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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K/ A

|  |  |                                                                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------
|þ |  | AMENDMENT NO. 3 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(Address of principal executive
    offices) |  | 80111(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 31, 2004, there were
39,451,097 shares of Common Stock of the registrant
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None



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EXPLANATORY NOTE

This Amendment No. 3 to Quovadx, Inc.s
Annual Report on Form 10-K/ A for the fiscal year ended
December 31, 2003 is being filed for the purpose of
refiling corrected Items 3, 6, 7, 8, 9A and
Exhibits 31.1, 31.2, 32.1 and 32.2 to reflect the
restatement of our financial results for the years ended
December 31 2003 and 2002. We have made no further changes
to the previously filed Form 10-K/ A. All information in
this Form 10-K/ A is as of December 31, 2003, and does
not reflect any further subsequent information or events other
than the restatement. This Amendment No. 3 to
Form 10-K/ A amends our previously filed Amendment
No. 2 to Form 10-K/ A that was filed on March 31,
2004.

TABLE OF CONTENTS

|                                                    |  |                                                                                           |     |      |    |  |  | 
|--------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | -- |  |  | 
|Item                                                |  |                                                                                           |     |     
|Number                                              |  |                                                                                           |     | Page
|                                                    |  |                                                                                           |     |     
|PART I                                             
|3.                                                  |  | Legal Proceedings                                                                         |     |      | 3  | 
|PART II                                            
|6.                                                  |  | Selected Financial Data                                                                   |     |      | 6  | 
|7.                                                  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |     |      | 8  | 
|8.                                                  |  | Consolidated Financial
    Statements and Supplementary Data                              |     |      | 27 | 
|9A.                                                 |  | Controls and Procedures                                                                   |     |      | 28 | 
|PART IV                                            
|15.                                                 |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |     |      | 30 | 
|Signatures                                          |  |                                                                                           | 32  |     
|Consolidated Financial
    Statements               |  |                                                                                           | F-1 |     
|Schedule II 
    Valuation and Qualifying Accounts |  |                                                                                           | S-1 |     
|Consent of Ernst & Young LLP                       
|Certification of Acting Chief Executive Officer    
|Certification of Acting Chief Financial Officer    
|Certification of Acting Chief Executive Officer    
|Certification of Acting Chief Financial Officer    



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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.

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.

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PART I




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 Section 11 of the Securities Act of 1933 and
Section 10(b) of 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 Section 10(b) 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, 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. 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, Inc. and certain of its present and
former officers are defendants in a purported shareholder class
action lawsuit 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 of wrongdoing asserted by plaintiffs, and we believe
CareScience has meritorious defenses to plaintiffs claims.
We intend 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
selection 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 violations 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. On July 28, 2004, the
Court signed an order approving the form of the settlement
notices, setting forth requirements for providing notice to the
class and handling any objections, and scheduling a settlement
fairness hearing for October 27, 2004 to determine whether
the Court should approve the settlement. 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.

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On March 18, 2004, a purported class action
complaint was filed in the United States District Court for
District of Colorado, entitled Smith v. Quovadx, Inc. et
al, Case No. 04-M-0509, against Quovadx, Inc., its
now-former Chief Executive Officer and its now-former Chief
Financial Officer. The complaint alleged violations of
Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, purportedly on behalf of all
persons who purchased Quovadx common stock from October 22,
2003 through March 15, 2004. The claims are based upon
allegations the Company (i) purportedly overstated its net
income and earnings per share during the class period,
(ii) purportedly recognized revenue from contracts between
the Company and Infotech Networks Group prematurely, and
(iii) purportedly lacked adequate internal controls and was
therefore unable to ascertain the financial condition of the
Company. Eight additional, nearly identical class action
complaints were filed in the same Court based on the same facts
and allegations. The actions seek damages against the defendants
in an unspecified amount. On May 17 and 18, 2004, the
Company filed motions to dismiss each of the complaints. Also on
May 17, 2004, several potential lead plaintiffs filed
motions for appointment as lead plaintiff in the cases. On
May 21, 2004, the Court entered an order denying
consolidation of the actions and directing that all discovery
and other proceedings (including the appointment of a lead
plaintiff) are stayed pending determination of the motions to
dismiss. Since then, all but one of the actions, entitled
Heller v. Quovadx, Inc., et al., Case No. 04-M-0665
(OES) (D. Colo.), have been dismissed. The plaintiff in
Hellerhas filed a first amended complaint, which asserts
the same claims as those asserted in the original complaint, and
includes allegations regarding the Companys accounting for
certain additional transactions. On July 14, 2004, the
Company filed a motion to dismiss the first amended complaint in
Heller. The class actions are still in the preliminary
stages, and it is not possible for us to quantify the extent of
potential liability, if any.

On March 22, 2004, a shareholder derivative
action was filed in the District Court of Colorado, County of
Arapahoe, entitled Marcoux v. Brown et al, against the
members of the Board of Directors and certain now-former
officers of Quovadx alleging breach of fiduciary duty and other
violations of state law. The Company is named solely as a
nominal defendant against which no recovery is sought. This
complaint generally is based on the same facts and circumstances
as alleged in the class action complaints discussed above,
alleging that the defendants misrepresented Quovadx financial
projections and that one of the defendants violated state laws
relating to insider trading. The action seeks damages in an
unspecified amount against the individual defendants,
disgorgement of improper profits and attorneys fees, among
other forms of relief. On April 13, 2004, the Company and
its nonexecutive directors filed a motion to dismiss the action.
On or about April 21, 2004, a second, nearly identical
shareholder derivative complaint, seeking the same relief, was
filed in the United States District Court for the District of
Colorado, entitled Thornton v. Brown et al. The
plaintiffs in both of the shareholder derivative actions are
represented by the same local counsel. On or about May 20, 2004,
a third, nearly identical shareholder derivative complaint,
seeking the same relief, was filed in the District Court of
Colorado, County of Arapahoe, entitled Jaroslawicz v. Brown,
et al.On May 21, 2004, the Court entered an order in
Marcouxdirecting that the Company, named as a nominal
defendant, be realigned as a plaintiff in the action and
remanding the action back to state court. Subsequently, the
plaintiff in Thorntonvoluntarily dismissed his action
from federal court and refiled in state court. The three
shareholder derivative actions are now all pending in the
Colorado state court. A stipulation consolidating the three
actions and setting a date for the filing of a consolidated
amended complaint is currently before the state court for
approval. The shareholder derivative actions are still in the
preliminary stages, and it is not possible for us to quantify
the extent of potential liability, if any.

On April 12, 2004, the Company announced
that the Securities and Exchange Commission (SEC)
had notified the Company that its previously announced informal
inquiry had become a formal investigation pursuant to an
Order Directing Private Investigation and Designating
Officers to Take Testimony. The SEC is investigating
transactions entered into during the third quarter of 2002 and
transactions entered into during 2003 including two distributor
contracts totaling approximately $1 million and
transactions between Quovadx and Infotech Network Group. The
investigation is continuing, and the Company continues to
provide documents and information to the SEC.

On May 17, 2004, a purported class action
complaint was filed in the United States District Court for the
District of Colorado, entitled Henderson v. Quovadx, Inc. et
al, Case No. 04-M-1006 (OES), against

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Quovadx, Inc., its now-former Chief Executive
Officer, its now-former Chief Financial Officer and its Board of
Directors. The complaint alleged violations of Section 11
and Section 15 of the Securities Act of 1933, as amended,
purportedly on behalf of all former shareholders of Rogue Wave
Software, Inc. who acquired Quovadx common stock in connection
with the Companys exchange offer effective
December 19, 2003. The claims are based upon the same
theories and allegations as asserted in the Section 10(b)
class actions described above. The Court denied plaintiffs
motion to consolidate this Section 11 action with the
Section 10(b) cases and authorized the two competing lead
plaintiff candidates to take discovery of each other in advance
of a hearing on the appointment of lead plaintiff. On
July 14, 2004, the Company filed an answer to the
Section 11 complaint, denying allegations of wrongdoing and
asserting various affirmative defenses. The individual
defendants filed a motion to dismiss the Section 11
complaint. This class action also is in the preliminary stages,
and it is not possible for us to quantify the extent of
potential liability, if any.


On July 28, 2004, Ronald Renjilian, a former
employee, filed a Sarbanes-Oxley whistle blower complaint
against the Company with the US Department of Labor Occupational
Safety and Health Administration. The complaint alleges that the
Companys April 30, 2004 termination of
Mr. Renjilians employment was an action taken against
Mr. Renjilian as a result of his engaging in protected
activity. The Company denies any wrongdoing and intends to
aggressively defend this claim. 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.

The Company is engaged from time to time in
routine litigation that arises in the ordinary course of our
business.

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PART II




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 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. The data below reflect the restatement of
our consolidated financial statements for the years ended
December 31, 2002 and 2003. You should read the following
selected financial data with the consolidated financial
statements and related notes and the Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Amendment
No. 3 to our Form 10-K/A. You should also read our
quarterly reports on Form 10-Q for the first and second
quarters of 2004 filed concurrently with this Form 10-K/A
regarding subsequent events to the financial information
contained in this Form 10-K/A.

|                                                                   |  |                                       |         |            |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | ---------- |  | ---- | -------- | ---- |  | ---- | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                                   |  |                                      
|                                                                   |  | Year Ended December 31,              
|                                                                   |  |                                      
|                                                                   |  | 2003                                  |         | 2002       |  | 2001 |          | 2000 |  | 1999
|                                                                   |  |                                       |         |            |  |      |          |      |  |     
|                                                                   |  |                                      
|                                                                   |  | (In thousands, except per share data)
|                                                                   |  | (Restated)                            |         | (Restated) |  |     
|Statement of Operations Data:                                      |  |                                       |         |            |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Total revenue                                                      |  | $                                     | 69,932  |            |  | $    | 63,228   |      |  | $    | 52,180 |   |  | $ | 10,834  |   |  | $ | 4,853  |  
|Total costs and expenses                                           |  |                                       | 87,103  |            |  |      | 76,032   |      |  |      | 59,550 |   |  |   | 33,178  |   |  |   | 7,974  |  
|                                                                   |  |                                       |         |            |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Loss from operations                                               |  |                                       | (17,171 | )          |  |      | (12,804  | )    |  |      | (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                                                           |  | $                                     | (16,477 | )          |  | $    | (104,767 | )    |  | $    | (4,269 | ) |  | $ | (17,317 | ) |  | $ | (3,188 | )
|                                                                   |  |                                       |         |            |  |      |          |      |  |      |        |   |  |   |         |   |  |   |        |  
|Net loss per common share  basic and
    diluted                  |  | $                                     | (0.52   | )          |  | $    | (3.49    | )    |  | $    | (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, 2001
|                                                  |  |                  
|                                                  |  | 2003              |         | 2002       |  | 2001 |         | 2000 |  | 1999
|                                                  |  |                   |         |            |  |      |         |      |  |     
|                                                  |  |                  
|                                                  |  | (In thousands)   
|                                                  |  | (Restated)        |         | (Restated) |  |     
|Balance Sheet Data:                               |  |                   |         |            |  |      |         |      |  |      |         |  |  |   |        |  |  |   |         |  
|Cash, cash equivalents and short-term investments |  | $                 | 23,688  |            |  | $    | 47,621  |      |  | $    | 63,486  |  |  | $ | 78,319 |  |  | $ | 7,455   |  
|Working capital                                   |  |                   | 6,150   |            |  |      | 50,210  |      |  |      | 62,659  |  |  |   | 82,759 |  |  |   | 8,138   |  
|Total assets                                      |  |                   | 155,190 |            |  |      | 104,384 |      |  |      | 214,704 |  |  |   | 96,908 |  |  |   | 13,183  |  
|Mandatory redeemable convertible preferred stock  |  |                   |        |            |  |      |        |      |  |      |        |  |  |   |       |  |  |   | 23,842  |  
|Stockholders equity (deficit)                    |  |                   | 111,975 |            |  |      | 86,293  |      |  |      | 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.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 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 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

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 in Item 1.

