The Companys primary product is QDX
Platform V, which includes integrated application
development tools, integration tools, and business process
management tools. The Company has also developed packaged
solutions, or Adaptive Applications, using QDX Platform V. In
addition, the Company provides end-to-end service capabilities
including consulting, transaction hosting and operations
management for business-critical applications.



| |                      
| | ---------------------
| | Basis of Presentation

The Company is incorporated under the laws of the
State of Delaware. The consolidated financial statements include
the accounts of Quovadx and its wholly-owned subsidiaries, Rogue
Wave Software, Inc. (Rogue Wave),
CareScience, Inc. (CareScience), Outlaw
Technologies, Inc. (Outlaw), Pixel Group
(Pixel), Healthcare.com Corporation
(Healthcare.com), Confer Software, Inc.
(Confer), Integrated Media, Inc.
(Integrated Media) and Advica Health
Resources, Inc. (Advica). All material
intercompany amounts and transactions have been eliminated.



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates.



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

The Company recognizes revenue in accordance with
the provisions of Statement of Position (SOP) 97-2,
Software Revenue Recognition,as amended, and
SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type
Contracts.

License agreements generally provide that
customers pay a license fee based on a specified number of
instances of the software and the type of software modules
licensed. Customers that purchase licenses generally enter into
renewable one-year maintenance agreements that entitle the
customer to receive unspecified updates on the software
licensed, error corrections, and telephone support, generally
for a fixed fee.

The methodology the Company uses to recognize
software license and related services revenue is dependent on
whether the Company has established vendor-specific objective
evidence (VSOE) of fair value for the separate
elements of a multiple-element agreement. If an agreement
includes both license and service elements, the license fee is
recognized on delivery of the software if the remaining services
are not essential to the functionality of the software, the
collection of the fees is probable, the fees are fixed and
determinable, an agreement is signed and the Company has
established VSOE of fair value for the remaining services.
Revenue from the related services is recognized as the services
are provided. When the related services are essential to the
functionality of the base product or when the Company has not
established VSOE of fair value for the remaining services, the
software license fees are deferred and the entire contract is
recognized as the services are provided.

Professional services revenue represents software
development, implementation and consulting services. When
derived from a fixed price contract, and collection of fees is
probable, the Company recognizes professional services revenue
using the percentage-of-completion method of accounting. When
derived from a

F-7



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

time-and-materials contract, and the collection
of fees is probable, the Company recognizes professional
services revenue as the services are provided.

When revenue is recognized using the
percentage-of-completion basis of accounting, the Companys
management estimates the costs to complete the services to be
provided under the contract and recognizes revenue from the
percentage of costs incurred to date in comparison to the total
cost of the project. The Company may encounter budget and
schedule overruns caused by increased material, labor, or
overhead costs. Adjustments to cost estimates are made in the
period in which the facts requiring such revisions become known.
Estimated losses, if any, are recorded in the period in which
the current estimates of the costs to complete the services
exceed the revenue to be recognized under the contract.

Maintenance, a component of recurring revenue, is
derived from agreements for providing unspecified software
updates, error corrections, and telephone support. Maintenance
revenue is recognized ratably over the maintenance period, which
is generally 12 months.

Process management and services, a component of
recurring revenue, represent application hosting, transaction
processing and other services. When the fees are fixed and
determinable, and collection of the fees is probable, revenue is
recognized over the service period. When the fees are charged on
a per-transaction basis and collection of the fees is probable,
revenue is recognized as the transactions are processed.

When collection of fees is not probable, revenue
is recognized as cash is collected. The Company does not require
collateral from its customers. The Company has a history of
extending payment terms with customers not to exceed six months.



| |                                                      
| | -----------------------------------------------------
| | Cash, Cash Equivalents and Short-Term
    Investments

All liquid investments with original maturities
of three months or less when purchased are considered cash
equivalents. Short-term investments consist of
U.S. government and U.S. government agency debt
securities classified as held to maturity with
maturities less than 12 months.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The Companys financial instruments include
cash, short-term investments, accounts receivable, accounts
payable and accrued liabilities. The carrying amounts of
financial instruments approximate fair value due to their short
maturities.



| |                             
| | ----------------------------
| | Unbilled Accounts Receivable

Unbilled accounts receivable arise as revenue is
recognized for time and costs incurred on time-and-material
contracts, for revenue that is recognized on fixed price
contracts under the percentage-of-completion method of
accounting and for contracts with extended payment terms which
have not been billed none of which exceed six months in term.



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

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
certain customers to pay their accounts receivable balances. The
Company assesses the financial condition of its customers to
determine if there is an impairment of their ability to make
payments and additional allowances may be required if the
financial condition of the Companys customers
deteriorates. The Company does not require collateral from its
customers.

F-8



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |           
| | ----------
| | Warranties

The Company issues warranties to customers for
product performance in accordance with specifications that are
short term in nature, generally 90 days or less. The
Companys obligations under these warranties have not been
significant and are generally covered under customer maintenance
agreements. The Company also indemnifies customers against
patent infringement claims. As of December 31, 2003 and
2002, there were no liabilities recorded in the financial
statements related to indemnifications or warranties.



| |                
| | ---------------
| | Major Customers

The Company had the following customers, which
accounted for greater than 10% of revenue in any of the years
ended December 31, 2003, 2002 and 2001:

|         |  |              |    |      |  |      |    |   |  |  |    |  
|-------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|         |  |             
|         |  | Year Ended  
|         |  | December 31,
|         |  |             
|Customer |  | 2003         |    | 2002 |  | 2001
|         |  |              |    |      |  |     
|A        |  |              | 17 | %    |  |      | 22 | % |  |  | 9  | %
|B        |  |              | 3  | %    |  |      | 7  | % |  |  | 14 | %
|C        |  |              |   |      |  |      | 11 | % |  |  | 31 | %

One customer accounted for 25% of the accounts
receivable balance at December 31, 2002. There were no
customers that accounted for greater than 10% of accounts
receivable at December 31, 2003.



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

Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated
useful lives of the assets, ranging from two to five years.
Internally used software, whether purchased or developed is
capitalized and amortized over an estimated useful life of three
to five years. Equipment under capital lease arrangements as
well as leasehold improvements are amortized over the shorter of
their useful lives or the terms of the leases.

|                       |                                                |              |        |         |   |   |        |         |  
|---------------------- | ---------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                       |                                                |             
|                       |                                                | December 31,
|                       |                                                |             
|                       |                                                | 2003         |        | 2002   
|                       |                                                |              |        |        
|Property and Equipment |                                                |              |        |         |   |   |        |        
|                       | Furniture, fixtures and equipment              |              | $      | 5,583   |   |   | $      | 3,915   |  
|                       | Computer hardware                              |              |        | 18,372  |   |   |        | 12,251  |  
|                       | Computer software                              |              |        | 5,904   |   |   |        | 3,919   |  
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                |              | 29,859 |         |   |   | 20,085 |        
|                       | Less accumulated depreciation and amortization |              |        | (23,568 | ) |   |        | (14,759 | )
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                | $            | 6,291  |         |   | $ | 5,326  |        
|                       |                                                |              |        |         |   |   |        |        



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

Capitalized software costs consist of purchased
software, capitalized software development costs, and software
acquired through acquisitions. Purchased software is used with
the Companys existing software as well as held for resale
under exclusive license arrangements and is amortized ratably
over a three-year estimated useful life. In accordance with FASB
Statement No. 86 Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,
software development costs are required to be expensed until the
point that technological feasibility of the product is
established which the Company has determined to be when a
detailed program design is complete. Once technological
feasibility is established, such costs are capitalized until
general availability of the product. The establishment of
technological feasibility and

F-9



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

continuing evaluation of the recoverability of
the capitalized software development costs requires
managements judgment with respect to the impact of
external factors such as future revenue, estimated economic life
and changes in software and hardware technologies. Capitalized
software development costs are amortized on a straight-line
basis over an estimated life, which is generally three years.
Capitalized software acquired through business acquisitions
totaled $31.4 million, net of $9.3 million of
accumulated amortization. Capitalized software acquired through
business combinations is amortized on a straight line basis over
an estimated useful life which is generally three to five years.
The Company capitalized $3.6 million, $3.7 million and
$1.9 million of software development costs in 2003, 2002
and 2001, respectively. Software amortization expense, a
component of cost of sales, for the years ended
December 31, 2003, 2002 and 2001 was $7.0 million,
$5.5 million and $2.1 million, respectively.

|                     |                                        |              |        |         |   |   |        |        |  
|-------------------- | -------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------ | -
|                     |                                        |             
|                     |                                        | December 31,
|                     |                                        |             
|                     |                                        | 2003         |        | 2002   
|                     |                                        |              |        |        
|Capitalized Software |                                        |              |        |         |   |   |        |       
|                     | Software acquired through acquisitions |              | $      | 31,361  |   |   | $      | 19,910 |  
|                     | Purchased software                     |              |        | 3,046   |   |   |        | 2,294  |  
|                     | Software development costs             |              |        | 9,188   |   |   |        | 5,632  |  
|                     |                                        |              |        |         |   |   |        |       
|                     |                                        |              | 43,595 |         |   |   | 27,836 |       
|                     | Accumulated Amortization               |              |        | (14,374 | ) |   |        | (7,371 | )
|                     |                                        |              |        |         |   |   |        |       
|                     |                                        | $            | 29,221 |         |   | $ | 20,465 |       
|                     |                                        |              |        |         |   |   |        |       



| |         
| | --------
| | Goodwill

The Company has adopted Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets.

In accordance with SFAS No. 142, the
Company did not record amortization expense related to goodwill
for acquisitions entered into after July 1, 2001 and for
all acquisitions as of January 1, 2002. Had this provision
of SFAS No. 142 been in effect as of January 1, 2001,
the Companys net loss for the year ended December 31,
2001 would have been $2,909,000 and the Companys net loss
per common share would have been $0.14.

