##### 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 1934    
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31,
2002

Commission File Number 000-29273

Quovadx, Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(303) 488-2019


Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

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

Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filings for the past
90 days.     Yes þ          No o

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

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

The aggregate market value of the voting and
non-voting equity held by non-affiliates of the registrant as of
June 30, 2002 was $188.8 million, based on the last
sale price reported for such date on the NASDAQ National Market.
This determination is not necessarily conclusive for other
purposes.

As of February 28, 2003, there were
30,196,425 shares of Common Stock of the registrant
outstanding.



---






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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | Item 1. Business                                                                                       
|                                                 | Item 2. Properties                                                                                     
|                                                 | Item 3. Legal Proceedings                                                                              
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                 | Item 6. Selected Financial Data                                                                        
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                 | Item 7A. Qualitative and Quantitative Disclosures About Market Risk                                    
|                                                 | Item 8. Consolidated Financial Statements and Supplementary Data                                       
|                                                 | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure           
|PART III                                        
|                                                 | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                 | Item 11. Executive Compensation                                                                        
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13. Certain Relationships and Related Transactions                                                
|                                                 | Item 14. Controls and Procedures                                                                       
|PART IV                                         
|                                                 | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                      
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
|SARBANES-OXLEY SECTION 302(a) CERTIFICATION     
|INDEX TO EXHIBITS                               
|EX-10.8 Offer Letter with David E Nevisky       
|EX-10.12 Consulting Agreement - Joseph G Bleser 
|EX-10.13 Amendment No.1 to Consulting Agreement 
|EX-21 Subsidiaries                              
|EX-23.1 Consent of Ernst & Young LLP            
|EX-23.2 Consent of PricewaterhouseCoopers LLP   
|EX-99.1 Certifications                          



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##### Table of Contents



QUOVADX, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2002


TABLE OF CONTENTS

|         |     |  |  |                                                                                                    |  |  |        | 
|-------- | --- |  |  | -------------------------------------------------------------------------------------------------- |  |  | ------ | 
|Item     |     |  |  |                                                                                                   
|Number   |     |  |  | Page                                                                                              
|         |     |  |  |                                                                                                   
|PART I  
|         | 1.  |  |  | Business                                                                                           |  |  | 2      | 
|         | 2.  |  |  | Properties                                                                                         |  |  | 10     | 
|         | 3.  |  |  | Legal Proceedings                                                                                  |  |  | 10     | 
|         | 4.  |  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 11     | 
|PART II 
|         | 5.  |  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |  | 11     | 
|         | 6.  |  |  | Selected Financial Data                                                                            |  |  | 12     | 
|         | 7.  |  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  | 14     | 
|         | 7A. |  |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |  | 27     | 
|         | 8.  |  |  | Consolidated Financial Statements and
    Supplementary Data                                       |  |  | 27     | 
|         | 9.  |  |  | Changes In and Disagreements With Accountants on
    Accounting and Financial Disclosure           |  |  | 28     | 
|PART III
|         | 10. |  |  | Directors and Executive Officers of the Registrant                                                 |  |  | 28     | 
|         | 11. |  |  | Executive Compensation                                                                             |  |  | 28     | 
|         | 12. |  |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  | 28     | 
|         | 13. |  |  | Certain Relationships and Related Transactions                                                     |  |  | 28     | 
|PART IV 
|         | 14. |  |  | Controls and Procedures                                                                            |  |  | 28     | 
|         | 15. |  |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  | 29     | 
|         |     |  |  | Signatures                                                                                         |  |  | 32     | 
|         |     |  |  | Consolidated Financial Statements                                                                  |  |  | F1-F26 | 
|         |     |  |  | Schedule II  Valuation and
    Qualifying Accounts                                                |  |  | S-1    | 

