##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
   Form 10-K
   þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)  OF
    THE SECURITIES EXCHANGE ACT OF 1934   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.)7600 E. Orchard Rd.,
    Suite 300 S
    Greenwood Village, 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 ClassCommon Stock, par value
    $0.01 per sharePreferred Stock Purchase Rights   o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K




---



##### 



TABLE OF
    CONTENTS
  ItemNumber



PagePART I1.


Business


31A.


Risk Factors


161B.


Unresolved Staff
    Comments


232.


Properties


233.


Legal
    Proceedings


244.


Submission of
    Matter to a Vote of Security Holders


265.


Market for
    Registrants Common Equity, Related Stockholder Matters,
    and Issuer Repurchases of Equity Subsidiaries


27PART II6.


Selected Financial
    Data


287.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


307A.


Qualitative and
    Quantitative Disclosures About Market Risk


488.


Financial
    Statements and Supplementary Data


499.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


829A.


Controls and
    Procedures


829B.


Other
    Information


85PART III10.


Directors and
    Executive Officers of the Registrant


8511.


Executive
    Compensation


8512.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


8513.


Certain
    Relationships and Related Transaction


8514.


Principal
    Accountant Fees and Services


85PART IV15.


Exhibits


85Signatures


86Amended and Restated 1997 Stock PlanEmployment Agreement - Karen M. WilcoxEmployment Agreement - Afshin CangarluEmployment Agreement - Cory IsaacsonEmployment Agreement - Mark RangellEmployment Agreement - Linda WackwitzEmployment Agreement - Thomas ZajacAmended Form of Director Restricted Stock AgreementsAmended Form of Employee Restricted Stock AgreementsConsent of Independent Registered Public Accounting FirmCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)   2




---



##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  Trademarks
  and/or
 PART I  Item 1.
    Business  Overview
    www.quovadx.com. (303) 488-2019.
     3




---



##### Table of Contents



tm ®
  Form 10-Q, Form 10-Q class-action
          QUOVADX
    Divisions
  ®
 4




---



##### Table of Contents



Integration
    Solutions Division
      ® ® ®
  CLOVERLEAF®
    Integration
    Suite. ® ®
    
    Data Integrator  an open database
    connectivity (ODBC) based component that enables
    data level integration with industry-leading database
    managements systems such as Oracle, Sybase, Microsoft SQL Server
    and DB2
    Security Server  a user-based
    identification, authentication and authorization tool that
    secures access to specified modules within the integrated
    environment to protect your critical data and processes
    Secure Messenger  message encryption and
    user authentication technology to ensure the privacy and
    confidentially of sensitive data when shared among external
    partners
    Global Monitor  the ability to monitor
    message flow, with a single web browser, through all
    CLOVERLEAF®
    engines in your integrated environment  Screen Rejuvenator. ®
  Business Process Management Services  Process
    Level Integration. ®
 5




---



##### Table of Contents



Cash Accelerator
    INSURENET®
    Suite.
  
    INSURENET®
    Hub, through a single, unified user interface, offers real-time
    access to commercial and government payers for multiple
    transaction types. ISD currently has relationships with premier
    payer clearinghouses including HDX, Emdeon (formally WebMD), and
    MedAvant Healthcare Solutions. As a group, these clearinghouses
    cover the vast majority of payers in the United States. ISD
    manages these relationships and has built a
    state-of-the-art
    technology infrastructure to support the INSURENET Hub.
    INSURENET®
    Direct.  Cash Accelerator
    INSURENET®
    Direct is a complete electronic data interchange
    (EDI) solution platform that allows healthcare
    organizations to reduce dependence on clearinghouses with direct
    connections to payers. Many healthcare organizations that rely
    on one or a handful of clearinghouses have experienced the lack
    of availability of one or more strategic payers. Cash
    Accelerator provides the tools needed to connect directly to the
    most strategic payer partners by exchanging Health Insurance
    Portability and Accountability Act of 1996 (HIPAA)
    certified and validated transactions. INSURENET Direct links
    constituent systems and access points, automating all of the
    connections between payers and providers.  Identity Services. tm tm
  Intelligent Health Broker Suite.
  Quovadx Health Interoperability
    Solutions.
  Quovadx Clinical Interoperability Solutions
  
    Quovadx MD Office Gateway includes tools to enable
    physicians to connect to important partners such as hospitals,
    labs and pharmacies. In addition, the solution allows physician
    offices to participate in local and regional health information
    exchange initiatives.
    Quovadx eRx Gateway and Medication History Hub
    delivers support for the receipt of medication history at points
    of care and enable technology vendors to take advantage of
    e-prescribing
    standards such as the National Council for Prescription Drug
    Programs (NCPDP).
    Quovadx RHIO Gateway provides the technology and
    infrastructure to facilitate participation in local and regional
    healthcare information organization (RHIOs). RHIO Gateway allows
    authorized healthcare professionals from large or small
    organizations to become members of local or region-wide clinical
    data sharing networks enabling access to clinical information at
    the point of patient care.  Quovadx Financial Interoperability Solutions
  
    Quovadx Self-pay Assessment Solutions is a complete
    integrated solution for ascertaining patient insurance
    eligibility and status, obtaining correct patient demographic
    information, applying charity care and Medicaid qualifications
    rules and integrating this data into patient accounting workflow. 6




---



##### Table of Contents




    Quovadx National Provider ID (NPI) is a
    cross-indexing solution that allows for the creation of an
    enterprise view of key healthcare provider partners and their
    associated IDs and provides support to meet the HIPAA
    requirements.
    Quovadx
    Payer-to-Provider
    Exchange is an advanced technology platform that enables
    connection to over 2,000 health plans in the United States via
    HIPAA compliant transactions to improve claims processing.    Integration
    Solutions Division Markets and Customers
        Competition.
  Integration
    Solutions Division Sales and Marketing
    Integration
    Solutions Division Research and Development
    CareScience
    Division
   7




---



##### Table of Contents



CareScience
    Division Products and Services
  CareScience Quality Manager.
  
    improving patient throughput,
    reducing medical errors and complications,
    improving compliance with evidence-based medicine, and
    improving documentation and information handling.        and/or
  CareScience Data Manager.
  CareScience National Comparatives.
  CareScience Clinical Terminology Services.
  CareScience Standards of Care.
 8




---



##### Table of Contents




    Manage the influx of existing and new quality measures for
    public reporting
    Collect, analyze and submit data to organizations like CMS,
    JCAHO, The Leapfrog Group and the Institute for Healthcare
    Improvement (IHI)
    Preview data prior to public reporting, allowing customers to
    proactively implement improvement plans as well as develop a
    strategy for addressing areas of concern
    Reduce the resource drain on internal staff by providing a
    single chart review and point of data entry for all measure sets
    View organization-specific reports
    Benchmark against other hospitals and health systems
    Access real time quality indicator scorecard reports  CareScience
    Division Markets and Customers
    Competition.
  CareScience
    Division Sales and Marketing
    CareScience
    Division Research and Development
    Rogue
    Wave Software Division
   9




---



##### Table of Contents



Rogue
    Wave Products and Services
  ® ®
  Lightweight Enterprise Integration
    Framework.
  SOURCEPRO®
    C++ Suite.
    
    Multiplatform Support.  Cross-platform support
    allows technologists to develop applications and deploy software
    systems in a wide variety of environments with minimal
    development modification. SourcePro C++ tools incorporate basic
    and routine operations, allowing developers to focus on creating
    the business logic in an application, rather than the low-level
    details of their development environments. Currently SourcePro
    supports 51 separate hardware/operating system platforms and 14
    databases.
    Support for Distributed
    Applications.  Programmers who develop
    complicated, large and distributed applications can use the
    SourcePro C++ products to make their applications work in
    concert, across multiple systems, interfacing seamlessly.
    Enterprise Scalability.  SourcePro C++ tools
    help programmers develop flexible, modular applications that can
    be easily extended and enhanced.
    Highly Customizable.  SourcePro C++ enables
    developers to customize the components for their own specialized
    applications. Developers can use the standard application
    programming interfaces and avoid granular programming details,
    or can drill down to the native code when required.
    Tailored Application.  The SourcePro C++ Suite
    consists of four modules, each tailored for a specific area of
    C++ application development:  
    SOURCEPRO®
    Core handles the low-level intricacies of the C++ language,
    which enhances developer productivity.
    SOURCEPRO®
    DB provides a consistent, high-level C++ interface to work
    with relational databases from 13 different vendors. 10




---



##### Table of Contents




    SOURCEPRO®
    Net supplies components for building network and
    Internet-enabled applications.
    SOURCEPRO®
    Analysis delivers components for solving mathematical
    problems in business and research.  STINGRAY®. ® ®
    
    Objective Grid is an advanced grid component that mimics
    many of the features of
    Microsoft®
    Excel®,
    including support for database connectivity.
    Objective Toolkit is a broad library of drop-in
    components that address areas not covered by Microsoft
    Foundation Classes (MFC) and ActiveX libraries,
    which contain a set of basic C++ building blocks for creating
    Windows®
    based applications.
    Objective Edit offers an advanced text editors component
    useful for implementing an interactive environment, similar to
    Microsoft®
    Visual C++ editor, for viewing and editing source code, scripts
    and mark-up
    languages.
    Objective Chart delivers high-performance, advanced
    charting capabilities, including a variety of two-dimensional
    chart types.
    Object Views provides components for building
    drag-and-drop
    graphical interfaces that are Visio-like in functionality and
    for incorporating custom graphical objects and enhanced drawing
    capabilities.    HOSTACCESS®. ®
  ROGUE
    WAVE®
    Hydra.
  Rogue
    Wave Software Division Markets and Customers
   11




---



##### Table of Contents



Competition.
  Rogue
    Wave Software Division Sales and Marketing
    Rogue
    Wave Software Division Research and
    Development
    Quovadx
    Competition
      