SFAS No. 142 requires that goodwill be
tested annually for impairment and more frequently if events or
changes in circumstances indicate assets might be impaired. The
Company performed a transitional impairment test upon the
adoption of SFAS No. 142 on January 1, 2002 and
recorded no impairment because of this test. The Company has
identified the fourth quarter as the period for its annual
impairment test. However, due to significant negative industry
and economic trends affecting the market value of the
Companys common stock, the Company performed an interim
test of goodwill impairment in the third quarter of 2002. As a
result of this interim test, the Company recorded an impairment
charge of $93.1 million to reduce goodwill based on the
amount that the carrying value of the goodwill exceeded its fair
value. This

F-10



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

impairment charge eliminated goodwill associated
with all previous acquisitions and related to each of the
Companys reportable segments.

|                                                               |  |   |         |  
|-------------------------------------------------------------- |  | - | ------- | -
|Balance at January 1, 2002                                     |  | $ | 92,202  |  
|Adjustment to Confer and Pixel goodwill based on
    valuation |  |   | 883     |  
|Goodwill impairment                                            |  |   | (93,085 | )
|                                                               |  |   |         |  
|Balance at December 31, 2002                                   |  |   |        |  
|Acquisition of CareScience (Note 2)                            |  |   | 13,318  |  
|Acquisition of Rogue Wave (Note 2)                             |  |   | 34,697  |  
|                                                               |  |   |         |  
|Balance at December 31, 2003                                   |  | $ | 48,015  |  
|                                                               |  |   |         |  



| |                           
| | --------------------------
| | Acquired Intangible Assets

Intangible assets recognized in the
Companys acquisitions are being amortized over their
estimated lives ranging from three to eight years. Amortization
expense related to intangible assets was $1,720,000, $2,307,000,
and $1,585,000 for the years ended December 31, 2003, 2002
and 2001, respectively. The Company expects amortization expense
to be $3,276,000, $3,077,000, $3,031,000, $2,909,000, and
$2,840,000 for the years ended December 31, 2004, 2005,
2006, 2007 and 2008, respectively.

|                  |                          |              |        |        |   |   |       |        |  
|----------------- | ------------------------ | ------------ | ------ | ------ | - | - | ----- | ------ | -
|                  |                          |             
|                  |                          | December 31,
|                  |                          |             
|                  |                          | 2003         |        | 2002  
|                  |                          |              |        |       
|Intangible Assets |                          |              |        |        |   |   |       |       
|                  | Customer Base            |              | $      | 19,336 |   |   | $     | 6,569  |  
|                  | Tradename                |              |        | 1,041  |   |   |       | 618    |  
|                  | Other                    |              |        | 521    |   |   |       | 2,326  |  
|                  |                          |              |        |        |   |   |       |       
|                  |                          |              | 20,898 |        |   |   | 9,513 |       
|                  | Accumulated Amortization |              |        | (3,163 | ) |   |       | (3,247 | )
|                  |                          |              |        |        |   |   |       |       
|                  |                          | $            | 17,735 |        |   | $ | 6,266 |       
|                  |                          |              |        |        |   |   |       |       



| |                                      
| | -------------------------------------
| | Long-Lived Assets and
    Impairments

The Company periodically evaluates the carrying
value of long-lived assets, including, but not limited to,
property and equipment, software, and intangible assets when
events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flows from such asset is less than
its carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of
the long-lived asset. Fair value is determined primarily using
the anticipated cash flows discounted at a rate commensurate
with the risk involved.



| |             
| | ------------
| | Other Assets

Other current and long-term assets include
deferred costs, a note receivable from a customer, and an
investment in another Company. Deferred costs include direct
labor incurred related to implementation activities on certain
contracts where the revenue will be recognized on a
straight-line basis over the term of the contract. The costs,
which totaled $2.6 million and $1.7 million at
December 31, 2003 and 2002, respectively, are expected to
be amortized to expense over the contract periods of five to
seven years. The note receivable, which had a balance at
December 31, 2003 of $1.9 million is due to be paid in
monthly installments through 2006. Interest income will be
recognized once all principal has been paid. The investment in
another Company

F-11



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

had a balance of $2.0 million at both
December 31, 2003 and 2002 and is accounted for on a cost
basis as the Company does not have significant influence or
control over the investee.

As of December 31, 2002, the Company had
restricted cash of $0.7 million included in other assets of
the Companys balance sheet. Restricted cash represents
investments that support letters of credit related to an
operating lease. There was no restricted cash at
December 31, 2003.



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

Research and development expense includes costs
incurred by the Company to develop and enhance the
Companys software until the point that technological
feasibility is reached. Research and development costs are
charged to expense as incurred.



| |            
| | -----------
| | Advertising

The Company expenses advertising costs as
incurred. Advertising expense for the years ended
December 31, 2003, 2002 and 2001 was $348,000, $312,000 and
$493,000, respectively.



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

Deferred income taxes are recognized because of
temporary timing differences between when certain income or
expense items are recognized in the financial statements versus
when these items are recognized for tax purposes based on
enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
earnings. A valuation allowance is then established to reduce
the net deferred tax asset to the level at which it is more
likely than not that any tax benefits will be realized. Income
tax expense includes (i) income taxes currently payable;
(ii) income taxes deferred because of temporary timing
differences between the time that certain income or expense
items are recognized in the financial statements versus when
these items are recognized for tax purposes; and (iii) any
increase or decrease in the valuation allowance for deferred tax
assets.



| |                          
| | -------------------------
| | Stock Option Compensation

At December 31, 2003, the Company had four
stock option plans and an employee stock purchase plan, which
are described in Note 4. The Company has elected to account
for stock-based compensation arrangements using the intrinsic
value method under the provisions of Accounting Principles Board
Opinion No. 25 (APB 25), Accounting
for Stock Issued to Employees. Under this method, stock
compensation is recognized to the extent that the exercise price
is less than the market price for the underlying stock on the
date of grant. The following table illustrates the effect on net
loss and net loss per share if the Company had

F-12



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

applied the fair value recognition provisions of
Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                           |                                                                            |                                      |   |         |   |      |   |          |   |  |   |         |  
|-------------------------- | -------------------------------------------------------------------------- | ------------------------------------ | - | ------- | - | ---- | - | -------- | - |  | - | ------- | -
|                           |                                                                            |                                     
|                           |                                                                            | Year Ended December 31,             
|                           |                                                                            |                                     
|                           |                                                                            | 2003                                 |   | 2002    |   | 2001
|                           |                                                                            |                                      |   |         |   |     
|                           |                                                                            |                                     
|                           |                                                                            | (In thousands except per share data)
|Net loss:                  |                                                                            |                                      |   |         |   |      |   |          |   |  |   |        
|                           | As reported                                                                |                                      | $ | (14,694 | ) |      | $ | (104,112 | ) |  | $ | (4,269  | )
|                           | Plus: stock based compensation recognized under
    intrinsic value method |                                      |   |        |   |      |   | 231      |   |  |   | 460     |  
|                           | Less: stock based compensation under fair value
    method                 |                                      |   | (4,728  | ) |      |   | (8,760   | ) |  |   | (7,555  | )
|                           |                                                                            |                                      |   |         |   |      |   |          |   |  |   |        
|                           | Pro forma net loss                                                         |                                      | $ | (19,422 | ) |      | $ | (112,641 | ) |  | $ | (11,364 | )
|                           |                                                                            |                                      |   |         |   |      |   |          |   |  |   |        
|Net loss per common share: |                                                                            |                                      |   |         |   |      |   |          |   |  |   |        
|                           | As reported                                                                |                                      | $ | (0.47   | ) |      | $ | (3.47    | ) |  | $ | (0.20   | )
|                           | Pro forma                                                                  |                                      |   | (0.62   | ) |      |   | (3.77    | ) |  |   | (0.53   | )

For the years ended December 31, 2003, 2002
and 2001 the fair value of each option on the date of grant was
determined using the Black-Scholes valuation model. The
following assumptions were used for grants in 2003, 2002 and
2001: risk-free rates corresponding to government securities
with original maturities similar to the expected option lives of
3.9% for 2003, 3.0% for 2002 and 5.0% for 2001; expected
dividend yield of 0% for all periods; volatility factor of 120%
for 2003, 118% for 2002 and 118% for 2001; and expected lives of
5.0 years for 2003, 5.0 years for 2002 and
4.5 years for 2001.



| |                          
| | -------------------------
| | Net Loss Per Common Share

Net loss per common share (EPS) is
calculated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per
Share. Under the provisions of SFAS No. 128,
basic EPS is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution that
could occur if stock options were exercised, resulting in the
issuance of common stock that would share in the loss of the
Company. Potential dilution of the stock options exercisable
into common stock is computed using the treasury stock method
based on the average fair market value of the stock. In periods
where the Company has a net loss, the effect of common stock
equivalents is excluded from the computation of diluted EPS
since their inclusion would be anti-dilutive. Diluted EPS for
the periods presented is computed by dividing the net loss by
the weighted average number of common shares outstanding for the
period. In 2003, 2002 and 2001, 1,397,558, 508,109, and
1,546,010 options and warrants to purchase common stock were
excluded from the calculation because their inclusion would be
anti-dilutive.



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

SFAS No. 130, Reporting
Comprehensive Income establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income (loss) includes all changes in equity
during a period from non-owner sources. During each of the two
years ended December 31, 2002, the Company did not have any
significant transactions that are required to be reported as
adjustments to determine comprehensive income (loss). During the
year ended December 31, 2003, comprehensive (loss) included
the change in foreign currency translation.

F-13



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Foreign Currency Translations

The assets and liabilities of our foreign
operations are translated into U.S. dollars at current
exchange rates and revenues and expenses are translated at
average exchange rates for the period. The resulting translation
adjustment is recorded as a component of other comprehensive
income (loss). Foreign currency gains and losses on transactions
are recorded in the results of operations and historically have
not been material.