1



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FORWARD-LOOKING STATEMENTS

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




PART I






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

Overview

Quovadx provides software and services to enable
companies to achieve competitive process advantage.
QDXTM Platform V is application development
software that allows our customers to leverage the processes and
data in existing legacy applications and databases while they
develop new composite applications. The key to attaining a
competitive process advantage is owning a software platform that
provides software components that customers can easily modify to
react to changing business processes. QDXTM
Platform V software speeds development and deployment of
our customers process and integration applications to
improve their business processes and to achieve competitive
process advantage. In addition, Quovadx adds extensive
professional service capabilities, including consulting,
implementation, hosting, transaction services and operations
management. We believe our model creates value for our customers
by allowing them to automate and extend valuable business
processes and transact business in real-time with their trading
partners (customers, suppliers, business partners), while
preserving the significant investments they have made in their
legacy systems. We believe our key differentiator is proven by
the complex business applications we have built on
QDXTM Platform V. We have nine of these
applications called Adaptive Applications: QDXTM
HIPAA Express; the INSURENET® Solution; QDXTM
Case Management; QDXTM Utilization Management;
QDXTM Disease Management; QDXTM Quick
Trials; QDXTM Trading Partner Manager;
QDXTM Customer Focus; and the QDXTM Payer
Solution Suite. These applications demonstrate that
QDXTM Platform V is a complete toolset, capable
of undertaking the most complex application integration and
business process management problems. Our Adaptive Applications
offer our customers an alternative to the high cost of
developing a custom application and the inflexibility of
implementing a packaged application. Adaptive Applications,
built on QDXTM Platform V, include 50% to 75% of
the required out-of-the-box business process
functionality that an enterprise needs. Our Adaptive
Applications enable our customers to incorporate their best
practices into the software to gain competitive process
advantages and allow an organization to rapidly tailor and tune
business processes in response to evolving requirements,
regulations and policies. The result is a quickly deployable,
customized solution.

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

2



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Our History

We were incorporated in Delaware in March 1989
under the name Reilly Dike Dosher Corporation, Inc. In December
1996, we changed our name to MPower Solutions, Inc. In early
1998, we identified an emerging opportunity to utilize the
Internet to connect healthcare participants together into a
community structure. Beginning in mid-1998, we began to focus on
Internet-based healthcare solutions. In April 1999, we changed
our name to XCare.net, Inc. In 2000, we completed our initial
public offering at an offering price to the public of
$18.00 per share. In September 2001, we changed our name to
Quovadx, Inc.

Since the initial public offering, we have
completed several acquisitions to expand our product suite and
customer base. In November 2000, we acquired Integrated Media to
expand into the media and entertainment market. In June 2001, we
acquired Confer Software, to add their business process
management to our suite of products. In August 2001, we acquired
Healthcare.com, Inc. for their application interface tools. In
December 2001, we acquired the UK-based Pixel Group to add to
our application interface tools and to expand our international
capabilities. On March 27, 2002, we purchased all of the
outstanding capital stock of Outlaw Technologies, Inc.
(Outlaw) to add a customer relationship management
application to our suite of Adaptive Applications.

Market Overview

A company is made up of a series of processes and
workflows. These processes and workflows define the business and
provide the enterprise with a unique ability to compete. By
managing, monitoring and tuning these processes and workflows
within an integrated environment, companies can overcome the
challenge of connecting their people, their systems, their
business processes and their partners to gain a competitive
process advantage. Todays market requires all parts of a
company, both internal and external, be connected for
operational efficiency. Most organizations are burdened with
systems and applications that do not share information and do
not communicate with each other resulting in inadequate
information and organizational inefficiencies.
Intra-departmental systems and software applications were
designed to serve individual departmental needs, not the needs
of the company as a whole.

Companies now recognize that to gain a
competitive process advantage, they must leverage all data in
all the applications in their enterprise. Additionally,
organizations need to extend their business processes outside of
their enterprise and transact with their customers, partners and
suppliers in real-time. Finally, companies must build their
Information Technology (IT) architecture on a flexible,
responsive foundation or platform. We believe this common
pursuit of competitive process advantage creates a market for
our products and services.

The challenges facing businesses across every
industry are:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | How to adapt business processes in a rapidly
    changing environment in order to keep or gain a competitive
    process advantage;
|
| |  | How to leverage and unlock the value of data
    housed in isolated systems; and                                                   
|
| |  | How to communicate in real-time with valued
    customers, suppliers and partners without wasting time and money.                  