    Brand recognition and market awareness,
    Product features, functionality and quality,
    Comprehensiveness and quality of service offerings,
    Ease and timeliness of implementation,
    Adequate infrastructure,
    Technical and industry-specific domain expertise,
    Geographic coverage,
    Access to distribution channels,
    Merger and acquisition activities in our target markets, and
    Our financial resources compared to large competitors.   12




---



##### Table of Contents



Quovadx
    Sales, Marketing and Strategic Alliances
        Seasonality
    Major
    Customers
    Year Ended
    December 31,

Integration Solutions

CareScience

Rogue Wave2005


43
%


44
%


16
%2004


51
%


45
%


12
%   Intellectual
    Property
   13




---



##### Table of Contents



Government
    Regulation
      HIPAA
    Administrative Simplification
    Privacy
    Regulation
    of Transaction Services
   14




---



##### Table of Contents



Security
      Employees
    Available
    Information
  Form 10-K; Form 10-Q; Form 8-K;
  
  1-800-SEC-0330.
 15




---



##### Table of Contents



Item 1A.
    Risk
    Factors  In evaluating our business, you should carefully consider the
    risks and uncertainties discussed in this section, in addition
    to the other information presented in this Annual Report on
    Form 10-K.
    The risks and uncertainties described below may not be the only
    risks we face. If any of these risks and uncertainties actually
    occurs, our business, operating results or financial condition
    could be materially adversely affected and the market price of
    our common stock may decline.
  We have
    historically incurred losses and we may not be able to achieve
    or sustain profitability.
    We face
    risks related to the class action and derivative
    lawsuits.
        We have a
    contract with a major customer that is expected to terminate in
    November 2006. If we do not generate other sources of revenue
    before this contract terminates, or we do not renew this
    contract, it would adversely affect our future operating
    results.
    Our
    future revenue growth depends on our ability to successfully
    launch new products.
    
    The ISD is expected to launch the Intelligent Health Broker
    Suite, a new product which enables legacy applications to
    utilize web services and provides process orchestration of
    transactions flowing among disparate systems.
    The CareScience division is expected to launch CareScience
    Standards of Care, a new solution for external public reporting.
    The Rogue Wave Software division is expected to launch ROGUE
    WAVE®
    Hydra, a new service-oriented architecture product and service
    suite. 16




---



##### Table of Contents



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, we may not be able to
    increase revenue or our revenue may decline.
        We face
    increased competition in the marketplace that could impact our
    operations negatively.
    We face
    saturated or diminishing markets for some of our key
    products.
  ® ® ®
  ® ®
 17




---



##### Table of Contents



A
    significant portion of our recurring revenue comes from
    maintenance agreements that require periodic renewals.
    We have
    risk in sustaining professional service revenue in our
    markets.
    Our
    Integration Solutions and Rogue Wave Software divisions rely on
    the effectiveness of channel partners and third-party
    influencers to help achieve revenue goals. If we fail to
    maintain and expand these types of relationships, our business
    may suffer.
   18




---



##### Table of Contents



We face
    risks related to a formal investigation being conducted by the
    SEC.
    Goodwill,
    other intangible assets and capitalized software make up a
    significant portion of our total assets and are subject to
    recurring tests for impairment. We have a history of recording
    impairments for these assets and future impairments could
    adversely affect our operating results.
      We are
    exposed to infringement risks.
    We rely
    on third parties for technology in our products.
   19




---



##### Table of Contents



and/or
    Our
    products may be affected by unknown software defects.
      We may be
    unable to recruit and retain key employees who are essential to
    our operations.
   20




---



##### Table of Contents



We could
    incur liabilities related to the regulation, use and misuse of
    information.
    If
    security of our customer and patient information were to be
    compromised, we could be liable for damages and our reputation
    could suffer.
    If
    compliance with government regulation of healthcare becomes more
    costly and difficult for our customers, we may be unable to
    increase revenue in our Integration Solutions and CareScience
    divisions.
       21




---



##### Table of Contents



and/or and/or
  As we
    increase our international sales, we become subject to
    uncertainties in the international marketplace which could
    adversely affect our operating results.
    
    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.
    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.
    Our sales and marketing activities subject us to stringent
    privacy regulation that varies from jurisdiction to jurisdiction
    making compliance difficult. Our inability to comply with these
    regulations could subject us to sanctions that could impair our
    ability to effectively market our products and sell in the
    international marketplace.  If we do
    not establish and maintain our brands, our reputation could be
    adversely affected.
  and/or
  The
    trading price of our common shares has been, and may continue to
    be volatile.
    
    Our stock price has traded well below the $5.00 per share
    minimum threshold established by many institutional investors as
    criteria for ownership;
    The legacy effect of unresolved SEC and stockholder litigation
    issues; 22




---



##### Table of Contents




    A relatively small float and low trading volume in our shares;
    A decline or increase in analyst coverage;
    Changes to the Companys plan
    and/or
    prospects;
    Sales of our common stock by large, institutional investors;    We have
    implemented anti-takeover provisions that may adversely impact
    the market price of our common stock.
        Item 1B.
    Unresolved
    Staff Comments.None  Item 2.
    Properties   23




---



##### Table of Contents



2005Annual


Square


LeaseLocation

Primary Function

Rent


Footage


ExpirationAddison, TX

ISD Services

$
851,610



29,845


January 31, 2006(1)Philadelphia, PA

CareScience Division


576,057



22,637


October 5, 2011Mountain View, CA

ISD R&D


488,712



4,797


June 30, 2010Greenwood Village, CO

Corporate Headquarters


460,015



16,271


November 30,2008Woodland Hills, CA

ISD Headquarters


393,625



10,643


April 30, 2010Boulder, CO

Rogue Wave Headquarters


321,060



22,206


January 31, 2008Hempstead, England

ISD International Operations


254,504



5,500


May 26, 2012Atlanta, Georgia

ISD Sales


242,835



10,113


August 31, 2008Corvallis, Oregon

Rogue Wave R&D


178,041



10,500


July 31, 2006     (1)
    
    This operation has moved to a new location in Dallas with
    11,198 square feet and a lease that expires June 30,
    2011.  Item 3.
    Legal
    Proceedings  Contingencies
  Bartula v. XCare.net, Inc.,
    et al. No. 01-CV-10075). Rule 10b-5
  Smith v. Quovadx, Inc. et al, No. 04-M-0509,
 24




---



##### Table of Contents



Heller v. Quovadx, Inc., et
    al No. 04-M-0665 Heller No. 04-M-1006
  Marcoux v. Brown et al, Thornton v. Brown, et al. Jaroslawicz v. Brown, et al.
  Henderson v. Quovadx, Inc. et al, No. 04-M-1006 Special Situations
    Fund III, L.P., et al. v. Quovadx, Inc., et al. No. 04-M-1006 SSF
 25




---



##### Table of Contents



S-4 prima facie prima facie
  Heller SSF Heller two-and-one-half Heller Heller Heller Heller
      Item 4.
    Submission
    of Matters to a Vote of Security Holders    26




---



##### Table of Contents



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


Low2006First Quarter (January 3,
    2006 to March 1, 2006)

$
2.94


$
2.462005Fourth Quarter


3.03



2.37Third Quarter


3.13



2.59Second Quarter


3.30



2.56First Quarter


3.25



2.052004Fourth Quarter


2.39



1.69Third Quarter*


2.20



1.10Second Quarter*


3.88



1.00First Quarter*


6.70



3.11     *
    
    On May 14, 2004, based on our failure to file the
    March 31, 2004
    Form 10-Q
    with the SEC and pending an appeal, the NASDAQ changed our
    trading symbol to QVDXE. On August 25, 2004 our
    symbol was changed back based on our filing of all delinquent
    reports with the SEC. In a letter dated December 5, 2005,
    NASDAQ advised us of its determination that the Company, having
    made all required filings during the monitoring period, was in
    full compliance with all requirements the NASDAQ Listing
    Qualifications Panel imposed in August 2004, amended in November
    2004, for continued listing.     27




---



##### Table of Contents



PART II  Item 6.
    Selected
    Financial Data  Form 10-Q
  Year Ended
    December 31,2005


2004


2003


2002


2001(Amounts in thousands, except
    per share data)Consolidated Statement of
    Operations Data:Total revenue

$
83,103


$
82,801
(5)(6)

$
64,928


$
60,623


$
46,808Cost of revenue


36,869



53,294
(9)


40,263



37,671



29,044Gross Profit


46,234



29,507



24,665



22,952



17,764Operating expenses


49,633



56,530



42,242



36,519



25,667Loss from operations


(3,399
)


(27,023
)


(17,577
)


(13,567
)


(7,903
)Gain on sale of assets






1,535
(7)(8)






87
(2)


Goodwill impairment














(93,085
)(4)


Interest and other income, net


832



355



694



1,035



3,101Loss before income taxes


(2,567
)


(25,133
)


(16,883
)


(105,530
)


(4,802
)Income tax expense


321



133











Loss from continuing operations


(2,888
)


(25,266
)


(16,883
)


(105,530
)


(4,802
)Income from discontinued operations






589
(10)


406
(10)


763
(10)


533
(10)Gain on sale of discontinued
    operations






446
(10)










Net loss

$
(2,888
)

$
(24,231
)

$
(16,477
)

$
(104,767
)

$
(4,269
)Net loss per common
    share  basic and diluted

$
(0.07
)

$
(0.61
)

$
(0.52
)

$
(3.49
)

$
(0.20
)Shares used in computing net loss
    per share  basic and diluted


40,924



39,892



31,407



29,987



21,308   28




---



##### Table of Contents



December 31,2005


2004


2003


2002


2001(In thousands)Consolidated Balance Sheet
    Data:Cash, cash equivalents and
    short-term investments