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

Certain prior year information has been
reclassified to conform to the current year presentation.



| |                         
| | ------------------------
| | New Accounting Standards

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. This
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest
entities that possess certain characteristics. FIN 46
requires that if a business enterprise has a controlling
financial interest in a variable interest entity
(VIE), the assets, liabilities, and results of the
activities of the variable interest entity must be included in
the consolidated financial statements with those of the business
enterprise. The consolidation requirements of FIN 46 are
effective immediately for VIEs created after
January 31, 2003. The consolidation requirements for older
VIEs were effective for financial statements of interim or
annual periods beginning after June 15, 2003, however in
October of 2003 the FASB deferred the effective date of
FIN 46 for older VIEs to the end of the first interim
or annual period ending after December 15, 2003. Certain
disclosure requirements are effective for all financial
statements issued after January 31, 2003, regardless of
when the VIE was established. We do not have any ownership in
any variable interest entities as of December 31, 2003. We
will apply the consolidation requirements of FIN 46 in
future periods should an interest in a variable interest entity
be acquired.



|   |                                    
|-- | -----------------------------------
|2. | Business Acquisitions/ Dispositions

In 2001, the Company acquired Confer,
Healthcare.com and Pixel for a combined purchase price of
$107 million. The 2001 acquisitions generated goodwill and
intangible assets totaling $118.8 million.

In March 2002, the Company completed the sale of
certain assets of its Advica subsidiary to Royal Health Care of
Long Island, LLC, d/b/a Royal Health Care (Royal)
for $475,000 in cash and 4.6% of the outstanding equity in
Royal. In conjunction with the sale, Quovadx is providing ASP
services to Royal under a seven-year contract.

In the first quarter of 2002, the Company
acquired Outlaw. The purchase price, totaled $2.7 million
and generated goodwill and intangible assets of
$3.2 million.

On September 19, 2003, Quovadx consummated
the acquisition of CareScience, Inc. The primary reasons
for the acquisition were as follows:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enhancing our ability to reach certain of our
    strategic objectives, which include extending our product and
    service offering to include CareScience products, enabling us to
    bring real time capabilities to care management application
    offerings;
|
| |  | enabling us to leverage our customer base and
    brand recognition to accelerate market penetration and growth;                                                                                                                                                   

F-14



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enabling us to enhance our position in areas
    where Quovadx products and services are already strong by
    offering complementary products and services developed by
    CareScience; and
|
| |  | increasing our revenue stream.                                                                                                                                                               

Under the terms of the merger, a wholly owned
subsidiary of Quovadx merged with CareScience and CareScience
became a wholly owned subsidiary of Quovadx. CareScience
stockholders received a fixed exchange rate of $1.40 cash and
0.1818 shares of Quovadxs common stock for each share
of CareScience common stock they owned. The purchase price
totaling $30.1 million included 2,415,900 shares of
Quovadx common stock issued in exchange for all outstanding
shares of CareScience capital stock, cash of $4.7 million,
net of cash acquired, and $2.3 million in merger-related
costs, including transaction fees and stock option payout. The
value of the shares issued in the transaction was
$9.2 million which was calculated using an average of the
closing price of Quovadxs stock for the five days
surrounding the announcement of the acquisition. This
transaction was accounted for as a purchase.

The Company recorded significant
acquisition-related restructuring charges in connection with a
headcount reduction of CareScience employees and the abandonment
of certain leased facilities from the CareScience acquisition.
The lease abandonment cost was estimated to include remaining
lease liabilities offset by an estimate of sublease income.
Estimates related to sublease costs and income were based on the
assumptions regarding the period required to sublease the
facilities and the likely sublease rates. These restructuring
charges are included in accrued liabilities on the accompanying
balance sheet.

|                        |  |                |       |         |  |              |      |   |  |   |       |  
|----------------------- |  | -------------- | ----- | ------- |  | ------------ | ---- | - |  | - | ----- | -
|                        |  |                |       |         |  | Accrual at  
|                        |  | Accrued at     |       | Paid in |  | December 31,
|                        |  | Acquisition    |       | 2003    |  | 2003        
|                        |  |                |       |         |  |             
|                        |  |               
|                        |  | (in thousands)
|Employee Severance      |  | $              | 256   |         |  | $            | (256 | ) |  | $ |      |  
|Lease abandonment costs |  | $              | 1,905 |         |  |              | (60  | ) |  |   | 1,845 |  
|Less: Sublease income   |  |                | (301  | )       |  |              |     |   |  |   | (301  | )
|                        |  |                |       |         |  |              |      |   |  |   |       |  
|                        |  | $              | 1,860 |         |  | $            | (316 | ) |  | $ | 1,544 |  
|                        |  |                |       |         |  |              |      |   |  |   |       |  

The Company retained an independent appraiser to
assist with the assigning of the fair values to the identifiable
intangibles acquired from CareScience. The acquisition generated
goodwill, software and customer base intangible assets acquired
is $13.3 million, $0.8 million and $8.6 million,
respectively. The Company has not completed its allocation of
goodwill by reporting segment. The Company expects to complete
the allocation in the first half of 2004. The amount of goodwill
that will be assigned to a reporting unit will be determined by
allocating the purchase price to the assets and liabilities of
each reporting unit. The goodwill recognized in the CareScience
acquisition is not subject to amortization but will be tested
for impairment annually or more frequently if events or changes
in circumstances indicate the asset might be impaired. The
identifiable intangible assets, consisting solely of customer
base, will be amortized over their estimated lives of seven
years. Operating results for CareScience after the date of
acquisition are included in our consolidated financial results
as of and for the twelve months ended December 31, 2003.

On December 19, 2003, Quovadx purchased the
outstanding stock of Rogue Wave Software, Inc. (Rogue
Wave). Rogue Wave develops, markets and supports
object-oriented and infrastructure software technology

F-15



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The primary reasons for the acquisition were as
follows:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | introduce the Rogue Wave customers to the Quovadx
    application development platform;
|
| |  | expand our penetration into new markets; and                                           
|
| |  | enhance our competitive position with the Rogue
    Wave brand; and.                   
|
| |  | increasing our revenue stream.                                                         

The acquisition, structured as an exchange offer,
provided that Quovadx acquire all of the outstanding stock of
Rogue Wave for $4.09 in cash and 0.5292 of a share of Quovadx
common stock for each share of Rogue Wave Common Stock. The
total purchase price for this acquisition was
$79.1 million, including 5,656,670 shares of Quovadx
common stock, cash of $8.0 million, net of cash acquired,
and $3.9 million in merger-related costs. The value of the
shares issued in the transaction was $28.5 million which
was calculated using an average of the closing price of
Quovadxs stock for the five days surrounding the
announcement of the acquisition. In exchange for their
outstanding options to purchase Rogue Wave common stock,
employees of Rogue Wave received an option to purchase a unit
consisting of 0.5292 shares of Quovadx common stock and
$4.09 in cash. The $4.09 received was treated as a discount to
the exercise price and to the extent this exceeded the exercise
price, the Company recorded a liability totalling
$1.4 million. The fair value of the vested stock options
assumed in the transaction was $3.4 million and was
calculated using the Black-Scholes valuation model. The fair
value of the unvested stock options assumed in the Rogue Wave
acquisition yielded $385,000 of deferred compensation expense
using the Black-Scholes valuation model. The unearned stock
compensation will be amortized to expense on a straight-line
basis over the vesting period of the stock options. This
transaction was accounted for as a purchase.

In the fourth quarter of 2003, due to the
acquisition, the company initiated a headcount reduction of
Rogue Wave employees. As a result, we recorded a preliminary
estimate of severance costs of $677,000 comprised of salary and
employee-related expenses. At December 31, 2003, the
balance of the accrual was $427,000. The remaining accrual for
severance costs is expected to be substantially paid in 2004.

The Company will retain an independent appraiser
to assist with the assigning of the fair values to the
identifiable intangibles acquired from Rogue Wave. The appraisal
is expected to be completed by the second quarter of 2004. The
preliminary estimate of goodwill, software and identifiable
intangible assets acquired is $34.7 million,
$10.6 million and $4.6 million, respectively. The
Company has not completed its allocation of goodwill by
reporting segment. The company expects to complete the
allocation in the first half of 2004. The amount of goodwill
that will be assigned to a reporting unit will be determined by
allocating the purchase price to the assets and liabilities of
each reporting unit. The goodwill recognized in the Rogue Wave
acquisition is not subject to amortization but will be tested
for impairment annually or more frequently if events or changes
in circumstances indicate the asset might be impaired. The
identifiable intangible assets will be amortized over their
estimated lives. Operating results for Rogue Wave after the date
of acquisition are included in our consolidated financial
results as of and for the twelve months ended December 31,
2003.

F-16



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below details the balance sheets
acquired in the Rogue Wave and CareScience acquisitions:

|                            |                                              |             |        |            |  |   |        |        | 
|--------------------------- | -------------------------------------------- | ----------- | ------ | ---------- |  | - | ------ | ------ | 
|                            |                                              | Carescience |        | Rogue Wave
|                            |                                              |             |        |           
|ASSETS                     
|Current assets:             |                                              |             |        |            |  |   |        |       
|                            | Cash, cash equivalents and short-investments |             | $      | 13,860     |  |   | $      | 35,672 | 
|                            | Accounts receivable                          |             |        | 1,360      |  |   |        | 3,582  | 
|                            | Other current assets                         |             |        | 755        |  |   |        | 1,010  | 
|                            |                                              |             |        |            |  |   |        |       
|Total current assets        |                                              |             | 15,975 |            |  |   | 40,264 |       
|Property and equipment, net |                                              |             | 1,745  |            |  |   | 803    |       
|                            |                                              |             |        |            |  |   |        |       
|Total assets                |                                              |             | 17,720 |            |  |   | 41,067 |       
|                            |                                              |             |        |            |  |   |        |       
|LIABILITIES                
|Current liabilities:        |                                              |             |        |            |  |   |        |       
|                            | Accounts payable                             |             |        | 666        |  |   |        | 474    | 
|                            | Accrued liabilities                          |             |        | 4,440      |  |   |        | 5,335  | 
|                            | Unearned revenue                             |             |        | 5,290      |  |   |        | 6,061  | 
|                            |                                              |             |        |            |  |   |        |       
|Total liabilities           |                                              |             | 10,396 |            |  |   | 11,870 |       
|                            |                                              |             |        |            |  |   |        |       
|Net Assets                  |                                              | $           | 7,324  |            |  | $ | 29,197 |       
|                            |                                              |             |        |            |  |   |        |       
|                           
|Purchase Price              |                                              | $           | 30,057 |            |  | $ | 79,121 |       
|Goodwill                    |                                              |             | 13,318 |            |  |   | 34,698 |       
|Customer base               |                                              |             | 8,566  |            |  |   | 4,201  |       
|Tradename                   |                                              |             |       |            |  |   | 423    |       
|Developed technology        |                                              |             | 849    |            |  |   | 10,602 |       
|                            |                                              |             |        |            |  |   |        |       
|Total intangibles           |                                              | $           | 22,733 |            |  | $ | 49,924 |       
|                            |                                              |             |        |            |  |   |        |       

The unaudited pro forma results of operations as
though the Rogue Wave and CareScience acquisitions had been
completed as of January 1, 2002 are as follows (in
thousands except for per share amounts):

|                   |  |              |         |              |  |   |          |  
|------------------ |  | ------------ | ------- | ------------ |  | - | -------- | -
|                   |  | Year Ended   |         | Year Ended  
|                   |  | December 31, |         | December 31,
|                   |  | 2003         |         | 2002        
|                   |  |              |         |             
|Revenue            |  | $            | 109,162 |              |  | $ | 118,507  |  
|Net loss           |  |              | (26,742 | )            |  |   | (122,310 | )
|Net loss per share |  | $            | (0.69   | )            |  | $ | (3.21    | )

The unaudited pro forma results above do not
include any anticipated cost savings or other effects of the
integration of acquired entities into the Company and are not
necessarily indicative of the results which would have occurred
if the acquisitions had been in effect on the date indicated, or
which may result in the future.