According to industry analysts, business process
management software is delivering cost-reducing benefits via:



| |   |                                              
| | - | ---------------------------------------------
| |  | Shorter time frames for completing processes;
|
| |  | Fewer number of steps;                       
|
| |  | Reduced error cycles;                        
|
| |  | Automated administrative tasks; and          
|
| |  | Decreased number of workers required.        

3



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Competition

The integration and business process management
software market is highly competitive. Competition, when coupled
with the rapid evolution of technology and business practices,
presents us with a challenging environment.

Competitive factors affecting us include:



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | Brand recognition and market awareness;                  
|
| |  | Product and features, functionality and quality;         
|
| |  | Service offering levels and quality;                     
|
| |  | Ease and timeliness of implementation;                   
|
| |  | Adequate infrastructure;                                 
|
| |  | Technical and industry-specific domain
    expertise; and
|
| |  | Financial resources.                                     

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

Our integration products provided in
QDXTM Platform V compete with other software
integration companies such as SeeBeyond Technology Corporation,
Tibco Software, Inc., Vitria and webMethods. Our Adaptive
Applications compete with certain offerings of these vendors as
well as with products offered by vendors such as Landacorp,
MedDecisions, Siebel and Oracle. The majority of these companies
have greater financial and organizational resources than we
do  putting us at a competitive disadvantage.

The Quovadx Solution

Quovadxs primary product is
QDXTM Platform V, which contains three
components:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application Development Tools:To facilitate rapid and composite
    application development, QDXTM Platform V allows
    developers to call on a set of common tools, frameworks,
    engines, interfaces and other internal or external services and
    to leverage existing applications.                                                                                                                  
|
| |  | Business Process Management Tools:The key to competitive process
    advantage is allowing companies to design, manage, monitor and
    tailor business processes as the business environment changes.
    Through QDXTM Platform Vs sophisticated
    business process management tools, companies can dynamically
    manage business processes, handle exceptions and respond to
    changing regulations.
|
| |  | Integration Tools:One of the keys to streamlining
    business processes is to leverage all of the information in
    existing applications, including legacy applications.
    QDXTM Platform V provides integration tools that
    offer connectivity to any application, which prevents the errors
    associated with re-keying information and maintaining
    duplicative information.                  

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

Quovadx offers nine Adaptive Applications, built
on QDXTM Platform V, to meet specific business
process needs. These applications include:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | QDXTM HIPAA Express enables companies
    to achieve Health Insurance Portability and Accountability Act
    of 1996 (HIPAA) compliance.

4



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| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The INSURENET® Solution allows healthcare
    provider organizations to verify patient insurance eligibility
    in real-time.                                                                                           
|
| |  | QDXTM Case Management automatically
    assigns cases to a Case Manager based on predefined
    qualification criteria that ensures all qualified cases are
    appropriately referred for case management oversight.    
|
| |  | QDXTM Utilization Management gives
    healthcare payers the ability to define methods for
    automatically performing care authorization for inpatient
    treatment, outpatient services and specialty referrals.     
|
| |  | QDXTM Disease Management automates
    routine administrative tasks and the disease management process
    or plan of care.                                                                                              
|
| |  | QDXTM Quick Trials helps sponsors
    complete clinical trials more quickly and less expensively.                                                                                                                        
|
| |  | QDXTM Trading Partner Manager assists
    the business enterprise in streamlining the administration,
    management and maintenance of its business partner
    relationships, commonly referred to as trading partners.
|
| |  | QDXTM CustomerFocus is a customer
    relationship management application that automates the tracking,
    routing, management and reporting of all customer interactions
    within a health plan.                      
|
| |  | QDXTM Payer Solution Suite is a
    healthcare payer solution to meet almost every requirement large
    and small health plans and managed care organizations would need
    to operate efficiently and effectively.    

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



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Envisioning
    Services to rapidly
    identify the technical architecture necessary to meet business
    needs and requirements.           
|
| |  | Development
    Services beginning with
    analysis and design of complex systems through development and
    implementation of applications
|
| |  | Integration
    Services connecting the
    disparate systems and databases within an organization.                                          

We provide a wide range of services to manage all
or part of an organizations technical environment,
including real-time or batch transactions, application
maintenance and hosting support for online web functionality in
our eCommerce operations center in Albuquerque, New Mexico.