$
32,656


$
24,847


$
23,688
(5)(6)

$
47,621


$
63,486Current assets


49,269



42,708



50,647



66,076



84,454Current liabilities


32,159



32,508



42,900



15,536



21,795Working capital


17,110



10,200



7,747



50,540



62,659Software, net


7,409



11,333
(9)


29,221



20,465
(3)


18,295Other intangible assets, net


13,862



17,713



17,735
(5)(6)


6,266
(3)


11,021
(1)Goodwill


46,724



46,724



48,015
(5)(6)



(4)


92,202
(1)Total assets


121,143



123,945



155,190



104,384
(3)


214,704Accumulated deficit


(184,290
)


(181,402
)


(157,171
)


(140,694
)


(35,927
)Stockholders equity

$
88,187


$
90,398


$
111,975
(5)(6)

$
86,293
(3)(4)

$
188,887
(1)       (1)
    
    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 Pixel Innovations Ltd. (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.(2)
    
    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 agreed to provide application service
    provider (ASP) services to Royal under a seven year
    contract.(3)
    
    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.(4)
    
    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 No. 142
    because of the significant negative Company, industry and
    economic trends affecting the market value of the Companys
    common stock. As a result, the Company recorded a charge of
    $93.1 million to reduce goodwill during the third quarter
    of 2002, based on the amount by which the carrying amount of
    these assets exceeded their estimated fair value.(5)
    
    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 29




---



##### Table of Contents



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.(6)
    
    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.(7)
    
    In the second quarter of 2004, the Company sold its minority
    equity investment in Royal Health Care, LLC (Royal).
    Royal is a healthcare management services company in which
    Quovadx owned an equity position. The sale price of
    $3.1 million, paid in cash, was received on June 29,
    2004. The Company recorded a $1.2 million gain on the sale
    of this asset.(8)
    
    In the third quarter of 2004, we sold the Healthcare.com domain
    name for a gain of $360,000.(9)
    
    In 2004, we incurred impairment charges totaling
    $7.2 million. We impaired $4.8 million of our
    internally developed and acquired capitalized software. Our
    decision to discontinue products resulted from our new
    managements effort to refocus our resources on products
    that would generate revenues in the near term and to conserve
    cash. We wrote off $1.7 million of the prepayments to
    Infotech for professional services, as a portion of the assets
    was deemed not recoverable due to the deterioration of the
    Companys relationship with Infotech and Infotechs
    inability to provide assurances that it can deliver those
    services in the future. We also impaired $0.7 million of
    deferred costs related to our transaction business because the
    total balance of the assets was not recoverable due to the
    cancellation of certain contracts and lower than expected
    revenues on other contracts.(10)
    
    On December 31, 2004 the Company sold the assets of its
    Albuquerque, New Mexico data center and its Managed Care
    Transaction Manager (MCTM) system. This data center
    and MCTM system no longer fit into the Companys new
    business strategy because they represent a niche area of the
    healthcare payer segment that is not an area of strategic
    growth. The assets were sold to Royal Health Care Data Center,
    LLC, a subsidiary of Royal, for $1.9 million in cash. A
    gain of $0.4 million was recognized on the sale. Royal is a
    management services organization serving New York healthcare
    organizations. The financial statements for the years ended
    December 31, 2003, 2002, and 2001 have been restated to
    reflect the presentation of the New Mexico data center as a
    discontinued operation.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  FORWARD
    LOOKING STATEMENTS
  Form 10-K
  Background
   30




---



##### Table of Contents



Executive
    Summary
    Year Ended December
    31,Revenue


PercentageDivision

2005


2004


2003


2005


2004


2003ISD

$
39,267


$
40,736


$
58,340



47
%


49
%


90
%CareScience  acquired in
    September 2003


15,441



13,910



4,213



19
%


17
%


6
%Rogue Wave  acquired in
    December 2003


28,395



28,155



2,375



34
%


34
%


4
%Total

$
83,103


$
82,801


$
64,928



100
%


100
%


100
%     Income (Loss) fromContinuing OperationsDivision

2005


2004


2003ISD

$
3,519


$
(12,621
)

$
(5,385
)CareScience  acquired in
    September 2003


(27
)


(1,249
)


(78
)RogueWave  acquired in
    December 2003


9,404



7,707



1,322Other Operations


(16,295
)


(20,860
)


(13,436
)Total

$
(3,399
)

$
(27,023
)

$
(17,577
)      31




---



##### Table of Contents



Integration Solutions Division:
  
    streamlining and automating processes,
    improving cash flow and eligibility verification,
    decreasing manual intervention costs,
    improving access and security to critical data, while adhering
    to HIPAA standards,
    increasing ability to share data through Regional Health
    Information Organizations (RHIOs),
    increasing revenues, and
    integrating a enterprise wide master patient index.      
    higher software license sales that traditionally result in
    higher gross margins and lower costs of revenue;
    higher margins in services achieved by exiting from unprofitable
    or low margin fixed price legacy contracts which accounted for
    approximately $2.0 million of services revenue in 2004 that
    was not realized in 2005;
    cost reductions in facilities, sales, research and development
    to align support organizations within the division to strategic
    assets; and
    reduction in amortization and asset impairment expenses of
    $7.2 million resulting from capitalized software write-offs
    in 2004 that were not included in 2005.     32




---



##### Table of Contents



CareScience Division:
  three-year
          Rogue Wave Software Division:
    ® ® ®
   33




---



##### Table of Contents



Background
    on financial statement restatement, class action lawsuits and
    SEC investigation into accounting practices
  SEC Proceedings.
  Legal Proceedings. class-action
  Enhanced Financial Disclosure Controls.
  Restatement
    of Financial Statements for 2002 and 2003
      Critical
    Accounting Policies and Estimates
   34




---



##### Table of Contents



Revenue
  Software Revenue Recognition, SOP 98-4, SOP 81-1, Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts.
    SOP 97-2,
  percentage-of-completion time-and-materials
  percentage-of-completion percentage-of-completion
     35




---



##### Table of Contents



Allowance
    for Doubtful Accounts
    Purchase
    Accounting
    Software
    Development Costs
    Asset
    Impairments
     36




---



##### Table of Contents



Accounting
    for Contingencies
  Accounting for Contingencies
  
    The period in which the underlying cause of the pending
    litigation occurred;
    The degree of probability of an unfavorable outcome;
    The ability to make a reasonable estimate of the amount of loss.    Share-Based
    Compensation
       37




---



##### Table of Contents



and/or
  Deferred
    Taxes
    Recently
    Issued Accounting Pronouncements
  New
    Accounting Standards
   38




---



##### Table of Contents



Results
    of Operations
    2005


2004





2003% of





% of


2005-2004





% of


2004-2003Revenue





Revenue


Change





Revenue


ChangeRevenue:Software license

$
29,792



36
%

$
27,172



33
%

$
2,620


$
20,270



31
%

$
6,902Professional services


13,210



16



14,540



17



(1,330
)


17,512



27



(2,972
)Recurring services(a)


40,101



48



41,089



50



(988
)


27,146



42



13,943Total revenue


83,103



100



82,801



100



302



64,928



100



17,873Cost of revenue:Software license


9,308



11



12,506



15



(3,198
)


9,850



15



2,656Professional services


9,534



11



14,715



18



(5,181
)


14,022



22



693Recurring services(b)


18,027



22



18,878



23



(851
)


16,391



25



2,487Asset impairment










7,195



8



(7,195
)






0



7,195Total cost of revenue


36,869



44



53,294



64



(16,425
)


40,263



62



13,031Gross profit


46,234



56



29,507



36



16,727



24,665



38



4,842Operating expenses:Sales and marketing


17,364



21



19,597



24



(2,233
)


17,785



27



1,812General and administrative


17,498



21



19,832



24



(2,334
)


12,742



20



7,090Research and development


10,921



13



13,383



16



(2,462
)


9,995



15



3,388Amortization of acquired intangible
    assets


3,850



5



3,718



4



132



1,720



3



1,998Total operating expenses


49,633



60



56,530



68



(6,897
)


42,242



65



14,288Loss from operations


(3,399
)


(4
)


(27,023
)


(32
)


23,624



(17,577
)


(27
)


(9,446
)Gain on sale of assets










1,535



2



(1,535
)










1,535Other income, net


177







45







132



(34
)






79Interest income, net


655



1



310







345



728



1



(418
)Loss before income taxes


(2,567
)


(3
)


(25,133
)


(30
)


22,566



(16,883
)


(26
)


(8,250
)Income tax expenses


321







133







188











133Net loss from continuing operations


(2,888
)


(3
)


(25,266
)


(30
)


22,378



(16,883
)


(26
)


(8,383
)Income from and gain on sale of
    discontinued operations










1,035



1



(1,035
)


406



1



629Net loss

$
(2,888
)


(3
)%

$
(24,231
)


(29
)%

$
21,343


$
(16,477
)


(25
)%

$
(7,754
)     (a)
    
    Revenues from discontinued operations of $5.2 million, and
    $5.0 million, for the years ended December 31, 2004
    and 2003, respectively, have been reclassified to income from
    discontinued operations.(b)
    
    Cost of sales from discontinued operations of $4.6 million,
    and $4.6 million, for the years ended December 31,
    2004 and 2003, respectively, have been reclassified to income
    from discontinued operations.  The
    Companys Results for the Year Ended December 31, 2005
    Compared to Year Ended December 31, 2004
  Total revenue. ®
 39




---



##### Table of Contents



Cost of revenue.
  