F-17



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                         
|-- | ------------------------
|3. | Balance Sheet Components

Certain balance sheet components are as follows
(in thousands):

|                     |                                 |              |       |       |  |   |       |     | 
|-------------------- | ------------------------------- | ------------ | ----- | ----- |  | - | ----- | --- | 
|                     |                                 |             
|                     |                                 | December 31,
|                     |                                 |             
|                     |                                 | 2003         |       | 2002 
|                     |                                 |              |       |      
|Other Current Assets |                                 |              |       |       |  |   |       |    
|                     | Prepaid maintenance and support |              | $     | 1,215 |  |   | $     | 744 | 
|                     | Note receivable                 |              |       | 1,010 |  |   |       |    | 
|                     | Deferred costs                  |              |       | 669   |  |   |       | 270 | 
|                     | Other                           |              |       | 1,410 |  |   |       | 890 | 
|                     |                                 |              |       |       |  |   |       |    
|                     |                                 | $            | 4,304 |       |  | $ | 1,904 |    
|                     |                                 |              |       |       |  |   |       |    

|                    |                              |              |        |       |  |   |       |       | 
|------------------- | ---------------------------- | ------------ | ------ | ----- |  | - | ----- | ----- | 
|                    |                              |             
|                    |                              | December 31,
|                    |                              |             
|                    |                              | 2003         |        | 2002 
|                    |                              |              |        |      
|Accrued Liabilities |                              |              |        |       |  |   |       |      
|                    | Accrued compensation         |              | $      | 2,966 |  |   | $     | 1,366 | 
|                    | Accrued rent                 |              |        | 2,274 |  |   |       | 1,197 | 
|                    | Accrued severance            |              |        | 436   |  |   |       | 151   | 
|                    | Accrued professional fees    |              |        | 450   |  |   |       | 866   | 
|                    | Accrued acquisition expenses |              |        | 3,121 |  |   |       |      | 
|                    | Option liability payout      |              |        | 1,399 |  |   |       |      | 
|                    | Other                        |              |        | 5,235 |  |   |       | 2,427 | 
|                    |                              |              |        |       |  |   |       |      
|                    |                              | $            | 15,881 |       |  | $ | 6,007 |      
|                    |                              |              |        |       |  |   |       |      



|   |                                           
|-- | ------------------------------------------
|4. | Stockholders Equity and Benefit
    Plans



| |               
| | --------------
| | Stock Warrants

In connection with the acquisition of
Healthcare.com, the Company converted warrants to purchase
395,000 shares of Healthcare.coms common stock to
warrants to purchase 148,000 shares of the Companys
stock, 32,000 of which were exercised during 2001. At
December 31, 2003, 116,000 warrants remain outstanding. Of
the warrants outstanding at December 31, 2003, 98,000 may
be exercised any time on or before March 13, 2004 at an
exercise price of $11.23 per share and 18,000 may be
exercised any time on or before December 31, 2004 at an
exercise price of $8.51 per share. The fair value of
Healthcare.com warrants was calculated to be $0.8 million
using the Black-Scholes option pricing model and included in the
purchase price.



| |              
| | -------------
| | Stock Options

During 1997, the Company adopted a stock option
plan (the 1997 Plan) that provided for the grant of
up to 2,200,000 stock options to directors, key employees, and
consultants. The 1997 Plan has a term of ten years, unless
terminated by the board of directors. From 2000 to 2002, the
Company added 3,444,414 shares to the 1997 Plan. In
February 2003, 1,224,0000 shares were added to the Plan.
The total number of shares authorized under the 1997 Plan was
6,868,414 at December 31, 2003. As of December 31,
2003, there were 2,438,872 options available for issuance. The
1997 Plan provides for the granting of incentive stock options
to employees or nonqualified options to employees, directors,
and consultants.

F-18



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Stock options are granted with an exercise price
not less than fair market value of the common stock on the date
of the grant, as determined by the board of directors. The
options generally expire ten years after the date of grant.
Options granted under the 1997 Plan vest over a four year
vesting period beginning on the date of grant.

In July 1999 and 2000, the board of directors
amended all existing stock option agreements under the 1997
Plan. The amendment provided that all options are immediately
exercisable. However, any shares acquired upon exercise are
subject to repurchase by Quovadx over a reverse vesting period
that entitles the optionee to exactly the same vesting schedule
as the original grant. The repurchase price is equal to the
exercise price of the options.

In January and February 2000, the Company granted
incentive stock options to certain employees to purchase
124,700 shares of common stock with exercise prices below
the deemed fair value of the Companys common stock at the
date of grant. In connection with such option grants, the
Company recognized unearned compensation totaling $123,000,
which was amortized over the vesting period of the related
options.

During 1999, the Company issued stock options to
certain employees under the 1997 Plan with exercise prices below
the deemed fair value of the Companys common stock at the
date of grant. The Company recorded unearned stock compensation
for the difference between the exercise price of the stock
options and the deemed fair value of the Companys common
stock at the date of grant. This unearned stock compensation was
amortized to expense over the vesting period, using an
accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28. $231,000 and
$460,000 was amortized to expense in the years ended
December 31, 2002 and 2001, respectively. As of
December 31, 2002, the unearned compensation balance was
fully amortized.

The Companys board of directors adopted a
1999 Director Option Plan in October 1999 (the
Director Plan) and authorized 250,000 shares
under the Director Plan. The Director Plan was approved by the
Companys Stockholders in January 2000, and became
effective upon completion of our Initial Public Offering. From
2000 to 2002, the Company added 364,083 shares to the 1997
Plan. In February 2003, 200,000 shares were added to the
Plan. The total number of shares authorized under the 1997 Plan
was 814,083 at December 31, 2003.

The Director Plan has a term of ten years, unless
terminated by our board of directors.

Options granted under the Director Plan vest over
a one year vesting period beginning on the date of grant.
Members of the board of directors who are not employees of
Quovadx are eligible to participate in the Director Plan. The
Director Plan provides for an automatic initial grant of an
option to purchase 25,000 shares of common stock (the
Initial Grant) upon the later of the effective date
of the Director Plan or the date a person first becomes a
non-employee director. After the initial grant, a non-employee
director will automatically be granted options to purchase
10,000 shares of common stock each year on the date of our
annual shareholders meeting.

In September 2000, the board of directors of the
Company adopted the 2000 Nonstatutory Stock Option Plan (the
NSO Plan) and authorized 600,000 shares under
the NSO Plan. Under the NSO Plan, the board of directors may
issue options to non-executive employees of the Company. The NSO
Plan has a term of ten years, unless terminated by our board of
directors. Options granted under the NSO Plan vest ratably at
25% per year, beginning on the date of grant. No options
will be issued under the NSO Plan to directors or executive
officers of the Company. From 2000 to 2002, the Company added
1,400,000 shares to the 1997 Plan. In February 2003,
1,200,000 shares were added to the Plan. The total number
of shares authorized under the 1997 Plan was 3,200,000 at
December 31, 2003.

In connection with the acquisition of
Healthcare.com, the Company assumed the Stock Option Plans of
Healthcare.com and each outstanding option to purchase shares of
Healthcare.com common stock under the

F-19



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Healthcare.com stock option plans. All
outstanding Healthcare.com options were fully vested and
exercisable upon the consummation of the acquisition. Each
Healthcare.com stock option assumed by the Company was
exercisable for that number of whole shares of Healthcare.com
common stock multiplied by the exchange ratio of 0.375 and the
per share exercise price for the Healthcare.com stock options
was equal to the quotient determined by dividing the exercise
price per share by the exchange ratio.

In connection with the acquisition of Rogue Wave,
the Company assumed the Stock Option Plans of Rogue Wave and
each outstanding option to purchase shares of Rogue Wave common
stock under the Rogue Wave stock option plans. Each Rogue Wave
stock option assumed by the Company was exercisable for that
number of whole shares of Rogue Wave common stock multiplied by
the exchange ratio of 0.5292 and the per share exercise price
for the Rogue Wave stock options was equal to the quotient
determined by dividing the exercise price per share by the
exchange ratio. The fair value of the vested stock options
assumed was $3.4 million and was calculated using the
Black-Scholes valuation model. The unvested stock options
assumed in the Rogue Wave acquisition yielded $385,000 of
deferred compensation expense. The fair value of each option was
determined using the Black-Scholes valuation model and unearned
stock compensation will be amortized to expense on a
straight-line basis over the vesting period of the stock options.

The weighted-average fair value of options at
grant date was $2.37, $5.18 and $9.71 in 2003, 2002 and 2001,
respectively.