Significant Events in 2004

During the first and second quarters of 2004 a
number of key events occurred that affected our business
operations and business prospects and required significant
senior management attention, including restatement of previously
issued financial statements. Our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO) resigned and
were replaced by Harvey A. Wagner, Acting
President & CEO, effective May 1, 2004 and
Melvin L. Keating, Acting CFO, effective April 13,
2004. After these appointments, other management changes have
been made, primarily involving terminations and promotions in
financial and sales management.

Internal Review.During the second quarter of 2004, we
began an internal review of our historical accounting policies,
practices and controls in preparation for our first quarter 2004
quarter-end closing and financial statement preparation under
the new management team. Previously, on March 15, 2004, we
had announced the need to restate and subsequently restated the
third quarter of 2003 financial results. Our Audit Committee
retained independent counsel to conduct a full investigation of
our relationship with Infotech Network Group and the
circumstances leading up to that restatement. As a result of
this review, on May 13, 2004 we delayed reporting our first
quarter 2004 Form 10-Q. Additionally, under the direction
of our Board of Directors and with the advice of outside counsel
and our independent registered public accounting firm, our new
management conducted an internal review and investigation of
prior periods to determine whether there

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were additional revisions to be made. As a
result, we are amending and refiling our 2003 annual report on
Form 10-K/ A to reflect restated financial results for 2003
and 2002 simultaneously with the initial filing of our
Forms 10-Q for the periods ending March 31, and
June 30, 2004.


SEC Proceedings.In
December 2003, we were notified by the US Securities and
Exchange Commission (SEC) that it was conducting an
informal inquiry into selected transactions completed in the
third quarter of 2002. In March 2004, we voluntarily notified
the SEC that we would restate our financial results for the
unaudited third quarter of 2003; after this notification, the
SEC informed us that its informal inquiry would be expanded to
include our relationship with Infotech Network Group and would
become a formal investigation. In April 2004, we received notice
from the SEC of a formal order of investigation and subpoena.
This investigation is ongoing.

Legal Proceedings.Following our March restatement
announcement, various shareholder class-action and derivative
lawsuits have been filed against the Company, certain former
officers and, in the case of certain of the lawsuits, against
our independent directors. For a further description of the
nature and status of these legal proceedings, see
Item 3  Legal Proceedings.

Enhanced Financial Disclosure Controls.Our ongoing internal review includes
an evaluation of our policies and procedures for disclosure and
internal controls, corporate governance and other processes, in
order to ensure the quality, consistency and timeliness of our
financial information and reporting. We continue to invest
financial resources in upgrading our financial reporting
processes and capabilities, including hiring additional
personnel, utilizing outside consultants and implementing new
review processes. We plan to continue investing significant
resources on this initiative and in preparation for additional
reporting on internal controls as required by Section 404
of the Sarbanes-Oxley Act of 2002.

Overview

Quovadx is a global software and services firm
that has helped 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 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.

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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), an Indian company, in the third
and fourth quarters 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. After the shipments of software product, the
Company has 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.



| |                                                          
| | ---------------------------------------------------------
| | Restatement of Financial Statements for
    2002 and 2003

On March 15, 2004, the Company announced
that it was restating its 2003 third quarter financial results
to reverse all previously recorded revenue associated with
Infotech Network Group. Subsequently, new management undertook a
review of the Companys historical accounting policies and
practices. As a result of this review, additional accounting
inaccuracies were detected affecting the Companys
financial results for the years ended December 31, 2003 and
2002 and the Company commenced an internal investigation under
the direction of the Board of Directors. As a result of this
investigation, the Company has restated its financial results
for the years ending December 31, 2003 and 2002.

The financial results for the years ended
December 31, 2003 and 2002 have been restated to properly
account for transactions that were previously inaccurately
reflected in the Companys financial results. The
cumulative effect of these restated financial statements
increased the previously reported net loss by $1,783,000 for the
year ended December 31, 2003 and $655,000 for the year
ended December 31, 2002. These inaccuracies
(a) overstated software license revenues due to the timing
of delivery of software products and the accounting for certain
reseller relationships (b) overstated professional services
revenues due to the timing of adjustments to estimates used in
determining the recognition of revenue under the percentage of
completion method and (c) understated the cost of
professional services revenue due to the capitalization of
software development costs without properly deducting the
portion of the cost related to a professional services agreement
with a customer. A detailed summary of the restatement is set
forth below.

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STATEMENT OF OPERATIONS

|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | -------------------------------------------- | ------- | ----------- | ------ | ----------- | ------ | ------ | ---- | - | ------- | ------ | ------ | 
|                                                                   |                                            | 2003                                         |         | Restatement |        | 2003       
|                                                                   |                                            | As Previously Reported                       |         | Adjustments |        | As Restated
|                                                                   |                                            |                                              |         |             |        |            
|                                                                   |                                            |                                             
|                                                                   |                                            | (Amounts in thousands except per share data)
|Revenues:                                                          |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|                                                                   |                                            | Software license                             |         | $           | 21,228 |             |        | $      | (958 | ) |         | $      | 20,270 | 
|                                                                   |                                            | Professional services                        |         |             | 18,217 |             |        |        | (705 | ) |         |        | 17,512 | 
|                                                                   |                                            | Recurring services                           |         |             | 32,150 |             |        |        |      |   |         |        | 32,150 | 
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Total revenue                                                      |                                            |                                              | 71,595  |             |        |             | (1,663 | )      |      |   | 69,932  |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Costs and expenses:                                                |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|                                                                   | Cost of revenue:                           |                                              |         |             |        |             |        |        |      |   |         |        |       
|                                                                   |                                            | Software license                             |         |             | 9,941  |             |        |        | (91  | ) |         |        | 9,850  | 
|                                                                   |                                            | Professional services                        |         |             | 13,811 |             |        |        | 211  |   |         |        | 14,022 | 
|                                                                   |                                            | Recurring services                           |         |             | 20,989 |             |        |        |      |   |         |        | 20,989 | 
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Total cost of revenue                                              |                                            |                                              | 44,741  |             |        |             | 120    |        |      |   | 44,861  |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|                                                                   | Gross Profit                               |                                              |         | 26,854      |        |             |        | (1,783 | )    |   |         | 25,071 |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Operating expenses:                                                |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|                                                                   | Sales and marketing                        |                                              |         | 17,785      |        |             |        |        |      |   |         | 17,785 |       
|                                                                   | General and administrative                 |                                              |         | 12,742      |        |             |        |        |      |   |         | 12,742 |       
|                                                                   | Research and development                   |                                              |         | 9,995       |        |             |        |        |      |   |         | 9,995  |       
|                                                                   | Amortization of acquired intangible assets |                                              |         | 1,720       |        |             |        |        |      |   |         | 1,720  |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|                                                                   |                                            | Total operating expenses                     |         |             | 42,242 |             |        |        |      |   |         |        | 42,242 | 
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Loss from operations                                               |                                            |                                              | (15,388 | )           |        |             | (1,783 | )      |      |   | (17,171 | )     
|Interest income, net                                               |                                            |                                              | 694     |             |        |             |        |        |      |   | 694     |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Net loss                                                           |                                            | $                                            | (14,694 | )           |        | $           | (1,783 | )      |      | $ | (16,477 | )     
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Loss per common share  basic and
    diluted                      |                                            | $                                            | (0.47   | )           |        | $           | (0.05  | )      |      | $ | (0.52   | )     
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                                              | 31,407  |             |        |             |        |        |      |   | 31,407  |       
|                                                                   |                                            |                                              |         |             |        |             |        |        |      |   |         |       

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STATEMENT OF OPERATIONS

|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | -------------------------------------------- | -------- | ----------- | ------ | ----------- | ----- | ---- | ---- | - | -------- | ------ | ------ | 
|                                                                   |                                            | 2002                                         |          | Restatement |        | 2002       
|                                                                   |                                            | As Previously Reported                       |          | Adjustments |        | As Restated
|                                                                   |                                            |                                              |          |             |        |            
|                                                                   |                                            |                                             
|                                                                   |                                            | (Amounts in thousands except per share data)
|Revenues:                                                          |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   |                                            | Software license                             |          | $           | 11,854 |             |       | $    | (430 | ) |          | $      | 11,424 | 
|                                                                   |                                            | Professional services                        |          |             | 22,459 |             |       |      |      |   |          |        | 22,459 | 
|                                                                   |                                            | Recurring services                           |          |             | 29,345 |             |       |      |      |   |          |        | 29,345 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Total revenue                                                      |                                            |                                              | 63,658   |             |        |             | (430  | )    |      |   | 63,228   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Costs and expenses:                                                |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Cost of revenue:                           |                                              |          |             |        |             |       |      |      |   |          |        |       
|                                                                   |                                            | Software license                             |          |             | 5,458  |             |       |      |      |   |          |        | 5,458  | 
|                                                                   |                                            | Professional services                        |          |             | 14,743 |             |       |      | 225  |   |          |        | 14,968 | 
|                                                                   |                                            | Recurring services                           |          |             | 19,087 |             |       |      |      |   |          |        | 19,087 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Total cost of revenue                                              |                                            |                                              | 39,288   |             |        |             | 225   |      |      |   | 39,513   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Gross Profit                               |                                              |          | 24,370      |        |             |       | (655 | )    |   |          | 23,715 |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Operating expenses:                                                |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Sales and marketing                        |                                              |          | 13,343      |        |             |       |      |      |   |          | 13,343 |       
|                                                                   | General and administrative                 |                                              |          | 13,660      |        |             |       |      |      |   |          | 13,660 |       
|                                                                   | Research and development                   |                                              |          | 7,209       |        |             |       |      |      |   |          | 7,209  |       
|                                                                   | Amortization of acquired intangible assets |                                              |          | 2,307       |        |             |       |      |      |   |          | 2,307  |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   |                                            | Total operating expenses                     |          |             | 36,519 |             |       |      |      |   |          |        | 36,519 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Loss from operations                                               |                                            |                                              | (12,149  | )           |        |             | (655  | )    |      |   | (12,804  | )     
|Gain on sale of assets                                             |                                            |                                              | 87       |             |        |             |       |      |      |   | 87       |       
|Goodwill impairment                                                |                                            |                                              | (93,085  | )           |        |             |       |      |      |   | (93,085  | )     
|Interest income, net                                               |                                            |                                              | 1,035    |             |        |             |       |      |      |   | 1,035    |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Net loss                                                           |                                            | $                                            | (104,112 | )           |        | $           | (655  | )    |      | $ | (104,767 | )     
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Loss per common share  basic and
    diluted                      |                                            | $                                            | (3.47    | )           |        | $           | (0.02 | )    |      | $ | (3.49    | )     
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                                              | 29,987   |             |        |             |       |      |      |   | 29,987   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       

The restatement also decreased current assets by
$800,000 and $0 at December 31, 2003 and 2002,
respectively, and increased current liabilities by $978,000 and
$330,000 at December 31, 2003 and 2002, respectively.