    $2.5 million reduction in software amortization expenses
    resulting from the lower carrying amounts assigned to software
    assets in ISD based on the asset impairment described below.
    $1.2 million reduction in software amortization expenses
    associated with acquired technology assets in the Rogue Wave
    division. The lower amortization expenses in 2005 was
    attributable to a re-allocation of asset values completed at the
    end of 2004 resulting from the Companys third party
    valuation of acquired assets and goodwill. The re-allocation
    resulted in lower amounts assigned to capitalized software in
    Rogue Wave and higher amounts being assigned to goodwill,
    thereby resulting in lower overall amortization expense recorded
    in 2005 compared to 2004.
    Professional services costs decreased $5.2 million, or 35%,
    to $9.5 million primarily as a result of a decrease in
    salary and related expenses due to a decrease in headcount.
    Recurring services costs decreased $0.9 million, or 5%, to
    $18.0 million primarily as a result of lower outside
    consulting expenses and lower headcount and related costs in the
    ISD division.
    Asset impairment charges decreased $7.2 million. In the
    first quarter of 2004, we recorded asset impairment charges in
    ISD totaling $7.2 million. The Company wrote down
    $4.8 million of capitalized software in 2004 due to a
    decision to discontinue products that resulted from
    managements effort to refocus the Companys resources
    to products that will generate revenues in the near term and
    conserve cash flows. 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 $2.1 million prepayment under an
    outsourcing agreement. Payments totaling $1.7 million were
    written off in the first quarter of 2004 when the asset was
    deemed not recoverable due to Infotechs inability to
    provide assurances that it could deliver services in the future.
    The Company also wrote down $0.7 million of deferred costs
    related to its transaction business in the first quarter of
    2004. The deferred costs were written down to their expected
    realizable value since the total balance of the asset was not
    recoverable due to the cancellation of certain contracts and
    lower than expected revenues on other contracts. There were no
    impairment charges recorded in 2005.
    Royalties to a third party vendor for sales of software licenses
    increased $0.6 million from 2004 to 2005.  Sales and marketing.
  General and administrative.
  
    The Company received $1.0 million in reimbursements from
    its primary D&O insurance provider for certain legal
    expenses incurred during the time period May 2004 to August 2005
    as part of the Companys defense of shareholder and
    derivative lawsuits. The reimbursements were recorded as a
    credit to legal expenses.
    Bad debt expenses decreased by $0.6 million as a result of
    improved collection processes and lower overall credit risk
    associated with the Companys receivable portfolio.
    Third party consulting costs decreased by $0.2 million as a
    result of lower costs associated with the 404 Sarbanes Oxley
    internal control project and company efforts to perform
    compliance work internally.
    Insurance costs decreased by $0.5 million as a result of
    lower premiums and other consolidation of previously outstanding
    policies. 40




---



##### Table of Contents




    Additionally, legal fees in 2005 compared to 2004 decreased
    $1.5 million. This decrease is a result of the higher level
    of expenditures incurred in 2004 at the onset of the internal
    investigations, class action lawsuits, and SEC investigation
    compared to current year activities.    Research and development.
  Amortization of acquired
    intangibles.
  Gain on sale of assets.
  Other income, net.
  Interest income, net.
  Income tax.
  Income from and gain on sale of discontinued
    operations.
 41




---



##### Table of Contents



Results
    of Division Operations for the Year Ended December 31,
    2005 Compared to Year Ended December 31, 2004
  Integration
    Solutions Division
    2005


2004


2005-2004% of Revenue





% of Revenue


ChangeRevenue:Software license

$
8,994



23
%

$
7,085



17
%

$
1,909Professional services


6,132



16



8,229



20



(2,097
)Recurring services


24,141



61



25,422



63



(1,281
)Total revenue


39,267



100



40,736



100



(1,469
)Cost of revenue:Software license


4,876



12



6,887



17



(2,011
)Professional services


6,181



16



9,967



24



(3,786
)Recurring services


13,251



34



14,400



35



(1,149
)Asset impairment










7,195



18



(7,195
)Total cost of revenue


24,308



62



38,449



94



(14,141
)Gross profit


14,959



38



2,287



6



12,672Operating expenses:Sales and marketing


6,795



17



8,478



21



(1,683
)General and administrative


706



2











706Research and development


3,146



8



5,103



13



(1,957
)Amortization of acquired
    intangible assets


793



2



1,327



3



(534
)Total operating expenses


11,440



29



14,908



37



(3,468
)Net income (loss) from operations

$
3,519



9
%

$
(12,621
)


(31
)%

$
16,140      42




---



##### Table of Contents



CareScience
    Division
    2005


2004


2005-2004% of Revenue





% of Revenue


ChangeRevenue:Software license

$
5,354



35
%

$
5,136



37
%

$
218Professional services


6,022



39



5,158



37



864Recurring services


4,065



26



3,616



26



449Total revenue


15,441



100



13,910



100



1,531Cost of revenue:Software license


2,719



17



2,747



20



(28
)Professional services


2,599



17



3,659



26



(1,060
)Recurring services


3,831



25



3,226



23



605Total cost of revenue


9,149



59



9,632



69



(483
)Gross profit


6,292



41



4,278



31



2,014Operating expenses:Sales and marketing


1,990



13



1,685



12



305General and administrative


590



4



93



1



497Research and development


2,515



16



2,515



18



Amortization of acquired
    intangible assets


1,224



8



1,234



9



(10
)Total operating expenses


6,319



41



5,527



40



792Net income (loss) from operations

$
(27
)


0
%

$
(1,249
)


(9
)%

$
1,222        43




---



##### Table of Contents



Rogue
    Wave Software Division
    2005


2004


2005-2004% of Revenue





% of Revenue


ChangeRevenue:Software license

$
15,444



54
%

$
14,951



53
%

$
493Professional services


1,056



4



1,153



4



(97
)Recurring services


11,895



42



12,051



43



(156
)Total revenue


28,395



100



28,155



100



240Cost of revenue:Software license


1,713



6



2,872



10



(1,159
)Professional services


754



3



1,089



4



(335
)Recurring services


945



3



1,252



5



(307
)Total cost of revenue


3,412



12



5,213



19



(1,801
)Gross profit


24,983



88



22,942



81



2,041Operating expenses:Sales and marketing


7,532



27



7,846



28



(314
)General and administrative


954



3



466



2



488Research and development


5,260



18



5,763



20



(503
)Amortization of acquired
    intangible assets


1,833



7



1,160



4



673Total operating expenses


15,579



55



15,235



54



344Net income from operations

$
9,404



33
%

$
7,707



27
%

$
1,697       Total
    Company Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
  Total Revenue.
 44




---



##### Table of Contents



Cost of revenue.
    Sales and marketing.
  General and administrative.
  Research and development.
  Amortization of acquired intangibles.
  Gain on sale of assets.
 45




---



##### Table of Contents



Interest income, net.
  Income tax expenses.
  Income from and gain on sale of discontinued
    operations.
  Results
    of Division Operations for the Year Ended December 31,
    2004 Compared to Year Ended December 31, 2003
    Liquidity
    and Capital Resources
  Cash
    requirements
    2011 &Total


2006


2007


2008


2009


2010


Thereafter(Dollars in thousands)Operating leases

$
10,059


$
2,741


$
2,247


$
1,729


$
1,309


$
1,130


$
903Purchase obligations


3,149



3,149



















$
13,208


$
5,890


$
2,247


$
1,729


$
1,309


$
1,130


$
903     
    Continue to fund ongoing operations, including the addition of
    sales, product and infrastructure support personnel;
    Continue to invest in new product development and market
    penetration strategies, including our Intelligent Health Broker
    Suite in ISD, Standards of Care in CareScience and Rogue Wave
    Hydra;
    Invest in additional hardware and software to maintain and
    enhance our existing networks and software applications;
    Defend and settle outstanding class action and derivative
    lawsuits;
    Complete leasehold improvements to our facilities; and
    Continue to comply with the provisions of Section 404 of
    the Sarbanes-Oxley Act of 2002. 46




---



##### Table of Contents



Sources
    and Uses of Cash
    2005


2004


2003Operating activities

$
10,626


$
(4,150
)

$
(7,275
)Investing activities


(11,610
)


(2,646
)


(1,736
)Financing activities


1,275



1,444



1,318            47




---



##### Table of Contents



Commitments
    Assessment
    of Future Liquidity
    
    Our consolidated cash, cash equivalents and short-term
    investments of $32.8 million as of December 31, 2005;
    The anticipated level of capital expeditures during 2006; and
    Our expectation of realizing positive cash flow from operations
    through 2006.  Item 7A.
    Qualitative
    and Quantitative Disclosures About Market Risk     48




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            /s/ Ernst & Young LLP
    49




---



##### Table of Contents



QUOVADX,
    INC.
  CONSOLIDATED BALANCE SHEETS
  December 31,2005


2004(In thousands, except for share
    and per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
17,806


$
18,822Short-term investments


14,850



6,025Accounts receivable, net of
    allowance of $462 and $1,067, respectively


14,122



14,068Unbilled accounts receivable


720



1,195Prepaids and other


1,771



2,598Total current assets


49,269



42,708Property and equipment, net


3,220



4,182Software, net


7,409



11,333Other intangible assets, net


13,862



17,713Goodwill


46,724



46,724Restricted cash


175



578Other assets


484



707Total assets

$
121,143


$
123,945LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,383


$
3,523Accrued liabilities


11,175



9,058Deferred revenue


17,601



19,927Total current liabilities


32,159



32,508Other longterm liabilities


797



1,039Total liabilities


32,956



33,547Commitments and contingenciesStockholders equity:Preferred stock, $.01 par
    value, 5,000,000 shares authorized; no shares issued and
    outstanding






Common stock, $.01 par value;
    100,000,000 authorized and 41,641,606 and 40,618,535 shares
    issued and outstanding, respectively


416



406Deferred compensation


(530
)


(214
)Accumulated other comprehensive
    income/(loss)


(199
)


871Additional paid-in capital


272,790



270,737Accumulated deficit


(184,290
)