We offer our customers hosting services and we
provide part of our technology in an Application Service
Provider (ASP) environment that has advantages over
traditional internal hosting by deploying, delivering and
managing access to packaged applications on a subscription or
rental basis.

Technology

QDX Platform V.QDX Platform V offers a comprehensive solution for rapid
application development and deployment, including Web Services
applications, that enables organizations to perform seamless
integration between enterprise systems and all commerce touch
points  including customers, partners, and
exchanges  within intranet, extranet and Internet
environments. QDXTM Platform Vs
J2EE-compliant scalable architecture differentiates
QDXTM Platform Vs powerful run-time and
visual development environment from other technologies.

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QDX Platform Vs architecture contains
a complete integration stack including:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Presentation layerwith Simple Object Access Protocol (SOAP) and an XML
    (Extensible Mark-Up Language)-based user interface:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Dynamic branding and role-based personalization;                                 
|
| |  | XML/ XSL (Extensible Stylesheet
    Language) provided device-independence; and
|
| |  | Screen rejuvenation for legacy systems.                                          



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Business process
    layerto orchestrate the logic of the
    flow between the users and systems:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | XML Topic Mapping for content indexing and
    infrastructure;
|
| |  | Distributed transactions across systems; and                  
|
| |  | Separate business logic from adapters.                        



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | Integration layerto
    connect and communicate to different Web Services or legacy
    systems:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Industry standards-based EAI (Enterprise
    Application Integration) adapters; 
|
| |  | Leverage BPMS (Business Process
    Management) to separate data from logic; and
|
| |  | XML messaging and HTTP/ S for inter- and
    intra-enterprise.                    

To increase developer productivity,
QUOVADXTM technology uses XSP (eXtensible
Server Pages) to provide a business process automation tag
library, which reduces the programming skill requirements for
developing web-based applications.

In an environment where using EJB
(Enterprise JavaBeans) is the common practice, the
QDXTM XSP engine will utilize the servers EJB
container for thread and JDBC (Java Database
Connectivity) transaction management. This results in
tight integration with existing EJB applications. For an
environment where EJB is not used, QDXTM
Platform V can also be configured to use its own modules to
provide similar functionalities.

For protecting data as it is transmitted between
systems, QDXTM Platform V includes built-in
standard Internet security, such as SSL (Secure Socket Layer)
and X509. QDXTM Platform V also includes
security at the application framework level, including user
authentication and access control. Users may also replace the
native QDX security module with their own for integrating with
third-party security products such as LDAP (Lightweight
Directory Access Protocol) servers or SiteMinder®.

Customers

We have sold products and services to over
3,000 customers in four primary market vertical segments:
healthcare  payer market; healthcare 
provider market; healthcare  pharmaceutical and
biotech market; and media and entertainment market.

Two of our customers accounted for 22% and 11% of
revenue, respectively, for the year ended December 31, 2002.

Sales, Marketing and Strategic
Alliances

Our sales are conducted through direct sales
representative, strategic alliances and distributors. As of
December 31, 2002, our sales and marketing organization
included 71 employees. Our sales force is divided into specific
vertical markets that include technical and professional
resources that primarily cover the 48 contiguous United States,
Hawaii, Canada, the United Kingdom and Europe. We also have
distribution relationships covering Australia, New Zealand and
Asia. Our sales in the United Kingdom and Europe are performed
by a combination of direct sales and distributors. The sales
cycle varies depending on the size and scope of the engagement
and can range from 90 to 360 days.

6



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

Over the past year, Quovadx has formed an
Alliance Partner Program to expand the markets we are able to
effectively address. Our partners include leading software
vendors and service providers such as McKesson Information
Solutions and GE Medical Systems Information Technologies. Our
Alliance Partner Program is an integral part of our strategy to
enhance, develop, and market innovative technology solutions and
services, and consists of two programs: Referral Partners and
Channel Solution Partners.



| |                         
| | ------------------------
| | Alliance Partner Program

The Alliance Partner Program allows us to
strategically market our products along with complementary
products and service offerings provided by other companies.
These alliance partners enhance our marketing efforts by tightly
integrating our products into more comprehensive solutions to
the problems faced by our customers. Our Alliance Partner
Program enhances our direct sales organization through Referral
Partners and also develops indirect distribution channels for
our products through Channel Solution Partners.