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 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.

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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) 977-2,
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 either
that customers pay a license fee based on a specified number of
instances of the software on the type of software modules
licensed or pay a subscription fee for a set number of years.
Customers that purchase licenses, under a perpetual license
agreement, 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
perpetual license 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.

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| |                                    
| | -----------------------------------
| | 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
acquired 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 incomes are based on 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, development 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.

14



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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
|                      |                                            |                          |       |            |      |     
|                      |                                            | (Restated)               |       | (Restated) |      |     
|Revenue:              |                                            |                          |       |            |      |      |        |        |      |  |       |     
|                      | Software license                           |                          |       | 29.0       | %    |      |        | 18.1   | %    |  |       | 12.3 | %   
|                      | Professional services                      |                          |       | 25.0       |      |      |        | 35.5   |      |  |       | 54.5 |     
|                      | Recurring services                         |                          |       | 46.0       |      |      |        | 46.4   |      |  |       | 33.2 |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Total revenue         |                                            |                          | 100.0 |            |      |      | 100.0  |        |      |  | 100.0 |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Cost of revenue:      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|                      | Software license                           |                          |       | 14.1       |      |      |        | 8.6    |      |  |       | 4.6  |     
|                      | Professional services                      |                          |       | 20.0       |      |      |        | 23.7   |      |  |       | 32.4 |     
|                      | Recurring services                         |                          |       | 30.0       |      |      |        | 30.2   |      |  |       | 27.9 |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Total cost of revenue |                                            |                          | 64.1  |            |      |      | 62.5   |        |      |  | 64.9  |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|                      | Gross profit                               |                          |       | 35.9       |      |      |        | 37.5   |      |  |       | 35.1 |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Operating expenses:   |                                            |                          |       |            |      |      |        |        |      |  |       |     
|                      | Sales and marketing                        |                          |       | 25.4       |      |      |        | 21.1   |      |  |       | 17.0 |     
|                      | General and administrative                 |                          |       | 18.2       |      |      |        | 21.6   |      |  |       | 19.9 |     
|                      | Research and development                   |                          |       | 14.3       |      |      |        | 11.4   |      |  |       | 9.2  |     
|                      | Amortization of acquired intangible assets |                          |       | 2.5        |      |      |        | 3.6    |      |  |       | 3.0  |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|                      |                                            | Total operating expenses |       |            | 60.4 |      |        |        | 57.7 |  |       |      | 49.1 | 
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Loss from operations  |                                            |                          | (24.5 | )          |      |      | (20.2  | )      |      |  | (14.0 | )   
|                      | Gain on sale of assets                     |                          |       |           |      |      |        | 0.1    |      |  |       |     |     
|                      | Goodwill impairment                        |                          |       |           |      |      |        | (147.2 | )    |  |       |     |     
|                      | Interest income, net                       |                          |       | 1.0        |      |      |        | 1.6    |      |  |       | 5.9  |     
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     
|Net loss              |                                            |                          | (23.5 | )%         |      |      | (165.6 | )%     |      |  | (8.1  | )%  
|                      |                                            |                          |       |            |      |      |        |        |      |  |       |     



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

Total Revenue.Total
revenue increased $6.7 million, or 11%, to
$69.9 million for the year ended December 31, 2003
from $63.2 million for the year ended December 31,
2002. The Company experienced an increase of $8.8 million,
or 77.4%, in revenue generated from its license segment to
$20.3 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 $4.9 million, or 22%, 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.

Cost of revenue.Cost of revenue increased $5.3 million, or 14%, to
$44.9 million for the year ended December 31, 2003
from $39.5 million in 2002. Cost of revenue for the license
segment increased 80% or

15



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##### Table of Contents



$4.4 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 $1.4 million in 2003 over 2002 and
increased royalty expenses of $3.2 million. The addition of
CareScience and Rogue Wave added $667,000 and $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.


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 $3.3 million of software
development costs in 2003. As a percentage of revenue, research
and development expenses increased 3% from 11% for the twelve
months ended December 31, 2002 to 14% 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

16



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##### Table of Contents



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.




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

Total Revenue.Total
revenue increased $11.0 million, or 21%, to
$63.2 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 $5.0 million,
or 78%, in revenue generated from its software license segment
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
$5.6 million, or 16%, to $39.5 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 $3.5 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 increasing
amortization expense in 2002 from 2001 by $722,000. This
decrease was more than offset by an increase in the amortization
of intangible

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##### Table of Contents



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.


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 a minority interest
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 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 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

18



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##### Table of Contents



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.


In the fourth quarter of 2003, the Company
prepaid $0.9 million to Infotech Network Group
(Infotech) for professional services. In March 2004,
the Company paid Infotech an additional $2.0 million
prepayment for professional services. Payments totaling
$1.6 million were written off in the first quarter of 2004
because the recoverability of the asset is uncertain due to the
deterioration of the Companys relationship with Infotech
and their inability to provide assurances that it can deliver
those services in the future.

Net cash used in operating activities was
$7.3 million in 2003, $10.3 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 ($1.7) million in 2003, ($14.5) million
in 2002 and $20.7 million in 2001. Net cash used in
investing activities in 2003 decreased primarily due to the
acquisitions of CareScience and Rogue Wave partially offset by
net sales of short-term investments. The decrease in 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 $3.5 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 that allowed the Company to borrow up to
$4.0 million. On December 9, 2003, the Company reduced
the line of credit to $3.1 million. The line of credit was
secured by the Companys assets exclusive of intellectual
property assets, and was 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 was subject to financial covenants, including a minimum
cash requirement, restrictions on mergers and acquisitions,
obtaining additional indebtedness and dividends.

The Companys cash and cash equivalents
balances are expected to be sufficient to meet its anticipated
liquidity needs for working capital and capital expenditures for
the next 12 months. At July 31, 2004, the
Companys cash and cash equivalents balance was
$17.4 million. The Company has reduced its workforce and
reducing other costs as part of a focused effort to better align
total costs of doing business with a revenue stream and to
preserve cash. If additional capital resources were required for
working capital or to grow our business internally, we may seek
other financing arrangements; however, we cannot be assured that
any financing arrangements would be available in amounts or on
terms acceptable to us in the future.

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

|                    |  |                        |        |      |  |        |       |        |  |            |       |  |  |   |       |  |  |   |       | 
|------------------- |  | ---------------------- | ------ | ---- |  | ------ | ----- | ------ |  | ---------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  |                        |        |      |  | 2005 & |       | 2007 & |  | 2009 &    
|                    |  | Total                  |        | 2004 |  | 2006   |       | 2008   |  | 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.

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##### Table of Contents



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

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 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.

We incurred losses for the years ended
December 31, 2003, 2002 and 2001. As of December 31,
2003, we had an accumulated deficit of $157 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 face risks related to a formal
    investigation being conducted by the SEC.

We have been cooperating with the SEC with
respect to a formal order of investigation and subpoena
regarding certain transactions in 2002 and 2003. Cooperation
with the SEC in its investigation and our own related internal
investigation has required, and likely will continue to 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. We cannot predict the
outcome of the investigation. If the SEC finds wrongdoing on our
part, a financial or administrative penalty may be imposed which
could jeopardize our financial viability. In addition, such
findings could provide basis for additional lawsuits.



| |                                                                       
| | ----------------------------------------------------------------------
| | We face risks related to the class action
    and derivative lawsuits.

Recently, certain former officers, independent
directors and the Company have been named defendants in various
class action and derivative lawsuits. The findings and outcome
of the SEC investigations may affect these pending lawsuits.
Under Delaware law, our charter and bylaws, we are generally
obligated to indemnify our directors and officers who are named
defendants in any of these lawsuits and advance legal fees and
costs. We are unable to estimate our liability in these matters
and we may be required to pay judgments or settlements and incur
expenses in aggregate amounts that could have a materially
adverse effect on our business, financial condition, results of
operations and cash flows.

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We currently have director and officer liability
insurance that may pay a portion or all of the legal fees and
costs incurred in defending against claims, settlement amounts,
or, damages awarded. However, if the plaintiffs are successful,
we may not have sufficient insurance to cover the judgment or
our insurers may deny coverage.

For a further description of the nature and
status of these legal proceedings see,
Item 3  Legal Proceedings.



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our investors, customers, suppliers,
    current employees and prospective employees may react adversely
    to the restatement of our historical financial statements and
    our ability to file in a timely manner all of our SEC
    filings.

Our future success depends largely upon the
support of our customers, suppliers, employees, prospective
employees and investors. The restatement of our historical
financial statements and our inability to file on a timely basis
all of our SEC filings has resulted in negative publicity about
us, has resulted in The Nasdaq Stock Market investigating
delisting of our stock, and may continue to have a negative
impact on the market price of our common stock. The restatement
of our historical financial statements and our inability to file
SEC filings in a timely manner could cause some of our customers
or potential customers to refrain from purchasing or defer
decisions to purchase our products and services. Additionally,
current or potential suppliers may re-examine their willingness
to do business with us, to develop critical interfaces to our
products or to supply products and services if they lose
confidence in our ability to fulfill our commitments. Employees
and prospective employees may factor in these uncertainties
relating to our stability and the value of any equity-based
incentives in their decisions regarding employment opportunities
and decide to leave our employ. Any of these losses could have a
material adverse effect on our financial and business prospects.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have made changes to our senior
    management team, diverting attention from strategic planning and
    business operations that could negatively affect our results of
    operations.

In April 2004 we replaced our chief executive
officer and chief financial officer; in May we replaced our
executive vice president of sales. It may take some time for
this new management team to develop strong working
relationships, re-establish momentum in sales efforts, and to
execute our strategic plan and operating plan. In addition, new
managements ability to complete this process has been and
continues to be hindered by its need to spend significant time
and effort dealing with internal and external investigations,
enhancing corporate governance procedures, strengthening
reporting lines and reviewing internal controls. We cannot give
assurance that this restructuring of the senior management team,
and the accompanying distractions, will not adversely affect our
results of operations.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | We may encounter significant employee
    turnover that could reduce our ability to sell, deliver, and
    support future commitments.