Total stock options outstanding and exercisable
under the option plans as of December 31, 2003 are as
follows:

|                         |  |           |           |                  |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | --------- | --------- | ---------------- |  | ---------------- | ---- | --------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |           |           | Weighted Average |  |                  |      |           |  |                 
|                         |  |           |           | Remaining        |  |                  |      |           |  |                 
|                         |  | Number of |           | Contractual Life |  | Weighted Average |      | Number of |  | Weighted Average
|Range of Exercise Prices |  | Shares    |           | (Years)          |  | Exercise Price   |      | Shares    |  | Exercise Price  
|                         |  |           |           |                  |  |                  |      |           |  |                 
|$0.25 - $2.61            |  |           | 1,267,316 |                  |  |                  | 7.18 |           |  | $                | 1.56  |  |  |  | 694,110   |  |  | $ | 0.81  | 
|2.67 - 3.61              |  |           | 647,210   |                  |  |                  | 6.55 |           |  |                  | 2.83  |  |  |  | 469,375   |  |  |   | 2.80  | 
|3.74 - 5.06              |  |           | 721,159   |                  |  |                  | 9.49 |           |  |                  | 4.69  |  |  |  | 377,730   |  |  |   | 4.47  | 
|5.07 - 5.94              |  |           | 662,455   |                  |  |                  | 6.32 |           |  |                  | 5.71  |  |  |  | 546,697   |  |  |   | 5.70  | 
|5.97 - 6.37              |  |           | 612,141   |                  |  |                  | 7.93 |           |  |                  | 6.08  |  |  |  | 357,115   |  |  |   | 6.13  | 
|6.40 - 8.50              |  |           | 527,466   |                  |  |                  | 6.93 |           |  |                  | 7.22  |  |  |  | 379,019   |  |  |   | 7.31  | 
|8.53 - 10.20             |  |           | 1,338,356 |                  |  |                  | 7.16 |           |  |                  | 9.71  |  |  |  | 895,839   |  |  |   | 9.75  | 
|10.28 - 11.19            |  |           | 916,253   |                  |  |                  | 7.27 |           |  |                  | 11.01 |  |  |  | 630,629   |  |  |   | 10.93 | 
|12.65                    |  |           | 200,000   |                  |  |                  | 7.62 |           |  |                  | 12.65 |  |  |  | 116,667   |  |  |   | 12.65 | 
|12.66 - 32.12            |  |           | 191,107   |                  |  |                  | 5.31 |           |  |                  | 16.63 |  |  |  | 183,128   |  |  |   | 16.77 | 
|                         |  |           |           |                  |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 
|$0.25 - $32.12           |  |           | 7,083,463 |                  |  |                  | 7.30 |           |  | $                | 6.95  |  |  |  | 4,650,309 |  |  | $ | 7.15  | 
|                         |  |           |           |                  |  |                  |      |           |  |                  |       |  |  |  |           |  |  |   |       | 

F-20



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Activity of the Plans are summarized in the
following table:

|                                       |                                  |           |           |                  |   |             |      |                  |  |  |           |  |  |   |      |  | 
|-------------------------------------- | -------------------------------- | --------- | --------- | ---------------- | - | ----------- | ---- | ---------------- |  |  | --------- |  |  | - | ---- |  | 
|                                       |                                  | Number of |           | Weighted Average |   | Options     |      | Weighted Average
|                                       |                                  | Shares    |           | Exercise Price   |   | Exercisable |      | Exercise Price  
|                                       |                                  |           |           |                  |   |             |      |                 
|Options outstanding, January 1, 2001   |                                  |           | 2,590,072 |                  |   | $           | 4.30 |                  |  |  | 2,248,897 |  |  | $ | 4.03 | 
|                                       | Converted Healthcare.com options |           |           | 1,262,796        |   |             |      | 7.68             |  |  |           |  |  |   |      |  | 
|                                       | Options granted                  |           |           | 3,165,899        |   |             |      | 9.71             |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (677,140         | ) |             |      | 6.22             |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (433,819         | ) |             |      | 6.33             |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                  |   |             |      |                  |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2001 |                                  |           | 5,907,808 |                  |   |             | 7.55 |                  |  |  | 4,896,516 |  |  |   | 7.24 | 
|                                       | Options granted                  |           |           | 1,718,096        |   |             |      | 4.60             |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (151,622         | ) |             |      | 1.98             |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (1,007,171       | ) |             |      | 8.70             |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                  |   |             |      |                  |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2002 |                                  |           | 6,467,111 |                  |   |             | 6.72 |                  |  |  | 2,928,651 |  |  |   | 6.36 | 
|                                       | Converted Rogue Wave options     |           |           | 620,658          |   |             |      | 7.38             |  |  |           |  |  |   |      |  | 
|                                       | Options granted                  |           |           | 786,033          |   |             |      | 2.63             |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (140,404         | ) |             |      | 2.54             |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (649,935         | ) |             |      | 7.14             |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                  |   |             |      |                  |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2003 |                                  |           | 7,083,463 |                  |   | $           | 6.95 |                  |  |  | 4,650,309 |  |  | $ | 7.15 | 
|                                       |                                  |           |           |                  |   |             |      |                  |  |  |           |  |  |   |      | 



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

In October 1999, the board of directors adopted
an employee stock purchase plan (the ESPP) subject
to shareholder approval, which became effective immediately on
the effective date of the IPO. A total of 500,000 shares of
common stock were initially reserved for issuance under the
ESPP. From 2000 to 2002, the Company added 828,165 shares
to the 1997 Plan. In February 2003, 500,000 shares were
added to the Plan. The total number of shares authorized under
the 1997 Plan was 1,828,165 at December 31, 2003. The ESPP
permits eligible employees to purchase common stock totaling up
to 20% of an employees compensation through payroll
deductions. The ESPP for U.S. employees is intended to
qualify under Section 423 of the Internal Revenue Service
Code and contains consecutive overlapping twelve-month offering
periods. Each offering period includes two six-month purchase
periods. The price of common stock to be purchased will be 85%
of the lower of the fair market value of the common stock either
at the beginning of the offering period or at the end of that
purchase period. The Company issued 319,308 shares at
$1.31 per share in May 2003 and 230,157 shares at
$2.37 per share in October 2003. The Company issued
72,372 shares at $6.37 per share in May 2002 and
125,157 shares at $1.32 per share in October 2002. The
Company issued 37,544 shares at $4.68 in May 2001 and
39,098 shares at $5.51 per share in October 2001. In
connection with the acquisition of Healthcare.com, the Company
assumed the employee stock purchase plan of Healthcare.com. In
September 2001, the Company issued 7,256 shares at
$10.25 per share related to the Healthcare.com plan.



| |            
| | -----------
| | 401(k) Plan

The Company has adopted an employee savings and
retirement plan (the 401(k) Plan) covering
substantially all of the Companys employees. Pursuant to
the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the statutory prescribed limit and
have the amount of such reduction contributed to the 401(k)
Plan. The Company may contribute to the 401(k) Plan on behalf of
eligible employees. The Company had not contributed to the
401(k) Plan prior to the acquisition of Healthcare.com on
August 13, 2001. In connection with the acquisition of
Healthcare.com, the Company

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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

assumed the 401(k) plan of Healthcare.com and
made contributions totaling $169,000. Healthcare.coms
401(k) plan matched 50% of the first 6% contributed by each
employee. The Healthcare.com 401(k) plan was merged into
Companys plan in 2002. In 2002, the Company amended its
401(k) plan to match 50% of the first 6% contributed by
employees. The Company contributed $650,000 and $649,000 to its
employees 401(k) accounts in 2003 and 2002, respectively.
Company contributions vest over a two-year period.



| |                         
| | ------------------------
| | Stockholders Rights Plan

In 2000, the Quovadx board of directors declared
a dividend right of one right to purchase one one-thousandth
share of Quovadx Series A participating preferred stock for
each outstanding share of Quovadx common stock at an exercise
price of $60.00 per right, subject to adjustment, to the holders
of record at that time. The rights are exercisable in the event
of a person or group purchasing 15% or more of Quovadxs
outstanding common stock. Each holder of a right is entitled,
upon exercise, to receive Quovadx common stock having a value
equal to two times the exercise price. Quovadx may redeem the
rights at a price of $0.001 per right. The rights expire in
August 2010.



|   |               
|-- | --------------
|5. | Line of Credit

In August 2003, the Company established a line of
credit with a commercial bank thereby allowing the Company to
borrow up to $4.0 million on a secured basis. At
December 31, 2003, the Company had no outstanding
borrowings under the revolving line of credit, which is secured
by the Companys assets, exclusive of intellectual property
assets. The line of credit is subject to financial covenants
including a minimum cash balance. The Company is in compliance
with the covenants.



|   |             
|-- | ------------
|6. | Income Taxes

A reconciliation of the expected income tax
benefit (based on the U.S. Federal statutory rate of 35%)
to the actual income tax (expense) benefit is as follows:

|                                         |  |                         |        |      |  |      |         |   |  |   |        |  
|---------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2003                    |        | 2002 |  | 2001
|                                         |  |                         |        |      |  |     
|Federal income tax benefit               |  | $                       | (4,660 | )    |  | $    | (34,943 | ) |  | $ | (1,494 | )
|State income tax, net of federal benefit |  |                         | (370   | )    |  |      | (248    | ) |  |   | (101   | )
|Change in valuation allowance            |  |                         | 4,979  |      |  |      | 3,495   |   |  |   | 652    |  
|Unearned compensation                    |  |                         |       |      |  |      | 81      |   |  |   | 161    |  
|Goodwill amortization                    |  |                         |       |      |  |      | 31,565  |   |  |   | 723    |  
|Other                                    |  |                         | 51     |      |  |      | 50      |   |  |   | 59     |  
|                                         |  |                         |        |      |  |      |         |   |  |   |        |  
|Income tax expense                       |  | $                       |       |      |  | $    |        |   |  | $ |       |  
|                                         |  |                         |        |      |  |      |         |   |  |   |        |  