(181,402
)Total stockholders equity


88,187



90,398Total liabilities and
    stockholders equity

$
121,143


$
123,945    50




---



##### Table of Contents



QUOVADX,
    INC.
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended
    December 31,2005


2004


2003(In thousands, except per share
    amounts)Revenue:Software license

$
29,792


$
27,172


$
20,270Professional services


13,210



14,540



17,512Recurring services


40,101



41,089



27,146Total revenue


83,103



82,801



64,928Cost of revenue:Software license


9,308



12,506



9,850Professional services


9,534



14,715



14,022Recurring services


18,027



18,878



16,391Asset impairment






7,195



Total cost of revenue


36,869



53,294



40,263Gross profit


46,234



29,507



24,665Operating expenses:Sales and marketing


17,364



19,597



17,785General and administrative


17,498



19,832



12,742Research and development


10,921



13,383



9,995Amortization of acquired
    intangible assets


3,850



3,718



1,720Total operating expenses


49,633



56,530



42,242Loss from operations


(3,399
)


(27,023
)


(17,577
)Gain on sale of assets






1,535



Other income, net


177



45



(34
)Interest income, net


655



310



728Loss before income taxes


(2,567
)


(25,133
)


(16,883
)Income tax expense


321



133



Loss from continuing operations


(2,888
)


(25,266
)


(16,883
)Discontinued operations:Income from discontinued operations






589



406Gain on sale of discontinued
    operations






446



Net loss

$
(2,888
)

$
(24,231
)

$
(16,477
)Net loss from continuing
    operations per common share  basic and diluted

$
(0.07
)

$
(0.63
)

$
(0.54
)Income from and gain on sale of
    discontinued operations per common
    share   basic and diluted






0.02



0.02Net loss per common
    share  basic and diluted

$
(0.07
)

$
(0.61
)

$
(0.52
)Shares used in computing net loss
    per share  basic and diluted


40,924



39,892



31,407    51




---



##### Table of Contents



QUOVADX,
    INC.
  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
    EQUITY
  AccumulatedOther


AdditionalCommon Stock


Deferred


Comprehensive


Paid-in


AccumulatedShares


Amount


Compensation


Income


Capital


Deficit


Total(In thousands)Balance at January 1, 2003


30,176


$
302


$



$



$
226,685


$
(140,694
)

$
86,293Net loss






















(16,477
)


(16,477
)Currency translation adjustment














131











131Comprehensive loss


























(16,346
)Shares issued for acquisitions


8,072



81











41,014







41,095Stock option exercises and
    issuances under employee stock purchase plan


690



6











1,312







1,318Deferred compensation from options
    exchanged in acquisition










(385
)














(385
)Balance at December 31, 2003


38,938



389



(385
)


131



269,011



(157,171
)


111,975Net loss






















(24,231
)


(24,231
)Currency translation adjustment














740











740Comprehensive loss


























(23,491
)Stock option exercises and
    issuances under employee stock purchase plan


1,586



16











1,428







1,444Deferred compensation from options
    exchanged in acquisition










365







105







470Deferred compensation from
    restricted stock awards


95



1



(194
)






193







Balance at December 31, 2004


40,619



406



(214
)


871



270,737



(181,402
)


90,398Net loss






















(2,888
)


(2,888
)Currency translation adjustment














(1,070
)










(1,070
)Comprehensive loss


























(3,958
)Stock option exercises and
    issuances under employee stock purchase plan


747



7











1,268







1,275Deferred compensation from options
    exchanged in acquisition










20















20Deferred compensation from
    restricted stock awards


276



3



(336
)






785







452Balance at December 31, 2005


41,642


$
416


$
(530
)

$
(199
)

$
272,790


$
(184,290
)

$
88,187    52




---



##### Table of Contents



QUOVADX,
    INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended
    December 31,2005


2004


2003(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIESNet loss

$
(2,888
)

$
(24,231
)

$
(16,477
)Adjustments to reconcile net loss
    to net cash used in operating activities Depreciation and
    amortization


7,570



11,108



9,715Amortization of acquired
    intangible assets


3,850



3,332



1,720Share based compensation


452







Amortization of deferred
    compensation


20



470



Asset impairments






7,529



Gain on sale of assets






(1,981
)


(Recovery) provision for losses on
    accounts receivable


(461
)


162



82Change in assets and liabilities
    (net of assets and liabilities acquired)Accounts receivable


220



3,986



(559
)Unbilled accounts receivable


474



2,270



1,128Prepaids and other


1,467



2,063



618Accounts payable


(120
)


(4,430
)


5,525Accrued liabilities


2,083



(5,139
)


(6,046
)Deferred revenue


(2,041
)


711



(2,981
)Net cash provided by (used in)
    operating activities


10,626



(4,150
)


(7,275
)CASH FLOWS FROM INVESTING
    ACTIVITIESPurchase of property and equipment


(1,277
)


(1,010
)


(1,971
)Purchased and capitalized software


(1,508
)


(1,087
)


(3,557
)Business acquisitions, net of cash
    acquired










(12,585
)Proceeds from sale of assets






5,476



Purchase of short-term investments


(38,240
)


(6,025
)


(33,720
)Sale of short-term investments


29,415







50,097Net cash used in investing
    activities


(11,610
)


(2,646
)


(1,736
)CASH FLOW FROM FINANCING ACTIVITIESProceeds from issuance of common
    stock and exercise of stock options


1,275



1,444



1,318Net cash provided by financing
    activities


1,275



1,444



1,318EFFECT OF FOREIGN CURRENCY
    EXCHANGE RATE CHANGES ON CASH


(1,307
)


486



137Net decrease in cash and cash
    equivalents


(1,016
)


(4,866
)


(7,556
)Cash and cash equivalents at
    beginning of period


18,822



23,688



31,244Cash and cash equivalents at end
    of period

$
17,806


$
18,822


$
23,688SUPPLEMENTAL DISCLOSURE OF
    NON-CASH INVESTING AND FINANCING TRANSACTIONSIssuance of common stock in
    business acquisitions

$



$



$
41,095SUPPLEMENTAL DISCLOSURE OF CASH
    FLOW INFORMATION:Cash paid for income taxes

$
(256
)

$
160


$
23    53




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the three years ended December 31, 2005, 2004, and
    2003
  1.
    Organization
    and Summary of Significant Accounting Policies  Overview
    Basis
    of Presentation
    Reclassifications
    Use of
    Estimates
    Revenue
    Recognition
  Software Revenue Recognition, SOP 98-4, SOP 81-1, Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts.
     54




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  SOP 97-2,
  percentage-of-completion time-and-materials
  percentage-of-completion percentage-of-completion
        Cash
    and Cash Equivalents
        Short-Term
    Investments
   55




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
    Historic Cost as of


Historic Cost as ofDecember 31, 2005


December 31, 2004Interest bearing money market
    accounts

$
6,175


$
6,025Auction rate securities


8,675



Total

$
14,850


$
6,025   Fair
    Value of Financial Instruments
    Unbilled
    Accounts Receivable
  time-and-material percentage-of-completion
  Allowance
    for Doubtful Accounts
      ReductionBalance at


(Credited)





in Sales





Balance atAllowance for Doubtful
    Accounts

Beginning


Charged to





Return





End ofand Sales Returns

of Period


Expense


Deduction


Allowance


Transfers


Period(Dollars in thousands)2005

$
1,067


$
(461
)

$
(144
)(a)

$



$



$
4622004


2,765



162



(1,555
)(a)


(305
)(b)

$



$
1,0672003


2,370



82



(919
)(a)






1,232
(c)


2,765     (a)
    
    Represents credit losses written off during the period, less
    collection of amounts previously written off.(b)
    
    Reduction in Rogue Wave sales allowance that is no longer needed
    as an adjustment to goodwill.(c)
    
    Transfer of allowance balances from business acquisitions.  Warranties
   56




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
    Major
    Customers
    Year Ended
    December 31,Customer

2005

2004

2003Medical University of South
    Carolina


15
%


16
%


20
%       Year Ended
    December 31,

Integration Solutions

CareScience

Rogue Wave2005


43
%


44
%


16
%2004


51
%


45
%


12
%     Property
    and Equipment
    December 31,2005


2004(In thousands)Property and
    EquipmentFurniture, fixtures and equipment

$
4,588


$
5,275Computer hardware


22,494



21,763Computer software


10,664



10,37037,746



37,408Less accumulated depreciation and
    amortization


(34,526
)


(33,226
)$
3,220


$
4,182   Purchase
    Accounting
   57




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
    Capitalized
    Software Costs
    December 31,2005


2004(In thousands)Capitalized SoftwareAcquired Software

$
27,098


$
27,182Capitalized Software


9,051



8,59036,149



35,772Accumulated Amortization


(28,740
)


(24,439
)$
7,409


$
11,333   Goodwill
     58




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
    RogueWave


CareScienceBalance at January 1, 2003

$



$
Acquisition of CareScience
    (Note 3)






13,318Acquisition of Rogue Wave
    (Note 3)


34,697



Balance at December 31, 2003


34,697



13,318Reconciliation of opening balances


(2,926
)


(219
)Valuation adjustment


1,603



Acquisition expenses






(357
)Leases restructuring


608



Balance at December 31, 2004


33,982



12,7422005 adjustments






Balance at December 31, 2005

$
33,982


$
12,742     Acquired
    Intangible Assets
    2005


2004Accumulated


Net Book





Accumulated


Net BookCost


Amortization


Value


Cost


Amortization


ValueCustomer base

$
22,496


$
(8,982
)

$
13,514


$
22,496


$
(5,315
)

$
17,181Trade name


559



(243
)


316



559



(136
)


423Other


2,178



(2,146
)


32



2,178



(2,069
)


109$
25,233


$
(11,371
)

$
13,862


$
25,233


$
(7,520
)