Due to concerns related to our restatements, late
SEC filings, possible Nasdaq delisting and shareholder
litigation, we could encounter a significant increase in
departures of key employees from the Company. While we are
taking steps to support employee retention, there can be no
assurances that key employees will not leave the Company for
other jobs thus impairing our ability to meet commitments and
sustain revenue.



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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

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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 significant financial and
management resources in reorganizing and enhancing our software
sales effort. 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 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. Further, we may face significant
competition from open source software offerings, provided to
users on a no-charge basis. 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
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 and open source
offerings may cause customers to defer or forego purchases of
our products, which could have a material adverse effect on our
business, financial condition and results of operations.

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| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The market for solutions utilizing business
    process management and application 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 evolving. We earn a substantial portion
of our revenue from sales of solutions that utilize our business
process management software, application integration software,
and related services. We expect to earn a large percentage 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
application 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 or diverted focus of
information technology departments on issues related to
regulatory compliance may lead to longer sales cycle and slower
sales growth.



| |                                                                           
| | --------------------------------------------------------------------------
| | We face saturated or diminishing markets
    for some of our key products.

Our primary Enterprise Application Integration
product offering is sold primarily to the hospital market, and
this market is close to saturation, and therefore revenues may
decrease within this market segment. In addition, the primary
development tools sold by our Rogue Wave division target the C++
programming language, which is diminishing in usage when
compared with other programming languages such as Java. We
expect that the revenues for these tools may decline over time.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be immediately delisted from Nasdaq
    if we cannot meet the more stringent criteria Nasdaq recently
    established for our continued listing.

We failed to timely file our first quarter 2004
Form 10-Q with the SEC and Nasdaq. As a result, the Nasdaq
Stock Market initiated delisting procedures. On August 9,
2004, Nasdaq informed us that we had been granted an exception
to their continued listing standards. However, our continued
listing depends on our ability to timely file all periodic
reports for reporting periods ending on or before
September 30, 2005, and we will not be able to request an
automatic extension to prolong the deadline. If we are late in
making any filing during that period, we may be delisted
immediately with no right to a hearing or appeal. Additionally,
we must continue to meet all other continued listing
requirements; or failure to do so may result in a notice of
delisting to which we would be able to request a hearing. Our
continued delisting vulnerability may result in further loss of
investor confidence, loss of analyst coverage and depression of
our stock price, which could have a material adverse affect on
our business and financial prospects.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Our public stock price has fallen
    substantially and may fall further, negatively impacting its
    investment desirability.

Since the disclosure of our restatement of
financial statements and the formal investigation by the SEC,
our stock price has been trading well below the $5.00 per share
minimum that many institutional investors are prohibited from
buying. We have no assurance that the stock price will rise upon
our successful resolution of our delayed SEC filings. These
factors may have contributed to reducing the trading activity in
our stock and could further reduce the investment quality of our
stock.



| |                                                                            
| | ---------------------------------------------------------------------------
| | We have risk in sustaining professional
    service revenue in our markets.

Professional services is a very competitive
market that is highly dependent on the quality of our staff and
service image. We face much larger competitors in this market
segment who have considerably more resources to draw from than
we have. As a result, the loss of key employees is a risk factor
in this business that is affected by our current restatement
issues. These issues also impact our service image to present
and prospective customers and could cause contract delays.
Possible employee turnover, and declining revenue in

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this market segment may cause us to have an image
problem that makes closing large contracts for services more
difficult. Consequently, professional services revenue may
continue to decline for the Company.




| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Several segments of our business rely on
    the effectiveness of channel partners and third-party
    influencers to help achieve revenue goals. If we fail to
    increase and maintain our channel relationships, our business
    may suffer.

Relationships with established channel partners
are critical to our success. These relationships include
independent software vendor (ISV), distributor, co-marketer and
system integrator relationships. To date, we have established a
number of these relationships and we rely on these
partners ability to assist us in generating increased
acceptance and use of our applications, services, and product
offerings. 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. Additionally,
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.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We are subjected to many risks because our
    business is dependent on our intellectual property
    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. In the
event we were to have a dispute with a third party regarding our
rights under an agreement, the third party may have the right to
terminate our use of such software and/or obtain damages. 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.

Certain products include so called open
source software. In some cases open software imposes on us
certain requirements to license others both the open source
software as well as software that relates to, or interacts with,
or is a derivative work of open source software. These open
source license terms may be ambiguous and may result in
unanticipated obligations regarding our products, including the
obligation to make source code available. Because open source
software is generally available, it cannot be protected as a
trade secret and competitors and others would have access to
such software and the right to modify or distribute such
software. Also, in many instances where we obtain open source
software, we would not be able to determine if the provider of
such code has legal right to provide such code to the company on
the open source license terms.

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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.



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

In the past, our customers have experienced some
interruptions with our application and 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
applications, transactions and data at our facilities 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 portion of our recurring revenue to
be derived from customers who use our application and
transaction hosting services. As a result, our business will
suffer if we experience frequent or long-term system
interruptions that result in the unavailability or reduced
performance of our hosting service. 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 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.

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| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 software used within
    medical management processes, 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

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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
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.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | 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
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.

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 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.






|        |                                                             
|------- | ------------------------------------------------------------
|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-27 and S-1.

27



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

As described in Item 1, beginning in April
2004, the Companys acting chief executive officer and
acting chief financial officer have conducted a review of the
Companys accounting practices and policies and of the
Companys prior period results. This review included an
evaluation of disclosure controls and procedures, and internal
controls and procedures, applicable to the period covered by and
existing through the filing of this periodic report. Based on
that review, the Companys acting chief executive officer
and acting chief financial officer have concluded that the
Companys disclosure controls and procedures are effective
to provide reasonable assurance that information the Company is
required to disclose in its reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported accurately. As noted below, however, in light of the
restatements that new management determined were required in the
periods ending on and prior to December 31, 2003, our
acting chief executive officer and acting chief financial
officer have identified weaknesses in our internal controls that
existed during periods prior to December 31, 2003.

As more fully described elsewhere in this
Form 10-K/A, we postponed the release of our financial
results for the quarter ended March 31, 2004. On
March 15, 2004 we announced that we would delay the filing
of our annual report on Form 10-K for the year ended
December 31, 2003 to restate our 2003 third quarter
financial results and revise our previously announced
preliminary 2003 fourth quarter and full year financial results.
On April 12, 2004 we announced the resignation of the
companys President and Chief Executive Officer and of the
Chief Financial Officer. On May 13, 2004, we announced that
new management had identified certain issues that might further
affect our 2003 financial statements. Additionally, we announced
that the company was conducting a review of past accounting
practices. During the course of our review, and with the
assistance of our independent registered public accounting firm,
we determined that the accounting with respect to certain prior
period transactions required adjustments. As a result, we have
restated our consolidated financial statements for the years
ended December 31, 2003 and 2002.

In connection with our restatements, we and our
independent registered public accounting firm identified and
reported to our audit committee significant internal control
matters that collectively constitute material
weaknesses. These internal control matters, any one or
more of which may individually or together constitute a material
weakness, include: inadequate management level controls;
inadequate credit screening procedures and controls; inadequate
shipping procedures and controls; inadequate procedures for
adding new products to the products available for sale;
inadequate controls over the price book and inadequate
procedures for establishing revenue recognition on services.

Beginning in April 2004, through the filing date
of this report, we have begun to implement changes to address
these internal control weaknesses. These measures include the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have hired a new Acting President and Chief
    Executive Officer and a new Acting Chief Financial Officer who
    have expertise in financial controls and reporting, to improve
    the overall quality and level of experience in our finance and
    accounting organization.                                                                                                 
|
| |  | We have implemented a Code of Business Conduct
    and Ethics. We have communicated to senior management and all
    employees the importance of these requirements, which each has
    acknowledged, and will be conducting training.                                                                                                                                               
|
| |  | We have implemented a formal whistle blower
    reporting system through a third party provider to enable
    employees to identify potential concerns or ethical issues on an
    anonymous basis. We have communicated to employees the
    availability of this system and are conducting training on this
    system.                                                            
|
| |  | We are in the process of making changes to our
    shipping procedures to provide more detailed information
    regarding product shipments. We have completed these changes in
    our Rogue Wave Software division and have nearly completed them
    in our Integration Solution division; no changes are required in
    the CareScience division which licenses on an ASP basis.
|
| |  | We are in the process of making changes in our
    procedures for verifying the creditworthiness of prospective
    customers.                                                                                                                                                                                                                                                       

28



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##### Table of Contents





| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | We have made changes to procedures for estimating
    fees and establishing revenue recognition on our services work.
|
| |  | We are initiating additional training of our
    sales organizations regarding revenue recognition rules.            

We plan to take additional steps to strengthen
our internal controls, including formation of a
multidisciplinary price book committee that will control new
product introductions and determine legal and accounting
requirements for all products; implementation of processes to
improve communication among our various functional groups during
the transaction approval and contract negotiation phases; and
improved operating controls and reporting processes.

We also note, however, that a control system, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and breakdowns can
occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls also is based
in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, our control systems as we develop them
may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

In connection with the Companys efforts to
comply in 2004 with Section 404(a) of the Sarbanes-Oxley
Act, we have retained an independent risk consulting firm to
assist with the documentation, analysis and testing. We expect
that in response to their findings we will implement changes in
internal controls and procedures and that additional changes
will be made on an ongoing basis as business needs require.

The improvements described above have all been
made subsequent to the period ended December 31, 2003, and
there have been no other changes in our internal control over
financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting. No significant changes were made in
the Companys internal controls during the quarters ended
December 31, 2003 and March 31, 2004.

Appearing as exhibits to this report are the
certifications of our acting chief executive officer and acting
chief financial officer required in accordance with
Section 302 of the Sarbanes-Oxley Act of 2002. The
disclosures set forth in this Item 9A contain information
concerning the evaluation of our disclosure controls and
procedures, and changes in internal control over financial
reporting, referred to in paragraphs 4(c) and (d) of
the certifications. This Item 9A should be read in
conjunction with the certifications for a more complete
understanding of the topics presented.

29



---



##### Table of Contents






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 Registered Public
    Accounting Firm    |  |        | 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, 2003, 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
    the consummation of the transactions contemplated under the
    Agreement and Plan of Merger with Rogue Wave Software, Inc.

(c) Index to Exhibits

|        |    |                         |  |                                                                                                                                                                                                
|------- | -- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 23 |                         |  | Consent of Independent Registered Public
    Accounting Firm.                                                                                                                                  
|        | 31 | .1                      |  | Certification of Acting 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 Acting 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.

30



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##### Table of Contents



|        |    |                         |  |                                                                                                                                                                                                                      
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 32 | .1*                     |  | Certification of Acting 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 Acting 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.



---



|  |                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

31



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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
16th day of August, 2004.