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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the net deferred tax assets
and liabilities at December 31, 2003 and 2002 are presented
below (in thousands):

|                               |                                              |                                       |                           |         |   |        |         |        |   |        | 
|------------------------------ | -------------------------------------------- | ------------------------------------- | ------------------------- | ------- | - | ------ | ------- | ------ | - | ------ | 
|                               |                                              |                                      
|                               |                                              | December 31,                         
|                               |                                              |                                      
|                               |                                              | 2003                                  |                           | 2002   
|                               |                                              |                                       |                           |        
|Deferred tax assets:           |                                              |                                       |                           |         |   |        |         |       
|                               | Deferred revenue                             |                                       | $                         | 4,600   |   |        | $       | 1,690  |  
|                               | Employee benefits                            |                                       |                           | 533     |   |        |         | 213    |  
|                               | Allowance for doubtful accounts              |                                       |                           | 884     |   |        |         | 923    |  
|                               | Accrued liabilities                          |                                       |                           | 239     |   |        |         | 595    |  
|                               | Tax credits                                  |                                       |                           | 2,371   |   |        |         | 134    |  
|                               | Investment impairment                        |                                       |                           | 195     |   |        |         | 195    |  
|                               | Foreign net operating loss carryforwards     |                                       |                           | 1,583   |   |        |         |       |  
|                               | Other                                        |                                       |                           | 459     |   |        |         | 184    |  
|                               | Net operating loss carryforwards             |                                       |                           | 46,885  |   |        |         | 28,892 |  
|                               |                                              |                                       |                           |         |   |        |         |       
|                               |                                              |                                       | Total deferred tax assets |         |   | 57,749 |         |        |   | 32,826 | 
|                               |                                              |                                       |                           |         |   |        |         |       
|Deferred tax liabilities:      |                                              |                                       |                           |         |   |        |         |       
|                               | Sale of fixed assets, depreciation and other |                                       |                           | 416     |   |        |         | (454   | )
|                               | Amortization                                 |                                       |                           | (10,440 | ) |        |         | (3,447 | )
|                               |                                              |                                       |                           |         |   |        |         |       
|Total deferred tax liabilities |                                              |                                       | (10,024                   | )       |   |        | (3,901  | )     
|                               |                                              |                                       |                           |         |   |        |         |       
|Net deferred tax assets        |                                              |                                       | 47,725                    |         |   |        | 28,925  |       
|Less: valuation allowance      |                                              |                                       | (47,725                   | )       |   |        | (28,925 | )     
|                               |                                              |                                       |                           |         |   |        |         |       
|                               |                                              | Net deferred tax assets/(liabilities) |                           | $       |  |        |         | $      |  |       
|                               |                                              |                                       |                           |         |   |        |         |       

Under SFAS 109, deferred tax assets and
liabilities are recognized because of temporary timing
differences between when certain income or expense items are
recognized in the financial statements versus when these items
are recognized for tax purposes. A valuation allowance is then
established to reduce the deferred tax assets to the level at
which it is more likely than not that any tax
benefits will be realized. At December 31, 2003 and 2002
the Company has determined that it is not more likely than
not that any tax benefits will be realized and therefore a
full allowance has been recorded against the net deferred tax
asset. A reduction in this allowance and the recognition of a
deferred tax asset depends on having sufficient evidence that
the Company will generate taxable income within the carryback
and carryforward periods. Sources of taxable income that may
allow recognition of a net tax asset include (i) taxable
income in the current year or prior years that is available
through carryback; (ii) future taxable income that will
result from the reversal of existing taxable temporary
differences; and (iii) future taxable income generated by
future operations.

The valuation allowance for deferred income tax
assets at December 31, 2003 and 2002 was $47,725,000 and
$28,925,000 respectively. Approximately $35,126,000 of deferred
tax assets relate to acquired entities; of this amount
$19,896,000 would first be used to offset non-operating items.
The ordering rules for utilization of acquired deferred tax
asset are (i) first to off-set additional paid-in-capital
to the extent of stock option benefits then; (ii) against
goodwill then; (ii) against identified intangibles
resulting from purchase accounting adjustments and;
(iii) finally against expense arising from operations.
Approximately $9,880,000 of the December 31, 2003, net
operating loss deferred tax asset relates to the exercise of
stock options and warrants which would reverse against
additional paid-in capital rather than recognized as an income
tax benefit on the statement of operations.

F-23



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Internal Revenue Code of 1986, as amended,
contains provisions that may limit the federal tax net operating
loss (NOL) and tax credits available for use in any
given year upon the occurrence of certain events, including
significant changes in ownership interest. A change in ownership
of a company greater than 50% within a three-year period may
result in an annual limitation on the companys ability to
utilize its NOL carryforwards from tax periods prior to the
ownership change. Management believes the Companys NOL and
tax credit carryforwards as of December 31, 2003 are
subject to such limitations.

At December 31, 2002, an analysis of the
Companys NOLs and tax credits determined that it was
likely to permanently lose the tax benefit of $62,355,000 of
federal NOLs and $936,000 of tax credits as a result of the
limitations imposed by the Internal Revenue Code, discussed
above, and the expiration dates of the NOLs and credits. As a
result, these amounts were deducted from the deferred tax asset
balance as of December 31, 2002, along with a corresponding
amount of the valuation allowance. No additional deferred assets
related to NOLs or tax credits were removed at December 31,
2003. When the Company finalizes an analysis of the Internal
Revenue Code NOL and tax credit limitation for 2003, the
deferred tax asset and corresponding valuation reserve will be
adjusted, if necessary.

The NOLs available to the Company at
December 31, 2003 consist of two components: (i)
$76,892,000 of NOLs that were generated by the Company before
2003 and which have been evaluated in light of the above
limitations as of December 31, 2002. These NOLs may be
further limited by ownership changes during 2003 and; (ii)
$44,329,000 of NOLs, which have not yet been evaluated under the
Internal Revenue Code limitations discussed above and which may
be limited, either generated in 2003 by Quovadx or which relate
to 2003 business acquisitions. The amount of tax credit
available to the Company at December 31, 2003 also consists
of two components: (i) $246,000 which has been evaluated at
December 31, 2002 but which may be further limited by
changes which occurred during 2003 and; (ii) $2,125,000 which
has not yet been evaluated. Additionally, $6,107,000 of the
December 31, 2003 NOL is available until 2006 and can only
be used to offset gains recognized on the sale of certain assets
acquired in the acquisition of Confer. The Companys
remaining NOLs will begin to expire in 2008.



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies



| |            
| | -----------
| | Commitments

The Company leases equipment and office space
under various long-term non-cancelable operating leases that
expire at various dates before October 11, 2011. The
following is a schedule by year of future minimum lease payments
under operating leases, at December 31, 2003 (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 5,059  | 
|2005       |  |   | 3,790  | 
|2006       |  |   | 1,463  | 
|2007       |  |   | 742    | 
|2008       |  |   | 632    | 
|Thereafter |  |   | 1,455  | 
|           |  |   |        | 
|           |  | $ | 13,141 | 
|           |  |   |        | 

Total rent expense for the years ended
December 31, 2003, 2002 and 2001 was $2,859,000, $3,865,000
and $2,627,000, respectively.



| |              
| | -------------
| | Contingencies

On November 14, 2001, a shareholder class
action complaint was filed in the United States District Court,
Southern District of New York. On April 19, 2002,
plaintiffs filed an amended complaint. The

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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

amended complaint asserts that the prospectus
from the Companys February 10, 2000 initial public
offering (IPO) failed to disclose certain alleged
improper actions by various underwriters for the offering in the
allocation of the IPO shares. The amended complaint alleges
claims against certain underwriters, the Company and certain
officers and directors under the Securities Act of 1933 and the
Securities Exchange Act of 1934 (Bartula v.
XCare.net, Inc., et al., Case No. 01-CV-10075).
Similar complaints have been filed concerning more than 300
other IPOs; all of these cases have been coordinated as In
re Initial Public Offering Securities Litigation, 21 MC 92. In a
negotiated agreement, individual defendants, including all of
the individuals named in the complaint filed against the
Company, were dismissed without prejudice, subject to a tolling
agreement. Issuer and underwriter defendants in these cases
filed motions to dismiss and, on February 19, 2003, the
Court issued an opinion and order on those motions that
dismissed selected claims against certain defendants, including
the Rule 10b-5 fraud claims against the Company, leaving
only the Section 11 strict liability claims under the
Securities Act of 1933 against the Company. A committee of our
board of directors has approved a settlement proposal made by
the plaintiffs that will require no cash payment by the Company,
but the settlement is subject to a number of conditions. If the
settlement is not achieved, the Company will continue to
aggressively defend the claims. The Company believes it has
meritorious defenses. The Company does not believe that the
outcome of this action will have a material adverse effect on
our financial position, results of operations or liquidity;
however, litigation is inherently uncertain and the Company can
make no assurance as to the ultimate outcome or effect.

CareScience and certain of its present and former
officers are defendants in a purported shareholder class action
litigation pending in the United States District Court for the
Eastern District of Pennsylvania for alleged violations of
federal securities laws. The actions seek compensatory and other
damages, and costs and expenses associated with litigation.
Although we cannot predict the ultimate outcome of the case or
estimate the range of any potential loss that may be incurred in
the litigation, we believe the lawsuits are without merit,
CareScience denies all allegations or wrongdoing asserted by
plaintiffs, and we believe CareScience has meritorious defenses
to plaintiffs claims. CareScience intends to vigorously
defend the lawsuits. The class action litigation is the result
of several complaints filed with the court beginning on
October 17, 2001. These actions were consolidated on
November 16, 2001. The court approved the election of the
lead plaintiff in the litigation on March 12, 2002.
CareScience filed a motion to dismiss the consolidated complaint
on August 7, 2002. These complaints purport to bring claims
on behalf of all persons who allegedly purchased CareScience
common stock between June 29, 2000 and November 1,
2000, for alleged violation of the federal securities laws,
including Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933 by issuing a materially false and misleading
Prospectus and Registration Statement with respect to the
initial public offering of CareScience common stock.
Specifically, the complaints allege, among other things, that
the CareScience Prospectus and Registration Statement
misrepresented and omitted to disclose material facts concerning
its competitors, two of its prospective products and its
contract with the California HealthCare Foundation. On
July 25, 2003, the Judge granted CareSciences motion
to dismiss the claims under Section 12(a)(2) of the
Securities Act, but denied its motion to dismiss the claims
under Sections 11 and 15 of the Securities Act. CareScience
filed an answer denying all allegations of wrongdoing. Discovery
has not yet commenced. In February 2004, an agreement was
reached to settle this case, subject to court approval after
notice to the former shareholders. If the settlement is
achieved, the entire settlement amount will be paid by
insurance, without any contribution from the Company. If the
settlement is not achieved, the Company will continue to
aggressively defend the claims. The Company believes it has
meritorious defenses. The Company does not believe that the
outcome of this action will have a material adverse effect on
our financial position, results of operations or liquidity;
however, litigation is inherently uncertain and the Company can
make no assurance as to the ultimate outcome or effect.