Referral
Partners

This program encourages consulting firms, systems
integrators and other companies operating in the vertical
markets we serve to cooperatively market their products and/or
services along with the Quovadx solutions that end-users
require. The Referral Partner Program provides competitive
advantage to both organizations by allowing them to jointly
present a more comprehensive offering to increase opportunities
for product and service pull-through sales.

Channel
Solution Partners

This partner program is for Independent Software
Vendors (ISV) and ASPs who host or deliver
applications to end-users and desire to build their solutions on
Quovadxs platform or to enhance their solutions
value and speed to market through integration technologies.

Research and Development

At December 31, 2002, our research and
development group included approximately 76 employees
located in the United States and United Kingdom. We have made
substantial investments in advanced new technology development
and acquisitions. For the years ended December 31, 2002,
2001 and 2000, we incurred $7,209,000, $4,792,000 and
$2,952,000, respectively, in research and development expenses.
The Quovadx product suite consists of internally developed
products and products acquired through the Companys
business acquisitions. We intend to continue to consider the
licensing and acquisition of complementary software technologies
and businesses where appropriate, integrate acquired
technologies and products, and enhance the proprietary
technology to increase our software product sales, process
management services, and consulting services. Software products
are directly derived from the Quovadx developed standard-based,
but proprietary technology. We believe that continuing the
development of the state-of-the-art technology is necessary to
remain competitive in the marketplace.

Intellectual Property

Our success and ability to compete depend in part
on our proprietary technology. We seek to protect our software,
documentation and other written materials primarily through a
combination of trade secrets, trademark and copyright laws,
confidentiality procedures and contractual provisions. In
addition, we seek to avoid disclosure of our trade secrets, by,
among other things, requiring those persons with access to our

7



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proprietary information to execute
confidentiality agreements with us and restricting access to our
source code. We have been issued seven U.S. patents, and
have five additional patents pending.


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

Government Regulation

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



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

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



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

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

8



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##### Table of Contents





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

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

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

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



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

We currently process health claims between payers
and providers and therefore may be subject to the federal False
Claims Act and other state and federal laws that govern the
submission of claims for medical expense reimbursement. These
laws generally prohibit an individual or entity from knowingly
presenting or causing to be presented any claim for payment from
Medicare, Medicaid or other third party payers that is false or
fraudulent, or is for an item or service that was not provided
as claimed. These laws also provide civil and criminal penalties
for noncompliance. We have designed our current transaction
services and will design any future services to place
responsibility for compliance with these laws on provider
customers. However, we cannot guarantee that state and federal
agencies will regard billing errors processed by us as
inadvertent and not in violation of these laws. In addition,
changes in current healthcare financing and reimbursement
systems could cause us to make unplanned modifications of
applications or services, or result in delays or cancellations
of orders or in the revocation of endorsement of our
applications and services by healthcare participants.



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

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



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

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



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

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

9



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##### Table of Contents



Employees

As of December 31, 2002, we had a total of
455 employees, of whom 270 are engaged in professional
services and customer support functions, 71 in sales and
marketing, 38 in management, finance and administration and 76
in research and development. None of our employees are
represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to
be good.

Our future performance depends in part upon the
continued employment of our key personnel, none of whom is bound
by an employment agreement requiring service for any defined
period of time. Our future success also depends on our continued
ability to attract, integrate, retain and motivate highly
qualified sales, technical and managerial personnel. Competition
for such qualified personnel is intense. If our executive
officers and key personnel do not remain with us in the future,
we may experience difficulty in attracting and retaining
qualified personnel.






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

Our principal executive and corporate offices are
located in Englewood, Colorado, where we lease approximately
17,490 square feet of office space. The lease on this
facility expires in 2005. We also lease 138,512 square feet
of office space, primarily for operations and research and
development, in various locations in the United States and the
United Kingdom under agreements that expire at dates ranging
from 2003 through 2007. As of December 31, 2002, the
Company occupied 84% of the office space it leased. We believe
that our current facilities will be sufficient to meet our needs
for at least the next twelve months.