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



| |     |                     
| | --- | --------------------
| | BY: | /s/ HARVEY A. WAGNER

| |                                                 
| | ------------------------------------------------
| | Harvey A. Wagner                                
| | Acting President and Chief Executive
    Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Harvey A. Wagner and Melvin L. Keating, and each of them, as his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them or their or
his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities
and on the dates indicated.

|                                             |  |                                                                                                  |  |                 |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --------------- |  | 
|                                             |  |                                                                                                  |  |                
|Signatures                                   |  | Title                                                                                            |  | Date           
|                                             |  |                                                                                                  |  |                
|                                            
|/s/ HARVEY A. WAGNERHarvey A. Wagner         |  | Director, and Acting President and
    Chief Executive Officer
    (Principal Executive Officer) |  | August 16, 2004
|                                            
|/s/ MELVIN L. KEATINGMelvin L. Keating       |  | Acting Chief Financial Officer
    (Principal Financial and
    Accounting Officer)              |  | August 16, 2004
|                                            
|/s/ JEFFREY M. KRAUSSJeffrey M. Krauss       |  | Chairman of the Board                                                                            |  | August 16, 2004
|                                            
|/s/ FRED L. BROWNFred L. Brown               |  | Director                                                                                         |  | August 16, 2004
|                                            
|/s/ J. ANDREW COWHERDJ. Andrew Cowherd       |  | Director                                                                                         |  | August 16, 2004
|                                            
|/s/ JAMES B. HOOVERJames B. Hoover           |  | Director                                                                                         |  | August 16, 2004
|                                            
|/s/ CHARLES J. ROESSLEINCharles J. Roesslein |  | Director                                                                                         |  | August 16, 2004
|                                            
|/s/ JAMES A. GILBERTJames A. Gilbert         |  | Director                                                                                         |  | August 16, 2004

32



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##### Table of Contents



QUOVADX, INC.



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                               |  |      |     | 
|-------------------------------------------------------------- |  | ---- | --- | 
|                                                               |  | Page
|                                                               |  |     
|Report of Independent Registered Public
    Accounting Firm    |  |      | 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



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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 the
standards of the Public Company Accounting Oversight Board
(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 U.S.
generally accepted accounting principles. 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.

As discussed in Note 2 to the financial
statements, the Company has restated its financial statements
for the years ended December 31, 2003 and 2002.



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

Denver, Colorado

February 10, 2004,


except for Notes 1, 2, 6 and 7, as to which the
date is


August 12, 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)                    
|                                                                                                                                            |                                                                                                         | (Restated)                                 |          | (Restated)
|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                            |                                            |          | 17,593     |         |  |          | 10,980 |        
|                                                                                                                                            | Unbilled accounts receivable                                                                            |                                            |          | 3,465      |         |  |          | 5,571  |        
|                                                                                                                                            | Other current assets                                                                                    |                                            |          | 4,304      |         |  |          | 1,904  |        
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total current assets                       |          |            | 49,050  |  |          |        | 66,076  | 
|Property and equipment, net                                                                                                                 |                                                                                                         |                                            | 6,291    |            |         |  | 5,326    |       
|Software, net                                                                                                                               |                                                                                                         |                                            | 28,876   |            |         |  | 20,240   |       
|Other intangible assets, net                                                                                                                |                                                                                                         |                                            | 17,735   |            |         |  | 6,266    |       
|Goodwill                                                                                                                                    |                                                                                                         |                                            | 48,015   |            |         |  |         |       
|Other assets                                                                                                                                |                                                                                                         |                                            | 5,223    |            |         |  | 6,476    |       
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total assets                               |          | $          | 155,190 |  |          | $      | 104,384 | 
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                   
|Current liabilities:                                                                                                                        |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            | Accounts payable                                                                                        |                                            | $        | 7,953      |         |  | $        | 1,288  |        
|                                                                                                                                            | Accrued liabilities                                                                                     |                                            |          | 15,881     |         |  |          | 6,007  |        
|                                                                                                                                            | Unearned revenue                                                                                        |                                            |          | 19,066     |         |  |          | 8,571  |        
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total current liabilities                  |          |            | 42,900  |  |          |        | 15,866  | 
|Deferred revenue                                                                                                                            |                                                                                                         |                                            | 315      |            |         |  | 2,225    |       
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total liabilities                          |          |            | 43,215  |  |          |        | 18,091  | 
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|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                                                                                                                         |                                                                                                         |                                            | (157,171 | )          |         |  | (140,694 | )     
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total stockholders equity                 |          |            | 111,975 |  |          |        | 86,293  | 
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       
|                                                                                                                                            |                                                                                                         | Total liabilities and stockholders equity |          | $          | 155,190 |  |          | $      | 104,384 | 
|                                                                                                                                            |                                                                                                         |                                            |          |            |         |  |          |       

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

F-3



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | ---------------------------------------- | ------- | ---------- | ------ | ---- | -------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                   |                                            |                                         
|                                                                   |                                            | Year Ended December 31,                 
|                                                                   |                                            |                                         
|                                                                   |                                            | 2003                                     |         | 2002       |        | 2001
|                                                                   |                                            |                                          |         |            |        |     
|                                                                   |                                            |                                         
|                                                                   |                                            | (In thousands, except per share amounts)
|                                                                   |                                            | (Restated)                               |         | (Restated) |        |     
|Revenue:                                                           |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|                                                                   | Software license                           |                                          | $       | 20,270     |        |      | $        | 11,424 |        |   | $      | 6,416  |       
|                                                                   | Professional services                      |                                          |         | 17,512     |        |      |          | 22,459 |        |   |        | 28,449 |       
|                                                                   | Recurring services                         |                                          |         | 32,150     |        |      |          | 29,345 |        |   |        | 17,315 |       
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|Total revenue                                                      |                                            |                                          | 69,932  |            |        |      | 63,228   |        |        |   | 52,180 |       
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|Cost of revenue:                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|                                                                   | Software license                           |                                          |         | 9,850      |        |      |          | 5,457  |        |   |        | 2,415  |       
|                                                                   | Professional services                      |                                          |         | 14,022     |        |      |          | 14,969 |        |   |        | 16,930 |       
|                                                                   | Recurring services                         |                                          |         | 20,989     |        |      |          | 19,087 |        |   |        | 14,579 |       
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|Total cost of revenue                                              |                                            |                                          | 44,861  |            |        |      | 39,513   |        |        |   | 33,924 |       
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|                                                                   | Gross profit                               |                                          |         | 25,071     |        |      |          | 23,715 |        |   |        | 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                                               |                                            |                                          | (17,171 | )          |        |      | (12,804  | )      |        |   | (7,370 | )     
|Gain on sale of assets                                             |                                            |                                          |        |            |        |      | 87       |        |        |   |       |       
|Goodwill impairment                                                |                                            |                                          |        |            |        |      | (93,085  | )      |        |   |       |       
|Interest income, net                                               |                                            |                                          | 694     |            |        |      | 1,035    |        |        |   | 3,101  |       
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|Net loss                                                           |                                            | $                                        | (16,477 | )          |        | $    | (104,767 | )      |        | $ | (4,269 | )     
|                                                                   |                                            |                                          |         |            |        |      |          |        |        |   |        |       
|Net loss per common share  basic and
    diluted                  |                                            | $                                        | (0.52   | )          |        | $    | (3.49    | )      |        | $ | (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

|                                                                            |  |                |        |            |  |                 |     |                   |  |                      |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------- |  | -------------- | ------ | ---------- |  | --------------- | --- | ----------------- |  | -------------------- | ------- | ------- |  | ----- | ---- | - |  | - | --- |  |  | - | -------- | - |  | - | -------- | -
|                                                                            |  |                |        |            |  |                 |     |                   |  |                      |         |        
|                                                                            |  | Common Stock   |        |            |  |                 |     |                   |  |                      |         |        
|                                                                            |  |                |        | Additional |  | Unearned        |     | Accumulated Other |  | Accumulated          |         |        
|                                                                            |  | Shares         |        | Amount     |  | Paid-in Capital |     | Compensation      |  | Comprehensive 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 (Restated)                                  |  |                |       |            |  |                 |    |                   |  |                      |        |         |  |       |     |   |  |   |    |  |  |   | (104,767 | ) |  |   | (104,767 | )
|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 (Restated)                                     |  |                | 30,176 |            |  |                 | 302 |                   |  |                      | 226,685 |         |  |       |     |   |  |   |    |  |  |   | (140,694 | ) |  |   | 86,293   |  
|Net loss (Restated)                                                         |  |                |       |            |  |                 |    |                   |  |                      |        |         |  |       |     |   |  |   |    |  |  |   | (16,477  | ) |  |   | (16,477  | )
|Currency translation adjustment                                             |  |                |       |            |  |                 |    |                   |  |                      |        |         |  |       |     |   |  |   | 131 |  |  |   |         |   |  |   | 131      |  
|                                                                            |  |                |        |            |  |                 |     |                   |  |                      |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  
|Comprehensive loss (Restated)                                               |  |                |        |            |  |                 |     |                   |  |                      |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   | (16,346  | )
|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 (Restated)                                     |  |                | 38,938 |            |  | $               | 389 |                   |  | $                    | 269,011 |         |  | $     | (385 | ) |  | $ | 131 |  |  | $ | (157,171 | ) |  | $ | 111,975  |  
|                                                                            |  |                |        |            |  |                 |     |                   |  |                      |         |         |  |       |      |   |  |   |     |  |  |   |          |   |  |   |          |  

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)                           
|                                                                               |                                                                                                       | (Restated)                                |         | (Restated) |        |     
|CASH FLOWS FROM OPERATING ACTIVITIES                                           |                                                                                                       |                                           |         |            |        |      |          |        |         |   |        |      
|Net loss                                                                       |                                                                                                       | $                                         | (16,477 | )          |        | $    | (104,767 | )      |         | $ | (4,269 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities |                                                                                                       |                                           |         |            |        |      |          |        |         |   |        |      
|                                                                               | Depreciation and amortization                                                                         |                                           |         | 9,715      |        |      |          | 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 |                                           |         | (559       | )      |      |          | (4,456 | )       |   |        | 1,234 |       
|                                                                               |                                                                                                       | Unbilled accounts receivable              |         |            | 1,128  |      |          |        | 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             |         |            | (2,981 | )    |          |        | (1,285  | ) |        |       | 2,821  |  
|                                                                               |                                                                                                       |                                           |         |            |        |      |          |        |         |   |        |      
|                                                                               |                                                                                                       | Net cash used in operating activities     |         |            | (7,275 | )    |          |        | (10,298 | ) |        |       | (4,608 | )
|                                                                               |                                                                                                       |                                           |         |            |        |      |          |        |         |   |        |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                           |                                                                                                       |                                           |         |            |        |      |          |        |         |   |        |      
|Purchase of property and equipment                                             |                                                                                                       |                                           | (1,971  | )          |        |      | (1,457   | )      |         |   | (2,892 | )    
|Purchased and capitalized software                                             |                                                                                                       |                                           | (3,557  | )          |        |      | (3,508   | )      |         |   | (1,903 | )    
|Business acquisitions, net of cash acquired                                    |                                                                                                       |                                           | (12,585 | )          |        |      | (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                        |                                                                                                       |                                           | (1,736  | )          |        |      | (14,510  | )      |         |   | 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

For the three years ended December 31,
2003, 2002, and 2001


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.



| |                                                          
| | ---------------------------------------------------------
| | Restatement of Financial Statements for
    2003 and 2002

On March 15, 2004, the Company announced
that it was restating its 2003 third quarter financial results
to reverse all previously recorded revenue associated with
Infotech Network Group (Infotech) as further
described in Note 9. As a result of this restatement, the
Audit Committee retained independent counsel to conduct a full
investigation of the Infotech relationship. Additionally, the
Company, in conjunction with new management and under direction
of the Board of Directors, undertook a review of all historical
accounting policies and practices. As a result of this
subsequent review, additional accounting inaccuracies were
identified affecting the Companys financial results for
the years ended December 31, 2003 and 2002. Accordingly the
Company has restated its historical financial results for the
years ending December 31, 2003 and 2002. This restatement
is described in Note 2.



| |                 
| | ----------------
| | 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.