The Company and its subsidiaries are engaged from
time to time in routine litigation that arises in the ordinary
course of business.

F-25



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                    
|-- | -------------------
|8. | Segment Information

Segment information has been prepared in
accordance with FASB SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The
Company defines operating segments as components of an
enterprise for which discrete financial information is available
and is reviewed regularly by the chief operating decision-maker
or decision-making group, to evaluate performance and make
operating decisions. The chief operating decision-making group
reviews the revenue and margin by the nature of the services
provided and reviews the overall results of the Company.
Accounting policies of the segments are the same as those
described in the summary of significant accounting policies.

The Company operates in three segments: software
license, professional services, and recurring revenue. The
software license segment includes revenue from software license
sales and software subscriptions. The professional services
segment includes revenue generated from software implementation,
development, and integration. The recurring revenue segment
includes revenue generated from outsourcing, hosting
maintenance, transactions, and other recurring services. The
segment information for the years ended December 31, 2003,
2002 and 2001 is reflected in the Consolidated Statement of
Operations. A breakout of assets and capital expenditures for
all segments is not prepared or provided to the chief operating
decision maker. Revenue and long-term assets from our foreign
operations are $3.8 million and $0.5 million,
respectively.



|   |                              
|-- | -----------------------------
|9. | Quarterly Results (Unaudited)

This information has been derived from unaudited
consolidated financial statements. The unaudited consolidated
financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation of this information. These
unaudited quarterly results should be read in conjunction with
the audited financial statements and notes thereto. Operating
results are expected to vary significantly from quarter to
quarter and are not necessarily indicative of results for any
future period. Data relating to the results of operations for
the each quarter of the years ended December 31, 2003 and
2002 follows (in thousands except per share amounts):

|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |        |        | 
|------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                  |                                      |                         
|                                                  |                                      | Three Months Ended      
|                                                  |                                      |                         
|                                                  |                                      | March 31,                |        | June 30, |        | September 30, |        | December 31,
|                                                  |                                      | 2003                     |        | 2003     |        | 2003          |        | 2003        
|                                                  |                                      |                          |        |          |        |               |        |             
|                                                  |                                      |                          |        |          |        | (Restated)    |        |             
|STATEMENT OF OPERATIONS DATA:                     |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|Total revenue                                     |                                      | $                        | 17,433 |          |        | $             | 19,344 |              |        | $ | 15,209 |        |        | $ | 19,609 |       
|Costs and expenses:                               |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|                                                  | Cost of revenue                      |                          |        | 10,820   |        |               |        | 10,451       |        |   |        | 10,368 |        |   |        | 13,102 |       
|                                                  | Sales and marketing                  |                          |        | 3,842    |        |               |        | 4,052        |        |   |        | 4,260  |        |   |        | 5,631  |       
|                                                  | General and administrative           |                          |        | 3,030    |        |               |        | 3,146        |        |   |        | 3,001  |        |   |        | 3,565  |       
|                                                  | Research and development             |                          |        | 2,247    |        |               |        | 2,246        |        |   |        | 2,669  |        |   |        | 2,833  |       
|                                                  | Amortization of acquired intangibles |                          |        | 457      |        |               |        | 307          |        |   |        | 307    |        |   |        | 649    |       
|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|                                                  |                                      | Total costs and expenses |        |          | 20,396 |               |        |              | 20,202 |   |        |        | 20,605 |   |        |        | 25,780 | 
|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|Loss from operations                              |                                      |                          | (2,963 | )        |        |               | (858   | )            |        |   | (5,396 | )      |        |   | (6,171 | )     
|Interest income, net                              |                                      |                          | 189    |          |        |               | 207    |              |        |   | 89     |        |        |   | 209    |       
|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|Net loss                                          |                                      | $                        | (2,774 | )        |        | $             | (651   | )            |        | $ | (5,307 | )      |        | $ | (5,962 | )     
|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       
|Net loss per common share  basic and
    diluted |                                      | $                        | (0.09  | )        |        | $             | (0.02  | )            |        | $ | (0.17  | )      |        | $ | (0.17  | )     
|                                                  |                                      |                          |        |          |        |               |        |              |        |   |        |        |        |   |        |       

F-26



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |       |        | 
|---------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | - | ------- | ----- | ------ | - | ------ | ----- | ------ | 
|                                                           |                                      |                         
|                                                           |                                      | Three Months Ended      
|                                                           |                                      |                         
|                                                           |                                      | March 31,                |        | June 30, |        | September 30, |        | December 31,
|                                                           |                                      | 2002                     |        | 2002     |        | 2002          |        | 2002        
|                                                           |                                      |                          |        |          |        |               |        |             
|STATEMENT OF OPERATIONS DATA:                              |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Total revenue                                              |                                      | $                        | 17,769 |          |        | $             | 15,274 |              |        | $ | 14,973  |       |        | $ | 15,642 |      
|Costs and expenses:                                        |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|                                                           | Cost of revenue                      |                          |        | 9,925    |        |               |        | 10,523       |        |   |         | 9,478 |        |   |        | 9,362 |       
|                                                           | Sales and marketing                  |                          |        | 2,736    |        |               |        | 3,479        |        |   |         | 3,592 |        |   |        | 3,536 |       
|                                                           | General and administrative           |                          |        | 3,352    |        |               |        | 3,247        |        |   |         | 3,422 |        |   |        | 3,639 |       
|                                                           | Research and development             |                          |        | 1,432    |        |               |        | 1,777        |        |   |         | 1,807 |        |   |        | 2,193 |       
|                                                           | Amortization of acquired intangibles |                          |        | 570      |        |               |        | 553          |        |   |         | 599   |        |   |        | 585   |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|                                                           |                                      | Total costs and expenses |        |          | 18,015 |               |        |              | 19,579 |   |         |       | 18,898 |   |        |       | 19,315 | 
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Loss from operations                                       |                                      |                          | (246   | )        |        |               | (4,305 | )            |        |   | (3,925  | )     |        |   | (3,673 | )    
|Gain on sale of assets                                     |                                      |                          | 87     |          |        |               |       |              |        |   |        |       |        |   |       |      
|Goodwill impairment                                        |                                      |                          |       |          |        |               |       |              |        |   | (93,085 | )     |        |   |       |      
|Interest income, net                                       |                                      |                          | 261    |          |        |               | 292    |              |        |   | 263     |       |        |   | 219    |      
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Net income (loss)                                          |                                      | $                        | 102    |          |        | $             | (4,013 | )            |        | $ | (96,747 | )     |        | $ | (3,454 | )    
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Net income (loss) per common share 
    basic and diluted |                                      | $                        | 0.00   |          |        | $             | (0.13  | )            |        | $ | (3.22   | )     |        | $ | (0.11  | )    
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      



| |                                     
| | ------------------------------------
| | Restatement of Financial
    Results

The results for the third quarter of 2003 have
been restated. These revisions concern shipments to Infotech
Network Group (Infotech), a consortium of Indian
information technology companies, in the third quarter of 2003.
The Company believed at the time of the shipments that
collection of the receivable was probable due to the
establishment of a credit line by Infotech that could be used
for payment. Since the shipments of software product, however,
the Company has encountered unanticipated delays in obtaining
payment. Based on further analysis of Infotechs ability to
pay for the software purchased, the accounting for the revenue
recognized has been revised from an accrual to a cash basis. As
a result, the Company has materially restated its previously
reported financial results for the third quarter of 2003 by the
deletion of all revenue and commissions that had been recorded
related to Infotech.

Adjustments to the Companys third quarter
results for the year 2003 are as follows (in thousands):

|                                      |                                                                                                                                                                  |                    |        |        |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ------ | -
|                                      |                                                                                                                                                                  | Three Months Ended
|                                      |                                                                                                                                                                  | September 30, 2003
|                                      |                                                                                                                                                                  |                   
|                                      |                                                                                                                                                                  | (In thousands)    
|Matters impacting revenue:            |                                                                                                                                                                  |                    |        |       
|                                      |  Software license transactions for
    which revenue was recognized and it was subsequently reversed
    because it should have been recognized on a cash basis |                    | $      | (4,674 | )
|Matters impacting costs and expenses: |                                                                                                                                                                  |                    |        |       
|                                      |  Sales and marketing adjustments                                                                                                                                |                    |        | 425    |  
|                                      |                                                                                                                                                                  |                    |        |       
|Total net loss increase               |                                                                                                                                                                  | $                  | (4,249 | )     
|                                      |                                                                                                                                                                  |                    |        |       
|Impact per share                      |                                                                                                                                                                  | $                  | (0.14  | )     
|                                      |                                                                                                                                                                  |                    |        |       

F-27



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##### Table of Contents



QUOVADX, INC.