$
17,713   Long-Lived
    Assets and Impairments
   59




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
              Other
    Assets
      Research
    and Development
    Advertising
   60




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   Accounting
    for Contingencies
  Accounting for
    Contingencies
  
    The period in which the underlying cause of the pending
    litigation occurred;
    The degree of probability of an unfavorable outcome;
    The ability to make a reasonable estimate of the amount of loss.    Deferred
    Taxes
    Share-Based
    Compensation
    and/or
  61




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  Year Ended
    December 31,2005


2004


2003(In thousands except per share
    data)Net loss:As reported

$
(2,888
)

$
(24,231
)

$
(16,477
)Plus: stock based compensation
    recognized under intrinsic value method


472



470



Less: stock based compensation
    under fair value method


(5,160
)


(1,821
)


(5,838
)Pro forma net loss

$
(7,576
)

$
(25,582
)

$
(22,315
)Net loss per common share:As reported

$
(0.07
)

$
(0.61
)

$
(0.52
)Pro forma


(0.19
)


(0.64
)


(0.71
)              62




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   Net
    Loss Per Common Share
    Comprehensive
    Loss
    Foreign
    Currency Translations
    New
    Accounting Standards
    2.
    Business
    Acquisitions   63




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
        Year EndedDecember 31, 2003Revenue

$
102,335Net loss


(27,122
)Net loss per share

$
(0.70
)     Acquisition-Related
    Restructuring
    Accrual at





Accrual at





Accrual atAccrued at


Paid in


December 31,


Paid in


December 31,


Paid in


December 31,Acquisition


2003


2003


2004


2004


2005


2005(In thousands)Employee Severance

$
1,050


$
(623
)

$
427


$
(427
)

$



$



$
Lease abandonment costs


1,905



(60
)


1,845



(263
)


1,582



(242
)


1,340Less: Sublease income


(301
)






(301
)






(301
)






(301
)$
2,654


$
(683
)

$
1,971


$
(690
)

$
1,281


$
(242
)

$
1,039    64




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   3.
    Business/Asset
    Dispositions            December 31, 2004(In thousands)Net book value of assets
    sold:Furniture, leasehold improvements
    and equipment

$
322Deferred costs


993Total

$
1,315     Year Ended
    December 31,2004


2003(In thousands)Recurring services revenues

$
5,164


$
5,004Cost of recurring services revenue


4,575



4,598Income from discontinued operations

$
589


$
406  65




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   4.
    Balance
    Sheet Components    December 31,2005


2004Other Current AssetsPrepaid maintenance and support

$
1,434


$
999Note receivable






784Deferred costs


158



316Other


179



499$
1,771


$
2,598   December 31,2005


2004Accrued LiabilitiesAccrued compensation

$
4,679


$
3,309Accrued taxes


1,215



733Accrued rent


408



535Accrued legal fees


838



497Accrued audit fees


508



683Option liability payout


110



345Accrued professional fees


86



100Other


3,331



2,856$
11,175


$
9,058   5.
    Stockholders
    Equity and Benefit Plans  Stock
    Options
     66




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
     SharesInitial authorization 1997


2,200,0002000


1,400,0002001


820,4142002


1,224,0002003


1,224,0002004


1,224,0002005


Total authorized at
    December 31, 2005


8,092,414Total grants 1997 to 2005


(9,967,579
)Total cancellations 1997 to 2005


5,300,857Shares available for issuance
    December 31, 2005


3,425,692       SharesInitial authorization


250,0002001


164,0832002


200,0002003


200,0002004


200,0002005


Total authorized at
    December 31, 2005


1,014,083Total grants 1999 to 2005


(455,000
)Total cancellations 1999 to 2005


75,000Shares available for issuance
    December 31, 2005


634,083    67




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
      SharesInitial authorization


600,0002001


600,0002002


800,0002003


1,200,0002004


2005


Total authorized at
    December 31, 2005


3,200,000Total grants 2000 to 2005


(4,115,130
)Total cancellations 2000 to 2005


1,878,051Shares available for issuance
    December 31, 2005


962,921       Outstanding


ExercisableWeightedAverage


Weighted





WeightedRemaining


Average





AverageRange of

Number


Contractual


Exercise


Number


ExerciseExercise Prices

of Shares


Life (Years)


Price


of Shares


Price$ 0.25  $ 1.12


1,214,252



8.2


$
1.03



673,508


$
0.961.14    1.83


889,370



8.7



1.81



476,878



1.811.88    2.67


533,945



7.2



2.39



425,488



2.372.70    2.87


535,120



6.3



2.78



197,864



2.782.90    3.15


573,256



7.8



2.99



9,886



2.993.23    5.94


445,835



7.4



4.66



445,835



4.666.02    6.20


595,750



7.4



6.10



595,750



6.106.40    8.70


339,141



5.8



7.65



339,141



7.659.29   10.34


381,036



5.4



10.01



381,036



10.0110.83   24.41


175,767



4.8



12.34



175,767



12.34$ 0.25  $24.41


5,683,472



7.4


$
3.81



3,721,153


$
4.67  68




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
     Number of


Weighted Average


Options


Weighted AverageShares


Exercise Price


Exercisable


Exercise PriceOptions outstanding,
    January 1, 2003


6,467,111


$
6.72



2,928,651


$
6.36Converted Rogue Wave options


620,658



7.38Options granted


786,033



2.63Less: options exercised


(140,404
)


2.54Less: options forfeited


(649,935
)


7.14Options outstanding,
    December 31, 2003


7,083,463



6.95



4,650,309



7.15Options granted


3,653,625



2.65Less: options exercised


(1,082,429
)


0.58Less: options forfeited


(3,968,516
)


6.94Options outstanding,
    December 31, 2004


5,686,143



4.47



2,794,653



6.01Options granted


1,390,505



2.90Less: options exercised


(210,007
)


1.29Less: options forfeited


(1,183,169
)


4.62Options outstanding,
    December 31, 2005


5,683,472


$
3.81



3,721,153


$
4.67   Employee
    Stock Purchase Plan
   69




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
    PurchaseDate

Shares


PriceInitial authorization


500,000Authorized 2001


328,165Authorized 2002


500,000Issued 2000 to 2002


(290,056
)Available at December 31, 2002


1,038,109Authorized 2003


500,000Issued May 2003


(319,308
)

$
1.31Issued October 2003


(230,157
)


2.37Available at December 31, 2003


988,644Authorized 2004


500,000Issued April 2004


(264,355
)


2.01Issued October 2004


(238,411
)


1.49Available at December 31, 2004


985,878April 2005


(352,442
)


1.47October 2005


(189,841
)

$
2.33Available at December 31, 2005


443,595   401(k)
    Plan
    Stockholders
    Rights Plan
   70




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   6.
    Income
    Taxes    2005


2004


2003Domestic

$
(3,988
)

$
(25,175
)

$
(16,590
)Foreign


1,421



42



(293
)Total

$
(2,567
)

$
(25,133
)

$
(16,883
)       Years Ended
    December 312005


2004


2003(In thousands)Statutory income tax benefit

$
(898
)

$
(8,799
)

$
(5,426
)State income tax benefit, net of
    federal income tax benefit


(368
)


(665
)


(436
)Change in valuation allowance


(2,333
)


9,249



5,811Foreign tax rate differential


45



111



Other permanent items


3,875



237



51Income tax expense/(benefit)

$
321


$
133


$
  71




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
     2005


2004(In thousands)Current deferred tax assets
    (liabilities):Deferred revenue

$
285


$
Allowance for doubtful accounts


151



536Employee benefits


96



525Accrued liabilities


1,061



597Other


111



38Valuation allowance


(1,292
)


(1,530
)Current deferred tax assets
    (liabilities) net


412



166Non-current deferred tax assets
    (liabilities):Depreciation and amortization


(5,908
)


(6,391
)Investment impaired


195



195Tax credits


3,193



2,795U.S. net operating loss
    carryforwards


56,527



59,486Foreign net operating loss
    carryforwards


1,125



1,388Valuation allowance


(55,544
)


(57,639
)Non-current deferred tax asset
    (liability) net


(412
)


(166
)Net deferred tax
    assets/(liabilities)

$



$
        72




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
       7.
    Commitments
    and Contingencies  Commitments
    2006

$
2,7412007


2,2472008


1,7292009


1,3092010


1,130Thereafter


903$
10,059       Contingencies
   73




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  Bartula v. XCare.net, Inc., et al. No. 01-CV-10075). Rule 10b-5
  Smith v. Quovadx, Inc. et al, No. 04-M-0509, Heller v. Quovadx, Inc., et al No. 04-M-0665 Heller No. 04-M-1006
  Marcoux v. Brown et al,
 74




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  Thornton v. Brown, et al. Jaroslawicz v. Brown, et al.
  Henderson v. Quovadx, Inc. et al, No. 04-M-1006 Special Situations
    Fund III, L.P., et al. v. Quovadx, Inc., et al. No. 04-M-1006 SSF S-4 prima facie prima facie
  Heller SSF Heller two-and-one-half Heller
 75




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  Heller Heller Heller
      8.
    Related
    Party Transactions          9.
    Segment
    Information  Disclosures about Segments of
    an Enterprise and Related Information.
   76




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
     December 31, 2005

ISD


CareScience


Rogue Wave


Corporate


TotalRevenue:Software license

$
8,994


$
5,354


$
15,444






$
29,792Professional services


6,132



6,022



1,056







13,210Recurring services


24,141



4,065



11,895







40,101Total revenue


39,267



15,441



28,395







83,103Cost of revenue:Software license


4,876



2,719



1,713







9,308Professional services


6,181



2,599



754







9,534Recurring services


13,251



3,831



945







18,027Total cost of revenue


24,308



9,149



3,412







36,869Gross profit


14,959



6,292



24,983







46,234Operating expenses


11,440



6,319



15,579



16,295



49,633Income(loss) from operations

$
3,519


$
(27
)