F-7



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.

F-8



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | 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.



| |           
| | ----------
| | 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
|         |  |                         |     |            |  |     
|         |  | (Restated)              |     | (Restated) |  |     
|A        |  |                         | 20% |            |  |      | 22% |  |  |  | 9%  | 
|B        |  |                         |    |            |  |      | 11% |  |  |  | 14% | 
|C        |  |                         | 4%  |            |  |      | 7%  |  |  |  | 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

F-9



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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
$3.3 million (restated), $3.5 million
(restated) 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
$6.9 million (restated), $5.5 million and
$2.1 million, respectively.

|                     |                                        |              |        |            |   |   |        |        |  
|-------------------- | -------------------------------------- | ------------ | ------ | ---------- | - | - | ------ | ------ | -
|                     |                                        |             
|                     |                                        | December 31,
|                     |                                        |             
|                     |                                        | 2003         |        | 2002      
|                     |                                        |              |        |           
|                     |                                        | (Restated)   |        | (Restated)
|Capitalized Software |                                        |              |        |            |   |   |        |       
|                     | Software acquired through acquisitions |              | $      | 31,361     |   |   | $      | 19,910 |  
|                     | Purchased software                     |              |        | 3,046      |   |   |        | 2,294  |  
|                     | Software development costs             |              |        | 8,752      |   |   |        | 5,407  |  
|                     |                                        |              |        |            |   |   |        |       
|                     |                                        |              | 43,159 |            |   |   | 27,611 |       
|                     | Accumulated Amortization               |              |        | (14,283    | ) |   |        | (7,371 | )
|                     |                                        |              |        |            |   |   |        |       
|                     |                                        | $            | 28,876 |            |   | $ | 20,240 |       
|                     |                                        |              |        |            |   |   |        |       

F-10



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |         
| | --------
| | 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 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 |       
|                  |                          |              |        |        |   |   |       |       

F-11



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 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 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

F-12



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
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)
|                           |                                                                            | (Restated)                           |   | (Restated) |   |     
|Net loss:                  |                                                                            |                                      |   |            |   |      |   |          |   |  |   |        
|                           | As reported                                                                |                                      | $ | (16,477    | ) |      | $ | (104,767 | ) |  | $ | (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                                                         |                                      | $ | (21,205    | ) |      | $ | (113,296 | ) |  | $ | (11,364 | )
|                           |                                                                            |                                      |   |            |   |      |   |          |   |  |   |        
|Net loss per common share: |                                                                            |                                      |   |            |   |      |   |          |   |  |   |        
|                           | As reported                                                                |                                      | $ | (0.52      | ) |      | $ | (3.49    | ) |  | $ | (0.20   | )
|                           | Pro forma                                                                  |                                      |   | (0.68      | ) |      |   | (3.78    | ) |  |   | (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

F-13



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determine comprehensive income (loss). During the
year ended December 31, 2003, comprehensive (loss) included
the change in foreign currency translation.



| |                              
| | -----------------------------
| | 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. | Restatement of Financial Statements

The financial results for the years ended
December 31, 2003 and 2002 have been restated to properly
account for transactions that were previously inaccurately
reflected in the Companys historical financial results.
The cumulative effect of these restated financial statements
increased the previously reported net loss by $1,783,000 for the
year ended December 31, 2003 and $655,000 for the year
ended December 31, 2002. These inaccuracies
(a) overstated software license revenues due to the timing
of delivery of software products and the accounting for certain
reseller relationships (b) overstated professional services
revenues due to the timing of adjustments to estimates used in
determining the recognition of revenue under the percentage of
completion method and (c) understated the cost of
professional services revenue due to the capitalization of
software development costs without properly deducting the
portion of the cost related to a professional services agreement
with a customer.

F-14



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A detailed summary of the restatement is set
forth below.

STATEMENT OF OPERATIONS

|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | -------------------------------------------- | ------- | ----------- | ------ | ----------- | ------ | - | ------ | - | ------- | ------ | ------ | 
|                                                                   |                                            |                                              |         | Restatement |        |            
|                                                                   |                                            | 2003                                         |         | Adjustments |        | 2003       
|                                                                   |                                            |                                              |         |             |        |            
|                                                                   |                                            | As Previously Reported                       |         |             |        | As Restated
|                                                                   |                                            |                                             
|                                                                   |                                            | (Amounts in thousands except per share data)
|Revenues:                                                          |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|                                                                   |                                            | Software license                             |         | $           | 21,228 |             |        | $ | (958   | ) |         | $      | 20,270 | 
|                                                                   |                                            | Professional services                        |         |             | 18,217 |             |        |   | (705   | ) |         |        | 17,512 | 
|                                                                   |                                            | Recurring services                           |         |             | 32,150 |             |        |   |        |   |         |        | 32,150 | 
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Total revenue                                                      |                                            |                                              | 71,595  |             |        |             | (1,663 | ) |        |   | 69,932  |       
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Costs and expenses:                                                |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|                                                                   | Cost of revenue:                           |                                              |         |             |        |             |        |   |        |   |         |        |       
|                                                                   |                                            | Software license                             |         |             | 9,941  |             |        |   | (91    | ) |         |        | 9,850  | 
|                                                                   |                                            | Professional services                        |         |             | 13,811 |             |        |   | 211    |   |         |        | 14,022 | 
|                                                                   |                                            | Recurring services                           |         |             | 20,989 |             |        |   |        |   |         |        | 20,989 | 
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Total cost of revenue                                              |                                            |                                              | 44,741  |             |        |             | 120    |   |        |   | 44,861  |       
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|                                                                   |                                            | Gross Profit                                 |         |             | 26,854 |             |        |   | (1,783 | ) |         |        | 25,071 | 
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Operating expenses:                                                |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|                                                                   | Sales and marketing                        |                                              |         | 17,785      |        |             |        |   |        |   |         | 17,785 |       
|                                                                   | General and administrative                 |                                              |         | 12,742      |        |             |        |   |        |   |         | 12,742 |       
|                                                                   | Research and development                   |                                              |         | 9,995       |        |             |        |   |        |   |         | 9,995  |       
|                                                                   | Amortization of acquired intangible assets |                                              |         | 1,720       |        |             |        |   |        |   |         | 1,720  |       
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|                                                                   |                                            | Total operating expenses                     |         |             | 42,242 |             |        |   |        |   |         |        | 42,242 | 
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Loss from operations                                               |                                            |                                              | (15,388 | )           |        |             | (1,783 | ) |        |   | (17,171 | )     
|Interest income, net                                               |                                            |                                              | 694     |             |        |             |        |   |        |   | 694     |       
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Net loss                                                           |                                            | $                                            | (14,694 | )           |        | $           | (1,783 | ) |        | $ | (16,477 | )     
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Loss per common share  basic and
    diluted                      |                                            | $                                            | (0.47   | )           |        | $           | (0.05  | ) |        | $ | (0.52   | )     
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                                              | 31,407  |             |        |             |        |   |        |   | 31,407  |       
|                                                                   |                                            |                                              |         |             |        |             |        |   |        |   |         |       

F-15



---



##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

STATEMENT OF OPERATIONS

|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | -------------------------------------------- | -------- | ----------- | ------ | ----------- | ----- | ---- | ---- | - | -------- | ------ | ------ | 
|                                                                   |                                            |                                              |          | Restatement |        |            
|                                                                   |                                            | 2002                                         |          | Adjustments |        | 2002       
|                                                                   |                                            |                                              |          |             |        |            
|                                                                   |                                            | As Previously Reported                       |          |             |        | As Restated
|                                                                   |                                            |                                             
|                                                                   |                                            | (Amounts in thousands except per share data)
|Revenues:                                                          |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   |                                            | Software license                             |          | $           | 11,854 |             |       | $    | (430 | ) |          | $      | 11,424 | 
|                                                                   |                                            | Professional services                        |          |             | 22,459 |             |       |      |      |   |          |        | 22,459 | 
|                                                                   |                                            | Recurring services                           |          |             | 29,345 |             |       |      |      |   |          |        | 29,345 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Total revenue                                                      |                                            |                                              | 63,658   |             |        |             | (430  | )    |      |   | 63,228   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Costs and expenses:                                                |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Cost of revenue:                           |                                              |          |             |        |             |       |      |      |   |          |        |       
|                                                                   |                                            | Software license                             |          |             | 5,458  |             |       |      |      |   |          |        | 5,458  | 
|                                                                   |                                            | Professional services                        |          |             | 14,743 |             |       |      | 225  |   |          |        | 14,968 | 
|                                                                   |                                            | Recurring services                           |          |             | 19,087 |             |       |      |      |   |          |        | 19,087 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Total cost of revenue                                              |                                            |                                              | 39,288   |             |        |             | 225   |      |      |   | 39,513   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Gross Profit                               |                                              |          | 24,370      |        |             |       | (655 | )    |   |          | 23,843 |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Operating expenses:                                                |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   | Sales and marketing                        |                                              |          | 13,343      |        |             |       |      |      |   |          | 13,343 |       
|                                                                   | General and administrative                 |                                              |          | 13,660      |        |             |       |      |      |   |          | 13,660 |       
|                                                                   | Research and development                   |                                              |          | 7,209       |        |             |       |      |      |   |          | 7,209  |       
|                                                                   | Amortization of acquired intangible assets |                                              |          | 2,307       |        |             |       |      |      |   |          | 2,307  |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|                                                                   |                                            | Total operating expenses                     |          |             | 36,519 |             |       |      |      |   |          |        | 36,519 | 
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Loss from operations                                               |                                            |                                              | (12,149  | )           |        |             | (655  | )    |      |   | (12,804  | )     
|Gain on sale of assets                                             |                                            |                                              | 87       |             |        |             |       |      |      |   | 87       |       
|Goodwill impairment                                                |                                            |                                              | (93,085  | )           |        |             |       |      |      |   | (93,085  | )     
|Interest income, net                                               |                                            |                                              | 1,035    |             |        |             |       |      |      |   | 1,035    |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Net loss                                                           |                                            | $                                            | (104,112 | )           |        | $           | (655  | )    |      | $ | (104,767 | )     
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Loss per common share  basic and
    diluted                      |                                            | $                                            | (3.47    | )           |        | $           | (0.02 | )    |      | $ | (3.49    | )     
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                                              | 29,987   |             |        |             |       |      |      |   | 29,987   |       
|                                                                   |                                            |                                              |          |             |        |             |       |      |      |   |          |       

The restatement also decreased current assets by
$800,000 and $0 at December 31, 2003 and 2002,
respectively, and increased current liabilities by $978,000 and
$330,000 at December 31, 2003 and 2002, respectively.