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


|                                                  |  |                        |       |            |  |           |     |           |  |            |      |      |  |   |       |     |  |   |       | 
|------------------------------------------------- |  | ---------------------- | ----- | ---------- |  | --------- | --- | --------- |  | ---------- | ---- | ---- |  | - | ----- | --- |  | - | ----- | 
|                                                  |  | Balance at             |       |            |  |           |     |           |  | Balance at
|                                                  |  | Beginning              |       | Charged to |  |           |     |           |  | End of    
|Allowance for Doubtful Accounts and Sales Returns |  | of Period              |       | Expense    |  | Deduction |     | Transfers |  | Period    
|                                                  |  |                        |       |            |  |           |     |           |  |           
|                                                  |  |                        |       |           
|                                                  |  | (Dollars in thousands) |       |           
|2003                                              |  | $                      | 2,370 |            |  | $         | 82  |           |  | $          | (919 | )(a) |  | $ | 1,232 | (b) |  | $ | 2,765 | 
|2002                                              |  |                        | 1,932 |            |  |           | 474 |           |  |            | (36  | )(a) |  |   |      |     |  |   | 2,370 | 
|2001                                              |  |                        | 546   |            |  |           | 97  |           |  |            | (518 | )(a) |  |   | 2,057 | (b) |  |   | 1,932 | 



---



|    |  |                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------
|(a) |  | Represents credit losses written off during the
    period, less collection of amounts previously written off.
|   
|(b) |  | Transfer of allowance balances from business
    acquisitions.                                                

S-1



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##### Table of Contents



INDEX TO EXHIBITS

|        |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 2.1   |                         |  | Agreement and Plan of Merger, dated as of
    August 13, 2003, by and among CareScience, Inc., the
    Registrant and Carlton Acquisition Corporation (incorporated by
    reference to Annex A to the Prospectus filed by the Registrant
    under Rule 424(b)(3) on September 18, 2003).                                                                                                                                                                               
|        | 2.2   |                         |  | Agreement and Plan of Merger, dated as of
    November 3, 2003, by and among Rogue Wave Software, Inc.,
    the Registrant and Chess Acquisition Corporation (incorporated
    by reference to Annex A to the Prospectus filed by the
    Registrant under Rule 424(b)(3) on December 16, 2003).                                                                                                                                                                         
|        | 3.1   |                         |  | Restated Certificate of Incorporation of the
    Registrant (incorporated by reference to Exhibit 3.1 to the
    Quarterly Report on Form 10-Q of the Registrant for the
    quarter ended March 31, 2003, filed as of May 13,
    2003).                                                                                                                                                                                                                                
|        | 3.2   |                         |  | Bylaws of the Registrant (incorporated by
    reference to Exhibit 3.3 to the Registration Statement on
    Form S-1 of the Registrant, filed as of November 2,
    1999, Registration No. 333-90165).                                                                                                                                                                                                                                                                   
|        | 4.1   |                         |  | Specimen stock certificate representing shares of
    Common Stock of the Registrant (incorporated by reference to
    Exhibit 4.1 to the Current Report on Form 8-K of the
    Registrant, filed as of October 16, 2001).                                                                                                                                                                                                                                               
|        | 4.2   |                         |  | Preferred Stock Rights Agreement, dated as of
    July 24, 2000, between the Registrant and ChaseMellon
    Shareholder Services, L.L.C., as Rights Agent, including the
    Certificate of Designation, the form of Rights Certificate and
    the Summary of Rights attached thereto as Exhibits A, B, and C,
    respectively (incorporated by reference to Exhibit 1 to the
    Registration Statement on Form 8-A of the Registrant, filed
    as of July 28, 2000).
|        | 10.1* |                         |  | Amended and Restated 1997 Stock Plan and related
    agreements (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-8 of the Registrant, filed
    as of May 16, 2002, Registration No. 333-88408).                                                                                                                                                                                                                                    
|        | 10.2* |                         |  | Amended and Restated 1999 Employee Stock Purchase
    Plan and related agreements (incorporated by reference to
    Exhibit 10.2 to the Quarterly Report on Form 10-Q of
    the Registrant for the quarter ended September 30, 2003,
    filed as of November 3, 2003).                                                                                                                                                                                                 
|        | 10.3* |                         |  | Amended and Restated 1999 Director Option Plan
    and related agreements (incorporated by reference to
    Exhibit 4.3 to the Registration Statement on Form S-8
    of the Registrant, filed as of May 16, 2002, Registration
    No. 333-88408).                                                                                                                                                                                                                      
|        | 10.4* |                         |  | Amended and Restated 2000 Nonstatutory Stock
    Option Plan and related agreements (incorporated by reference to
    Exhibit 4.9 to the Registration Statement on Form S-8
    of the Registrant, filed as of April 1, 2003, Registration
    No. 333-104184).                                                                                                                                                                                                          
|        | 10.5* |                         |  | Amended and Restated Healthcare.com Corporation
    Non-Employee Director Stock Option Plan (filed as of
    August 13, 1999, as Exhibit 10 to the Quarterly Report
    on Form 10-Q of Healthcare.com Corporation for the quarter
    ended June 30, 1999, Commission File No. 0-27056, and
    incorporated by reference to Exhibit 10.42 to the
    Registration Statement on Form S-4 of the Registrant, filed
    as of June 29, 2001, Registration No. 333-64282). 
|        | 10.6* |                         |  | Healthcare.com Corporation Adjustment Stock
    Option Plan (filed as of October 24, 1995, as Exhibit 10.5
    to Amendment No. 1 to the Registration Statement on
    Form S-1 of Healthcare.com Corporation, Registration
    No. 33-96478, and incorporated by reference to
    Exhibit 10.43 to the Registration Statement on
    Form S-4 of the Registrant, filed as of June 29, 2001,
    Registration No. 333-64282).                                            
|        | 10.7* |                         |  | Healthcare.com Corporation Restated Stock Option
    Plan Two (filed as of May 11, 1998, as Exhibit 10.2 to the
    Quarterly Report on Form 10-Q of Healthcare.com Corporation
    for the quarter ended March 31, 1998, Commission File
    No. 0-27056, and incorporated by reference to
    Exhibit 10.44 to the Registration Statement on
    Form S-4 of the Registrant, filed as of June 29, 2001,
    Registration No. 333-64282).                               
|        | 10.8* |                         |  | Rogue Wave Software, Inc. 1996 Equity Incentive
    Plan (incorporated by reference to Exhibit 4.1 to the
    Post-Effective Amendment No. 1 to Form S-4 on
    Form S-8 Registration Statement of the Registrant, filed as
    of January 8, 2004, Registration No. 333-110388).                                                                                                                                                                                        

S-2



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##### Table of Contents



|        |        |                         |  |                                                                                                                                                                                                                                                                                                                                                          
|------- | ------ | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|Number  |        | Description of Document
|        |        |                        
|        | 10.9*  |                         |  | Rogue Wave Software, Inc. 1997 Equity Incentive
    Plan (incorporated by reference to Exhibit 4.2 to the
    Post-Effective Amendment No. 1 to Form S-4 on
    Form S-8 Registration Statement of the Registrant, filed as
    of January 8, 2004, Registration No. 333-110388).                                                                        
|        | 10.10* |                         |  | Offer letter, dated as of February 20, 2002,
    to David E. Nesvisky from the Registrant (incorporated by
    reference to Exhibit 10.8 to the Annual Report on
    Form 10-K of the Registrant for the year ended
    December 31, 2002, filed as of March 31, 2003).                                                                                  
|        | 10.11* |                         |  | Amended and Restated Employment Agreement, dated
    as of April 11, 2003, by and between CareScience, Inc. and
    Ronald A. Paulus (filed as of April 25, 2003, as
    Exhibit 10.2 to Amendment No. 1 to the Annual Report
    on Form 10-K/ A of CareScience, Inc. and incorporated by
    reference thereto).                                       
|        | 10.12  |                         |  | Office Lease Agreement, effective as of
    November 8, 1999, between Mountain States Mutual Casualty
    Company and the Registrant (incorporated by reference to
    Amendment 1 to the Registration Statement on Form S-1 of
    the Registrant, filed as of December 17, 1999, Registration
    No. 333-90165).                                      
|        | 10.13  |                         |  | Sublease, dated as of August 24, 2001,
    between Echo Bay Management Corp. and the Registrant
    (incorporated by reference to Exhibit 12.1 to the Annual
    Report on Form 10-K of the Registrant for the year ended
    December 31, 2001, filed as of March 26, 2002).                                                                            
|        | 10.14  |                         |  | Form of Indemnification Agreement entered into by
    the Registrant with each of its directors and executive officers
    (incorporated by reference to Exhibit 11.1 to the Annual
    Report on Form 10-K of the Registrant for the year ended
    December 31, 2001, filed as of March 26, 2002).                                                     
|        | 10.15  |                         |  | Restated License Agreement, dated as of
    April 1, 1995, between the Trustees of the University of
    Pennsylvania and Care Management Science Corporation (filed as
    of March 14, 2000, as Exhibit 10.3 to the Registration
    Statement on Form S-1 of CareScience, Inc., Registration
    No. 333-32376 and incorporated by reference thereto).
|        | 10.16  |                         |  | License Agreement, dated as of July 30,
    2001, by and between 3550 University City Science Center
    Associates as licensor and Carescience, Inc. as licensee, for
    the license to use a portion of a building for a data center.                                                                                                                 
|        | 10.17  |                         |  | Consent of Assignment, dated as of
    September 18, 2003, by 3550 University City Science Center
    Associates as licensor.                                                                                                                                                                                                                            
|        | 21     |                         |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                          
|        | 23     |                         |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                                                                                                                                                                  
|        | 31.1   |                         |  | Certification of Chief Executive Officer of the
    Registrant pursuant to Rule 13a-14(a) and
    Rule 15d-14(a), promulgated under the Securities Exchange
    Act of 1934, as amended.                                                                                                                                                                 
|        | 31.2   |                         |  | Certification of Chief Financial Officer of the
    Registrant pursuant to Rule 13a-14(a) and
    Rule 15d-14(a), promulgated under the Securities Exchange
    Act of 1934, as amended.                                                                                                                                                                 
|        | 32.1** |                         |  | Certification of Chief Executive Officer of the
    Registrant pursuant to Rule 13a-14(b) and
    Rule 15d-14(b), promulgated under the Securities Exchange
    Act of 1934, as amended, and 18 U.S.C. §1350.                                                                                                                                            
|        | 32.2** |                         |  | Certification of Chief Financial Officer of the
    Registrant pursuant to Rule 13a-14(b) and
    Rule 15d-14(b), promulgated under the Securities Exchange
    Act of 1934, as amended, and 18 U.S.C. §1350.                                                                                                                                            
|        | 99.1   |                         |  | Quovadx, Inc. Code of Business Conduct and Ethics.                                                                                                                                                                                                                                                                                                       



---



|  |                                                                           
|- | --------------------------------------------------------------------------
|* | Constitutes a management contract or compensatory
    plan or arrangement.



|   |                                                                                                                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | This certification is furnished to, but not
    filed, with the Commission. This certification shall not be
    deemed to be incorporated by reference into any filing under the
    Securities Act of 1933 or the Securities Exchange Act of 1934,
    except to the extent that the Registrant specifically
    incorporates it by reference.

S-3