$
9,404


$
(16,295
)


(3,399
)Other income, net


















832Loss before income taxes


















(2,567
)Income tax expense


















321Net loss

















$
(2,888
)   77




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
  December 31, 2004

ISD


CareScience


Rogue Wave


Corporate


TotalRevenue:Software license

$
7,085


$
5,136


$
14,951






$
27,172Professional services


8,229



5,158



1,153







14,540Recurring services


25,422



3,616



12,051







41,089Total revenue


40,736



13,910



28,155







82,801Cost of revenue:Software license


6,887



2,747



2,872







12,506Professional services


9,967



3,659



1,089







14,715Recurring services


14,400



3,226



1,252







18,878Asset impairment


7,195















7,195Total cost of revenue


38,449



9,632



5,213







53,294Gross profit


2,287



4,278



22,942







29,507Operating expenses


14,908



5,527



15,235



20,860



56,530Income(loss) from operations

$
(12,621
)

$
(1,249
)

$
7,707


$
(20,860
)


(27,023
)Gain on sale of assets


















1,535Other income, net


















355Loss before income taxes


















(25,133
)Income tax expense


















133Net loss from continuing operations


















(25,266
)Income from and gain on
    discontinued operations


















1,035Net loss

















$
(24,231
)  78




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
   December 31, 2003

ISD


CareScience(a)


Rogue Wave(b)


Corporate


TotalRevenue:Software license

$
16,974


$
1,418


$
1,878






$
20,270Professional services


15,706



1,786



20







17,512Recurring services


25,660



1,009



477







27,146Total revenue


58,340



4,213



2,375







64,928Cost of revenue:Software license


9,057



699



94







9,850Professional services


13,000



1,010



12







14,022Recurring services


15,555



744



92







16,391Total cost of revenue


37,612



2,453



198







40,263Gross profit


20,728



1,760



2,177







24,665Operating expenses


26,113



1,838



855



13,436



42,242Income(loss) from operations

$
(5,385
)

$
(78
)

$
1,322


$
(13,436
)


(17,577
)Other income, net


















694Net loss before from continuing
    operations


















(16,883
)Income from discontinued operations


















406Net loss

















$
(16,477
)     (a)
    
    The CareScience division was acquired in September 2003(b)
    
    The Rogue Wave Software division was acquired in December 2003.    ISD

CareScience

Rogue Wave

TotalDecember 31,
    2005Software, net


4,089



511



2,809



7,409Other intangible assets, net


2,626



5,810



5,426



13,862Goodwill






12,742



33,982



46,724Depreciation


1,265



536



337



2,138Capitalized software amortization


3,703



186



1,543



5,432Intangible amortization


793



1,224



1,833



3,850December 31,
    2004Software, net


7,349



697



3,287



11,333Other intangible assets, net


3,419



7,034



7,260



17,713Goodwill






12,742



33,982



46,724Depreciation


2,352



607



533



3,492Capitalized software amortization


5,048



136



2,432



7,616Intangible amortization


1,325



1,233



1,160



3,718  79




---



##### Table of Contents



QUOVADX,
    INC.
  NOTES TO CONSOLIDATED
    FINANCIAL STATEMENTS  (Continued)
     10.
    Quarterly
    Results (Unaudited)      Three Months EndedMarch 31,


June 30,


September 30,


December 31,2005


2005


2005


2005(In thousands except for per
    share amounts)STATEMENT OF OPERATIONSTotal revenue

$
20,776


$
20,499


$
20,186


$
21,642Cost and expenses:Cost of revenue


9,328



9,012



9,421



9,108Sales and marketing


4,382



4,038



3,865



5,079General and administrative


4,724



3,504



4,955



4,315Research and development


2,971



3,137



2,691



2,122Amortization of acquired
    intangibles


963



963



963



961Total costs and expenses


22,368



20,654



21,895



21,585Income (loss) from operations


(1,592
)


(155
)


(1,709
)


57Other income, net


156



145



114



417Net income (loss) before income
    taxes


(1,436
)


(10
)


(1,595
)


474Income tax expense


73



80



103



65Net income (loss)

$
(1,509
)

$
(90
)

$
(1,698
)

$
409Net Income (loss) per common
    share-basic and diluted

$
(0.04
)

$
(0.00
)

$
(0.04
)

$
0.01   80




---



##### Table of Contents



Three Months EndedMarch 31,


June 30,


September 30,


December 31,2004


2004


2004


2004(In thousands except for per
    share amounts)STATEMENT OF OPERATIONSTotal revenue (a)

$
22,294


$
20,276


$
19,749


$
20,482Cost and expenses:Cost of revenue(b)


13,498



11,685



11,387



9,529Asset impairment


6,765











430Sales and marketing


6,534



4,830



4,177



4,056General and administrative


3,693



6,738



4,456



4,945Research and development


3,683



3,657



3,096



2,947Amortization of acquired
    intangibles


1,182



755



770



1,011Total costs and expenses


35,355



27,665



23,886



22,918Loss from operations


(13,061
)


(7,389
)


(4,137
)


(2,436
)Gain on sales of assets






1,175



360



Other income, net


118



127



50



60Net loss before income taxes


(12,943
)


(6,087
)


(3,727
)


(2,376
)Income tax expense














133Loss from continuing operations


(12,943
)


(6,087
)


(3,727
)


(2,509
)Income from discontinued operations


161



197



113



118Gain on sale of discontinued
    operations














446Net loss

$
(12,782
)

$
(5,890
)

$
(3,614
)

$
(1,945
)Net loss before discontinued
    operations per common share  basic and diluted

$
(0.33
)

$
(0.15
)

$
(0.09
)

$
(0.06
)Income from and gain on sale of
    discontinued operations per common share  basic
    and diluted


0.00



0.00



0.00



0.01Net loss per common
    share  basic and diluted

$
(0.33
)

$
(0.15
)

$
(0.09
)

$
(0.05
)     (a)
    
    Revenues from discontinued operations of $1.4 million,
    $1.3 million, $1.2 million and $1.3 million for
    the three months ended March 31, 2004, June 30, 2004,
    September 30, 2004 and December 31, 2004,
    respectively, have been reclassified to income from discontinued
    operations.(b)
    
    Cost of revenue from discontinued operations of
    $1.2 million, $1.1 million , $1.1 million and
    $1.1 million for the three months ended March 31,
    2004, June 30, 2004, September 30, 2004 and
    December 31, 2004, respectively, have been reclassified to
    income from discontinued operations. 81




---



##### Table of Contents



Item 9.
    Changes
    In and Disagreements With Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    Controls and Procedures
    Form 10-Q
  Managements
    Annual Report on Internal Control over Financial
    Reporting
  Rule 13a-15(f).
  Changes
    in Internal Control Over Financial Reporting
  Form 10-K/
  
    the analysis and recording of revenue in multiple element
    transactions;
    calculation and recording of accrued liabilities;
    analysis of capitalized software and impairment; and
    capitalization and amortization of software.   82




---



##### Table of Contents



83




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                /s/ Ernst & Young LLP
    84




---



##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Code of
    Ethics
  Form 10-K.
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transaction    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statement Schedules.
  Exhibits.
 85




---



##### Table of Contents



SIGNATURES      By:
    /s/  Harvey
    A. Wagner    President and Chief Executive Officer
    Signature

Title

Date/s/  Harvey
    A. WagnerHarvey
    A. Wagner

Director, and President and Chief
    Executive Officer (Principal Executive Officer)

March 7, 2006/s/  Matthew
    T. PullamMatthew
    T. Pullam

Executive Vice President, Chief
    Financial Officer and Treasurer (Principal Financial Officer)

March 7, 2006/s/  Juan
    C. PerezJuan
    C. Perez

Vice President and Controller 
    (Principal Accounting Officer)

March 7, 2006/s/  Jeffrey
    M. KraussJeffrey
    M. Krauss

Chairman of the Board

March 7, 2006/s/  Fred
    L. BrownFred
    L. Brown

Director

March 7, 2006/s/  J.
    Andrew CowherdJ.
    Andrew Cowherd

Director

March 7, 2006/s/  James
    B. HooverJames
    B. Hoover

Director

March 7, 2006/s/  Charles
    J. RoessleinCharles
    J. Roesslein

Director

March 7, 2006/s/  James
    A. GilbertJames
    A. Gilbert

Director

March 7, 2006  86




---



##### Table of Contents



EXHIBIT
    INDEX
  ExhibitNumber

Description of
    Document2
.1

Agreement and Plan of Merger,
    dated as of August 13, 2003, by and among CareScience,
    Inc., the Registrant and Carlton Acquisition Corporation
    (incorporated by reference to Annex A to the Prospectus
    filed by the Registrant under Rule 424(b) (3) on
    September 18, 2003).2
.2

Agreement and Plan of Merger,
    dated as of November 3, 2003, by and among Rogue Wave
    Software, Inc., the Registrant and Chess Acquisition Corporation
    (incorporated by reference to Annex A to the Prospectus
    filed by the Registrant under Rule 424(b) (3) on
    December 16, 2003).3
.1

Restated Certificate of
    Incorporation of the Registrant (incorporated by reference to
    Exhibit 3.1 to the Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended March 31, 2003,
    filed on May 13, 2003).3
.2

Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.3 to the
    Registration Statement on
    Form S-1
    of the Registrant, filed on November 2, 1999, Registration
    No. 333-90165).4
.1

Specimen stock certificate
    representing shares of Common Stock of the Registrant
    (incorporated by reference to Exhibit 4.1 to the Current
    Report on
    Form 8-K
    of the Registrant, filed on October 16, 2001).4
.2