F-16



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The restated unaudited pro forma results of
operations as though the Rogue Wave and CareScience acquisitions
(See Note 3) 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        
|                   |  |              |         |             
|                   |  | (Restated)   |         | (Restated)  
|Revenue            |  | $            | 107,499 |              |  | $ | 118,077  |  
|Net loss           |  |              | (28,525 | )            |  |   | (122,965 | )
|Net loss per share |  | $            | (0.74   | )            |  | $ | (3.23    | )

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.



|   |                                    
|-- | -----------------------------------
|3. | 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 minority equity investment 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;                                                                                                                                                   
|
| |  | 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 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
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

F-17



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 incomes 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
of $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

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
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 totaling $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

F-18



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 third 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. 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 |       
|                            |                                              |             |        |            |  |   |        |       

F-19



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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 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-20



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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 were 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-21



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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-22



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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

F-23



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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 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 employees 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
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. On
December 9, 2003, the line of credit was reduced to
$3.1 million. 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.



|   |             
|-- | ------------
|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
|                                         |  |                         |        |            |  |     
|                                         |  | (Restated)              |        | (Restated) |  |     
|Federal income tax benefit               |  | $                       | (5,284 | )          |  | $    | (35,173 | ) |  | $ | (1,494 | )
|State income tax, net of federal benefit |  |                         | (425   | )          |  |      | (265    | ) |  |   | (101   | )
|Change in valuation allowance            |  |                         | 5,658  |            |  |      | 3,742   |   |  |   | 652    |  
|Unearned compensation                    |  |                         |       |            |  |      | 81      |   |  |   | 161    |  
|Goodwill amortization                    |  |                         |       |            |  |      | 31,565  |   |  |   | 723    |  
|Other                                    |  |                         | 51     |            |  |      | 50      |   |  |   | 59     |  
|                                         |  |                         |        |            |  |      |         |   |  |   |        |  
|Income tax expense                       |  | $                       |       |            |  | $    |        |   |  | $ |       |  
|                                         |  |                         |        |            |  |      |         |   |  |   |        |  

F-24



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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      
|                               |                                              |                                       |         |           
|                               |                                              | (Restated)                            |         | (Restated)
|Deferred tax assets:           |                                              |                                       |         |            |        |  |         |       
|                               | Deferred revenue                             |                                       | $       | 4,873      |        |  | $       | 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     |                                       |         | 1,447      |        |  |         |       |       
|                               | Other                                        |                                       |         | 459        |        |  |         | 184    |       
|                               | Net operating loss carryforwards             |                                       |         | 47,427     |        |  |         | 29,139 |       
|                               |                                              |                                       |         |            |        |  |         |       
|                               |                                              | Total deferred tax assets             |         |            | 58,428 |  |         |        | 33,073 | 
|                               |                                              |                                       |         |            |        |  |         |       
|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        |                                              |                                       | 48,404  |            |        |  | 29,172  |       
|Less: valuation allowance      |                                              |                                       | (48,404 | )          |        |  | (29,172 | )     
|                               |                                              |                                       |         |            |        |  |         |       
|                               |                                              | 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 $48,404,000
(restated) and $29,172,000 (restated) 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-25



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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) $76,437,000 (restated) 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) $45,756,000 (restated) 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

F-26



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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 Section 11 of the Securities
Act of 1933 and Section 10(b) of 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 Section 10(b) fraud
claims against the Company, leaving only the Section 11
strict liability claims under the Securities Act against the
Company. A committee of our Board of Directors has approved a
settlement proposal made by the plaintiffs, 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. 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, Inc. and certain of its present and
former officers are defendants in a purported shareholder class
action lawsuit 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. 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 selection 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 violations 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. On July 28, 2004, the
Court signed an order approving the form of the settlement
notices, setting forth requirements for providing notice to the
class and handling any objections, and scheduling a settlement
fairness hearing for October 27, 2004 to determine whether
the Court should approve the settlement. 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.

On March 18, 2004, a purported class action
complaint was filed in the United States District Court for
District of Colorado, entitled Smith v. Quovadx, Inc.
et al, Case No. 04-M-0509, against Quovadx, Inc.,
its now-former Chief Executive Officer and its now-former Chief
Financial Officer. The complaint alleged violations of
Section 10(b) and Section 20(a) of the Securities
Exchange Act of 1934, as amended, purportedly on behalf of all
persons who purchased Quovadx common stock from October 22,
2003 through

F-27



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

March 15, 2004. The claims are based upon
allegations the Company (i) purportedly overstated its net
income and earnings per share during the class period,
(ii) purportedly recognized revenue from contracts between
the Company and Infotech Networks Group prematurely, and
(iii) purportedly lacked adequate internal controls and was
therefore unable to ascertain the financial condition of the
Company. Eight additional, nearly identical class action
complaints were filed in the same Court based on the same facts
and allegations. The actions seek damages against the defendants
in an unspecified amount. On May 17 and 18, 2004, the
Company filed motions to dismiss each of the complaints. Also on
May 17, 2004, several potential lead plaintiffs filed
motions for appointment as lead plaintiff in the cases. On
May 21, 2004, the Court entered an order denying
consolidation of the actions and directing that all discovery
and other proceedings (including the appointment of a lead
plaintiff) are stayed pending determination of the motions to
dismiss. Since then, all but one of the actions, entitled
Heller v. Quovadx, Inc., et al., Case
No. 04-M-0665 (OES) (D. Colo.), have been dismissed. The
plaintiff in Hellerhas filed a first amended complaint,
which asserts the same claims as those asserted in the original
complaint, and includes allegations regarding the Companys
accounting for certain additional transactions. On July 14,
2004, the Company filed a motion to dismiss the first amended
complaint in Heller. The class actions are still in the
preliminary stages, and it is not possible for us to quantify
the extent of potential liability, if any.

On March 22, 2004, a shareholder derivative
action was filed in the District Court of Colorado, County of
Arapahoe, entitled Marcoux v. Brown et al,
against the members of the Board of Directors and certain
now-former officers of Quovadx alleging breach of fiduciary duty
and other violations of state law. The Company is named solely
as a nominal defendant against which no recovery is sought. This
complaint generally is based on the same facts and circumstances
as alleged in the class action complaints discussed above,
alleging that the defendants misrepresented Quovadx financial
projections and that one of the defendants violated state laws
relating to insider trading. The action seeks damages in an
unspecified amount against the individual defendants,
disgorgement of improper profits and attorneys fees, among
other forms of relief. On April 13, 2004, the Company and
its nonexecutive directors filed a motion to dismiss the action.
On or about April 21, 2004, a second, nearly identical
shareholder derivative complaint, seeking the same relief, was
filed in the United States District Court for the District of
Colorado, entitled Thornton v. Brown et al. The
plaintiffs in both of the shareholder derivative actions are
represented by the same local counsel. On or about May 20,
2004, a third, nearly identical shareholder derivative
complaint, seeking the same relief, was filed in the District
Court of Colorado, County of Arapahoe, entitled
Jaroslawicz v. Brown, et al. On May 21,
2004, the Court entered an order in Marcouxdirecting
that the Company, named as a nominal defendant, be realigned as
a plaintiff in the action and remanding the action back to state
court. Subsequently, the plaintiff in Thorntonvoluntarily dismissed his action from federal court and
refiled in state court. The three shareholder derivative actions
are now all pending in the Colorado state court. A stipulation
consolidating the three actions and setting a date for the
filing of a consolidated amended complaint is currently before
the state court for approval. The shareholder derivative actions
are still in the preliminary stages, and it is not possible for
us to quantify the extent of potential liability, if any.

On April 12, 2004, the Company announced
that the Securities and Exchange Commission (SEC)
had notified the Company that its previously announced informal
inquiry had become a formal investigation pursuant to an
Order Directing Private Investigation and Designating
Officers to Take Testimony. The SEC is investigating
transactions entered into during the third quarter of 2002 and
transactions entered into during 2003 including two distributor
contracts totaling approximately $1 million and
transactions between Quovadx and Infotech Network Group. The
investigation is continuing, and the Company continues to
provide documents and information to the SEC.

On May 17, 2004, a purported class action
complaint was filed in the United States District Court for the
District of Colorado, entitled Henderson v. Quovadx,
Inc. et al, Case No. 04-M-1006 (OES), against
Quovadx, Inc., its now-former Chief Executive Officer, its
now-former Chief Financial Officer and its Board of Directors.
The complaint alleged violations of Section 11 and
Section 15 of the Securities Act of 1933, as

F-28



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amended, purportedly on behalf of all former
shareholders of Rogue Wave Software, Inc. who acquired Quovadx
common stock in connection with the Companys exchange
offer effective December 19, 2003. The claims are based
upon the same theories and allegations as asserted in the
Section 10(b) class actions described above. The Court
denied plaintiffs motion to consolidate this
Section 11 action with the Section 10(b) cases and
authorized the two competing lead plaintiff candidates to take
discovery of each other in advance of a hearing on the
appointment of lead plaintiff. On July 14, 2004, the
Company filed an answer to the Section 11 complaint,
denying allegations of wrongdoing and asserting various
affirmative defenses. The individual defendants filed a motion
to dismiss the Section 11 complaint. This class action also
is in the preliminary stages, and it is not possible for us to
quantify the extent of potential liability, if any.

On July 28, 2004, Ronald Renjilian, a former
employee, filed a Sarbanes-Oxley whistle blower complaint
against the Company with the US Department of Labor Occupational
Safety and Health Administration. The complaint alleges that the
Companys April 30, 2004 termination of
Mr. Renjilians employment was an action taken against
Mr. Renjilian as a result of his engaging in protected
activity. The Company denies any wrongdoing and intends to
aggressively defend this claim. 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.

The Company is engaged from time to time in
routine litigation that arises in the ordinary course of our
business.



|   |                    
|-- | -------------------
|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

F-29



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of operations for the each quarter of the years
ended December 31, 2003 and 2002 follows (in thousands
except per share amounts):



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

The results for the third quarter of 2003 have
been restated from the financial results reported in the
Companys Form 10-Q. These revisions concern shipments
to Infotech Group (Infotech), an Indian company, 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. After 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 deleting all of the revenue and commissions,
$4.7 million and $0.4 million, respectively, that had
been recorded related to Infotech.

The results for the quarters reflected below have
also been restated due to the accounting inaccuracies described
in Note 2.

Data relating to the results of operations as
restated for each quarter of the years ended December 31,
2003 and 2002 follows:

|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |        | 
|------------------------------------------- | ------------------------------------ | ------------------------------------------- | ------ | ------------- |  | ------------------ | ------ | ----------------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                            |                                      |                                            
|                                            |                                      | Three Months Ended                         
|                                            |                                      |                                            
|                                            |                                      | March 31, 2003                              |        | June 30, 2003 |  | September 30, 2003 |        | December 31, 2003
|                                            |                                      |                                             |        |               |  |                    |        |                  
|                                            |                                      |                                            
|                                            |                                      | (In thousands except for per share amounts)
|STATEMENT OF OPERATIONS-AS REPORTED         |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|Total revenue                               |                                      | $                                           | 17,433 |               |  | $                  | 19,344 |                   |  | $ | 15,209 |        |  | $ | 19,609 |       
|Cost 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-30



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                         |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |    |  
|------------------------ | ------------------------------------ | ------------------------------------------- | --- | ------------- |  | ------------------ | ---- | ----------------- |  | - | ---- | -- |  | - | ---- | -- | -
|                         |                                      |                                            
|                         |                                      | Three Months Ended                         
|                         |                                      |                                            
|                         |                                      | March 31, 2003                              |     | June 30, 2003 |  | September 30, 2003 |      | December 31, 2003
|                         |                                      |                                             |     |               |  |                    |      |                  
|                         |                                      |                                            
|                         |                                      | (In thousands except for per share amounts)
|RESTATEMENT ADJUSTMENTS  |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   
|Total revenue            |                                      | $                                           | 100 |               |  | $                  | (759 | )                 |  | $ | (842 | )  |  | $ | (162 | ) 
|Cost and expenses:       |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   
|                         | Cost of revenue                      |                                             |     | 52            |  |                    |      | 20                |  |   |      | 49 |  |   |      | (1 | )
|                         | Sales and marketing                  |                                             |     |              |  |                    |      |                  |  |   |      |   |  |   |      |   |  
|                         | General and administrative           |                                             |     |              |  |                    |      |                  |  |   |      |   |  |   |      |   |  
|                         | Research and development             |                                             |     |              |  |                    |      |                  |  |   |      |   |  |   |      |   |  
|                         | Amortization of acquired intangibles |                                             |     |              |  |                    |      |                  |  |   |      |   |  |   |      |   |  
|                         |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   
|Total costs and expenses |                                      |                                             | 52  |               |  |                    | 20   |                   |  |   | 49   |    |  |   | (1   | ) 
|                         |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   
|Loss from operations     |                                      |                                             | 48  |               |  |                    | (779 | )                 |  |   | (891 | )  |  |   | (161 | ) 
|Interest Income, net     |                                      |                                             |    |               |  |                    |     |                   |  |   |     |    |  |   |     |   
|                         |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   
|Net loss                 |                                      | $                                           | 48  |               |  | $                  | (779 | )                 |  | $ | (891 | )  |  | $ | (161 | ) 
|                         |                                      |                                             |     |               |  |                    |      |                   |  |   |      |    |  |   |      |   

|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |        | 
|------------------------------------------- | ------------------------------------ | ------------------------------------------- | ------ | ------------- |  | ------------------ | ------ | ----------------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                            |                                      |                                            
|                                            |                                      | Three Months Ended                         
|                                            |                                      |                                            
|                                            |                                      | March 31, 2003                              |        | June 30, 2003 |  | September 30, 2003 |        | December 31, 2003
|                                            |                                      |                                             |        |               |  |                    |        |                  
|                                            |                                      |                                            
|                                            |                                      | (In thousands except for per share amounts)
|STATEMENT OF OPERATIONS-RESTATED            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|Total revenue                               |                                      | $                                           | 17,533 |               |  | $                  | 18,585 |                   |  | $ | 14,367 |        |  | $ | 19,447 |       
|Cost and expenses:                          |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|                                            | Cost of revenue                      |                                             |        | 10,872        |  |                    |        | 10,471            |  |   |        | 10,417 |  |   |        | 13,101 | 
|                                            | 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                    |                                      |                                             | 20,448 |               |  |                    | 20,222 |                   |  |   | 20,654 |        |  |   | 25,779 |       
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|Loss from operations                        |                                      |                                             | (2,915 | )             |  |                    | (1,637 | )                 |  |   | (6,287 | )      |  |   | (6,332 | )     
|Interest Income, net                        |                                      |                                             | 189    |               |  |                    | 207    |                   |  |   | 89     |        |  |   | 209    |       
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|Net loss                                    |                                      | $                                           | (2,726 | )             |  | $                  | (1,430 | )                 |  | $ | (6,198 | )      |  | $ | (6,123 | )     
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       
|Net loss per common share-basic and diluted |                                      | $                                           | (0.09  | )             |  | $                  | (0.05  | )                 |  | $ | (0.20  | )      |  | $ | (0.18  | )     
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |        |        |  |   |        |       

F-31



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |       | 
|------------------------------------------- | ------------------------------------ | ------------------------------------------- | ------ | ------------- |  | ------------------ | ------ | ----------------- |  | - | ------- | ----- |  | - | ------ | ----- | 
|                                            |                                      |                                            
|                                            |                                      | Three Months Ended                         
|                                            |                                      |                                            
|                                            |                                      | March 31, 2002                              |        | June 30, 2002 |  | September 30, 2002 |        | December 31, 2002
|                                            |                                      |                                             |        |               |  |                    |        |                  
|                                            |                                      |                                            
|                                            |                                      | (In thousands except for per share amounts)
|STATEMENT OF OPERATIONS-AS REPORTED         |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|Total revenue                               |                                      | $                                           | 17,769 |               |  | $                  | 15,274 |                   |  | $ | 14,973  |       |  | $ | 15,642 |      
|Cost 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 loss per common share-basic and diluted |                                      | $                                           | 0.00   |               |  | $                  | (0.13  | )                 |  | $ | (3.22   | )     |  | $ | (0.11  | )    
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      

|                         |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |     | 
|------------------------ | ------------------------------------ | ------------------------------------------- | - | ------------- |  | ------------------ | ---- | ----------------- |  | - | ---- | -- |  | - | --- | --- | 
|                         |                                      |                                            
|                         |                                      | Three Months Ended                         
|                         |                                      |                                            
|                         |                                      | March 31, 2002                              |   | June 30, 2002 |  | September 30, 2002 |      | December 31, 2002
|                         |                                      |                                             |   |               |  |                    |      |                  
|                         |                                      |                                            
|                         |                                      | (In thousands except for per share amounts)
|RESTATEMENT ADJUSTMENTS  |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    
|Total revenue            |                                      | $                                           |  |               |  | $                  | (200 | )                 |  | $ | (480 | )  |  | $ | 250 |    
|Cost and expenses:       |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    
|                         | Cost of revenue                      |                                             |   |              |  |                    |      |                  |  |   |      | 79 |  |   |     | 146 | 
|                         | Sales and marketing                  |                                             |   |              |  |                    |      |                  |  |   |      |   |  |   |     |    | 
|                         | General and administrative           |                                             |   |              |  |                    |      |                  |  |   |      |   |  |   |     |    | 
|                         | Research and development             |                                             |   |              |  |                    |      |                  |  |   |      |   |  |   |     |    | 
|                         | Amortization of acquired intangibles |                                             |   |              |  |                    |      |                  |  |   |      |   |  |   |     |    | 
|                         |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    
|Total costs and expenses |                                      |                                             |  |               |  |                    |     |                   |  |   | 79   |    |  |   | 146 |    
|                         |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    
|Loss from operations     |                                      |                                             |  |               |  |                    | (200 | )                 |  |   | (559 | )  |  |   | 104 |    
|Gain on sale of assets   |                                      |                                             |  |               |  |                    |     |                   |  |   |     |    |  |   |    |    
|Goodwill impairment      |                                      |                                             |  |               |  |                    |     |                   |  |   |     |    |  |   |    |    
|Interest Income, net     |                                      |                                             |  |               |  |                    |     |                   |  |   |     |    |  |   |    |    
|                         |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    
|Net loss                 |                                      | $                                           |  |               |  | $                  | (200 | )                 |  | $ | (559 | )  |  | $ | 104 |    
|                         |                                      |                                             |   |               |  |                    |      |                   |  |   |      |    |  |   |     |    

F-32



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |       | 
|------------------------------------------- | ------------------------------------ | ------------------------------------------- | ------ | ------------- |  | ------------------ | ------ | ----------------- |  | - | ------- | ----- |  | - | ------ | ----- | 
|                                            |                                      |                                            
|                                            |                                      | Three Months Ended                         
|                                            |                                      |                                            
|                                            |                                      | March 31, 2002                              |        | June 30, 2002 |  | September 30, 2002 |        | December 31, 2002
|                                            |                                      |                                             |        |               |  |                    |        |                  
|                                            |                                      |                                            
|                                            |                                      | (In thousands except for per share amounts)
|STATEMENT OF OPERATIONS-RESTATED            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|Total revenue                               |                                      | $                                           | 17,769 |               |  | $                  | 15,074 |                   |  | $ | 14,493  |       |  | $ | 15,892 |      
|Cost and expenses:                          |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|                                            | Cost of revenue                      |                                             |        | 9,925         |  |                    |        | 10,523            |  |   |         | 9,557 |  |   |        | 9,508 | 
|                                            | 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 |                   |  |   | 18,977  |       |  |   | 19,461 |      
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|Loss from operations                        |                                      |                                             | (246   | )             |  |                    | (4,505 | )                 |  |   | (4,484  | )     |  |   | (3,569 | )    
|Gain on sale of assets                      |                                      |                                             | 87     |               |  |                    |       |                   |  |   |        |       |  |   |       |      
|Goodwill impairment                         |                                      |                                             |       |               |  |                    |       |                   |  |   | (93,085 | )     |  |   |       |      
|Interest Income, net                        |                                      |                                             | 261    |               |  |                    | 292    |                   |  |   | 263     |       |  |   | 219    |      
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|Net loss                                    |                                      | $                                           | 102    |               |  | $                  | (4,213 | )                 |  | $ | (97,306 | )     |  | $ | (3,350 | )    
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      
|Net loss per common share-basic and diluted |                                      | $                                           | 0.00   |               |  | $                  | (0.14  | )                 |  | $ | (3.24   | )     |  | $ | (0.11  | )    
|                                            |                                      |                                             |        |               |  |                    |        |                   |  |   |         |       |  |   |        |      

F-33



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##### Table of Contents






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



---



##### Table of Contents



INDEX TO EXHIBITS

|        |    |                         |  |                                                                                                                                                                                                                          
|------- | -- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 23 |                         |  | Consent of Independent Registered Public
    Accounting Firm.                                                                                                                                                            
|        | 31 | .1                      |  | Certification of Acting 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 Acting 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 Acting 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 Acting 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.    



---



|  |                                                                                                                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.