Preferred Stock Rights Agreement,
    dated as of July 24, 2000, between the Registrant and
    ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
    including the Certificate of Designation, the form of Rights
    Certificate and the Summary of Rights attached thereto as
    Exhibits A, B, and C, respectively (incorporated by
    reference to Exhibit 1 to the Registration Statement on
    Form 8-A
    of the Registrant, filed on July 28, 2000).10
.1*

Amended and Restated 1997 Stock
    Plan.10
.2*

Amended and Restated 1999 Employee
    Stock Purchase Plan and related agreements dated
    November 1, 2005(incorporated by reference to
    Exhibit 10.2 to the Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended September 30, 2005,
    filed on October 31, 2005).10
.3*

Amended and Restated 1999 Director
    Option Plan and related agreements (incorporated by reference to
    Exhibit 4.3 to the Registration Statement on
    Form S-8
    of the Registrant, filed on May 16, 2002, Registration
    No. 333-88408).10
.4*

Amended and Restated 2000
    Nonstatutory Stock Option Plan and related agreements
    (incorporated by reference to Exhibit 4.9 to the
    Registration Statement on
    Form S-8
    of the Registrant, filed on April 1, 2003, Registration
    No. 333-104184).10
.5*

Amended Quovadx, Inc. Executive
    Management 2005 Annual Bonus Incentive Plan (incorporated by
    reference to Exhibit 99.1 to the Current Report on
    Form 8-K
    of the Registrant, filed on September 14, 2005).10
.6*

Healthcare.com Corporation Stock
    Option Plan (incorporated by reference to Exhibit 4.1 to
    the Post-Effective Amendment No. 1 to
    Form S-4
    on
    Form S-8
    Registration Statement of the Registrant, filed on
    August 16, 2001, Registration
    No. 333-64282).10
.7*

Healthcare.com Corporation
    Nonqualified Stock Option Plan (incorporated by reference to
    Exhibit 4.2 to the Post-Effective Amendment No. 1 to
    Form S-4
    on
    Form S-8
    Registration Statement of the Registrant, filed on
    August 16, 2001, Registration
    No. 333-64282).10
.8*

Rogue Wave Software, Inc. 1996
    Equity Incentive Plan (incorporated by reference to
    Exhibit 4.1 to the Post-Effective Amendment No. 1 to
    Form S-4
    on
    Form S-8
    Registration Statement of the Registrant, filed on
    January 8, 2004, Registration
    No. 333-110388).10
.9*

Rogue Wave Software, Inc. 1997
    Equity Incentive Plan (incorporated by reference to
    Exhibit 4.2 to the Post-Effective Amendment No. 1 to
    Form S-4
    on Form on January 8, 2004, Registration
    No. 333-110388).10
.10*

Asset Purchase Agreement, dated as
    of August 25, 2003, by and between CMI Corporate Marketing,
    Inc. (d/b/a Compuflex International) and the Registrant
    (incorporated by reference to Exhibit 10.14 to the
    Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended March 31, 2004,
    filed on August 16, 2004).10
.11*

Severance Agreement, dated as of
    April 11, 2004, by and between the Registrant and Lorine R.
    Sweeney (incorporated by reference to Exhibit 10.17 to the
    Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended June 30, 2004,
    filed on August 16, 2004). 87




---



##### Table of Contents



ExhibitNumber

Description of
    Document10
.12*

Severance Agreement, dated as of
    April 11, 2004, by and between the Registrant and Gary T.
    Scherping (incorporated by reference to Exhibit 10.18 to
    the Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended June 30, 2004,
    filed on August 16, 2004).10
.13*

Employment Agreement, dated as of
    February 10, 2005, by and between the Registrant and Melvin
    L. Keating (incorporated by reference to Exhibit 99.1 to
    the Current Report on
    Form 8-K
    of the Registrant, filed on February 11, 2005).10
.14*

Separation Agreement, dated as of
    August 1, 2005, by and between the Registrant and Melvin L.
    Keating (incorporated by reference to Exhibit 99.3 to the
    Current Report on
    Form 8-K
    of the Registrant, filed on August 4, 2005).10
.15*

Employment Agreement, dated as of
    October 8, 2004, by and between the Registrant and Harvey
    A. Wagner (incorporated by reference to Exhibit 99.1 to the
    Current Report on
    Form 8-K
    of the Registrant, filed on October 12, 2004).10
.16*

Employment Agreement, dated as of
    August 15, 2005, by and between the Registrant and Matthew
    T. Pullam (incorporated by reference to Exhibit 99.2 to the
    Current Report on
    Form 8-K
    of the Registrant, filed on August 4, 2005).10
.17*

Employment Agreement, dated as of
    September 12, 2005, by and between the Registrant and Karen
    M. Wilcox.10
.18*

Form of Lockup Agreement, dated as
    of September 30, 2005 (incorporated by reference to
    Exhibit 10.1 to the Current Report on
    Form 8-K
    of the Registrant, filed on October 4, 2005).10
.19

Form of Indemnification Agreement
    entered into by the Registrant with each of its directors and
    executive officers (incorporated by reference to
    Exhibit 11.1 to the Annual Report on
    Form 10-K
    of the Registrant for the year ended December 31, 2001,
    filed on March 26, 2002).10
.20

Restated License Agreement, dated
    as of April 1, 1995, by and between the Trustees of the
    University of Pennsylvania and Care Management Science
    Corporation (filed under a confidential treatment request on
    March 14, 2000, as Exhibit 10.3 to the Registration
    Statement on
    Form S-1
    of CareScience, Inc., Registration
    No. 333-32376
    and incorporated by reference to Exhibit 10.15 to the
    Annual Report on
    Form 10-K
    of the Registrant for the year ended December 31, 2003,
    filed on March 18, 2004).10
.21

License Agreement, dated as of
    October 2, 2000, by and between California HealthCare
    Foundation and CareScience, Inc. (filed under a confidential
    treatment request on March 26, 2002, as Exhibit 10.14
    to the Annual Report on
    Form 10-K
    of CareScience, Inc. for the year ended December 31, 2001,
    Commission File
    No. 0-30859,
    and incorporated by reference to Exhibit 10.24 to the
    Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended September 30, 2004).10
.22

License Agreement, dated as of
    July 30, 2001, by and between 3550 University City Science
    Center Associates as licensor and CareScience, Inc., as
    licensee, for the license to use a portion of a building for a
    data center (incorporated by reference to Exhibit 10.16 to
    the Annual Report on
    Form 10-K
    of the Registrant for the year ended December 31, 2003,
    filed on March 18, 2004).10
.23

Licensors Consent to
    Assignment of License between CareScience, Inc. and the
    Registrant, dated as of September 18, 2003, by 3550
    University City Science Center Associates as licensor
    (incorporated by reference to Exhibit 10.17 to the Annual
    Report on
    Form 10-K
    of the Registrant for the year ended December 31, 2003,
    filed on March 18, 2004).10
.24

Equity Buy-Back Agreement, dated
    as of June 29, 2004, by and between the Registrant and
    Royal Health Care of Long Island LLC (d/b/a Royal Health Care,
    LLC) (incorporated by reference to Exhibit 10.25 to the
    Quarterly Report on
    Form 10-Q
    of the Registrant for the quarter ended June 30, 2004,
    filed on August 16, 2004).10
.25

Asset Purchase Agreement, dated as
    of December 31, 2004, by and between the Registrant and
    Royal Health Care Data Center LLC (incorporated by reference to
    Exhibit 99.1 to the Current Report on
    Form 8-K
    of the Registrant, filed on January 3, 2005). 88




---



##### Table of Contents



ExhibitNumber

Description of
    Document10
.26

Master Services Agreement, dated
    September 30, 2005, by and between the Registrant and
    VeriCenter, Inc. (incorporated by reference to Exhibit 10.1
    to the Current Report on
    Form 8-K
    of the Registrant, filed under a confidential treatment request
    on October 6, 2005).10
.27*

Employment Agreement, dated as of
    March 24, 2005, by and between the Registrant and Afshin
    Cangarlu.10
.28*

Employment Agreement, dated as of
    March 25, 2005, by and between the Registrant and Cory
    Isaacson.10
.29*

Employment Agreement, dated as of
    February 10, 2005, by and between the Registrant and Mark
    Rangell.10
.30*

Employment Agreement, dated as of
    February 10, 2005, by and between the Registrant and Linda
    Wackwitz.10
.31*

Employment Agreement, dated as of
    April 1, 2005, by and between the Registrant and Thomas
    Zajac.10
.32*

Amended Form of Director
    Restricted Stock Agreements pursuant to the Amended and Restated
    1997 Plan.10
.33*

Amended Form of Employee
    Restricted Stock Agreements pursuant to the Amended and Restated
    1997 Plan.23
.1

Consent of Independent Registered
    Public Accounting Firm.31
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a),
    promulgated under the Securities Exchange Act of 1934, as
    amended.31
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to
    Rule 13a-14(a)
    and
    Rule 15d-14(a),
    promulgated under the Securities Exchange Act of 1934, as
    amended.32
.1**

Certification of Chief Executive
    Officer of the Registrant pursuant to
    Rule 13a-14(b)
    and
    Rule 15d-14(b),
    promulgated under the Securities Exchange Act of 1934, as
    amended, and 18 U.S.C. § 1350.32
.2**

Certification of Chief Financial
    Officer of the Registrant pursuant to
    Rule 13a-14(b)
    and
    Rule 15d-14(b),
    promulgated under the Securities Exchange Act of 1934, as
    amended, and 18 U.S.C. § 1350.     *
    
    Identifies exhibit that consists of or includes a management
    contract or compensatory plan or arrangement.**
    
    This certification is furnished to, but not filed, with the
    Commission. This certification shall not be deemed to be
    incorporated by reference into any filing under the Securities
    Act of 1933 or the Securities Exchange Act of 1934, except to
    the extent that the Registrant specifically incorporates it by
    reference. 89