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

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

The Company, and its wholly owned subsidiary
Healthcare.com Corporation, are currently litigating a dispute
with Hawaii Employees Retirement System (HERS) regarding a
contract entered into in October 1999 between HERS and Thermo
Information Solutions, subsequently assigned to Healthcare.com.
On June 19, 2002, after exhausting its administrative
remedies under Hawaii state law, Healthcare.com filed a
complaint against HERS in the Circuit Court of the First
Circuit, State of Hawaii. The complaint asserts that HERS is in
breach of its obligations under the contract, and demands that
HERS pay to the Company a sum to be determined at trial. On
June 21, 2002, HERS filed a complaint in the same state
court, asserting that Quovadx, Inc. and Healthcare.com have
breached their performance obligations under the contract, and
seeking damages in an amount to be determined at trial. The two
lawsuits have been consolidated, discovery was initiated in July
2002, and no trial date has been set. In February 2003, the
Company and HERS agreed to suspend the litigation pending the
outcome of settlement discussions. If those discussions are not
successful,

10



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##### Table of Contents



the Company intends to continue to prosecute its
claims, and defend the claims brought by HERS, vigorously;
however litigation is inherently uncertain and we can make no
assurance as to the outcome or effect.


Munshee.com, LLC (Munshee) commenced
an action in the Supreme Court of the State of New York, County
of New York on or about September 27, 2002, against
Quovadx, Inc., f/k/a XCare.net, Inc. and Lorine Sweeney.
Munshee purported to allege claims of breach of contract and
fraud against Quovadx, Inc. (Quovadx) and a claim of
fraud against Ms. Sweeney, a director and the President and
CEO of Quovadx, relating to a professional services agreement
entered into as of September 9, 1999, as amended, between
Munshee and XCare.net, Inc. Munshee sought to recover
restitution or compensatory damages of $966,000, plus
unspecified additional damages, including punitive damages, and
interest, costs and expenses. Quovadx and Sweeney filed a motion
seeking to dismiss the claims or stay the action and compel
arbitration. On January 2, 2003, the Court dismissed the
claims without prejudice. Should claims be reasserted in any
forum, Quovadx and Ms. Sweeney intend to vigorously contest
Munshees claims; however litigation is inherently
uncertain and we can make no assurance as to the outcome or
effect.

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






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

During the fourth quarter of 2002, no matters
were submitted to a vote of our security holders.




PART II






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

On September 24, 2001, the Company changed
its corporate name from XCare.net, Inc. to Quovadx, Inc. On
October 1, 2001, the ticker symbol under which the
Companys common stock is listed for trading on the NASDAQ
National Market was changed from XCAR to
QVDX.

The following table sets forth, for the period
indicated, the range of high and low closing sales prices per
share of Common Stock, as reported on the NASDAQ National Market.

|                                                      |  |      |       |     |  |   |       | 
|----------------------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                                      |  | High |       | Low
|                                                      |  |      |       |    
|2001                                                  |  |      |       |     |  |   |       | 
|First Quarter                                         |  | $    | 7.63  |     |  | $ | 5.38  | 
|Second Quarter                                        |  |      | 13.50 |     |  |   | 5.85  | 
|Third Quarter                                         |  |      | 16.85 |     |  |   | 10.96 | 
|Fourth Quarter                                        |  |      | 12.09 |     |  |   | 6.55  | 
|2002                                                  |  |      |       |     |  |   |       | 
|First Quarter                                         |  | $    | 8.95  |     |  | $ | 5.79  | 
|Second Quarter                                        |  |      | 8.50  |     |  |   | 5.59  | 
|Third Quarter                                         |  |      | 5.71  |     |  |   | 1.40  | 
|Fourth Quarter                                        |  |      | 2.95  |     |  |   | 1.23  | 
|2003                                                  |  |      |       |     |  |   |       | 
|First Quarter (January 1, 2003 to
    March 21, 2003) |  | $    | 2.68  |     |  | $ | 1.53  | 

On March 21, 2003, the last reported sale
price of the common stock was $2.03 per share, and the
number of registered holders of record of the common stock was
approximately 575. Because many of the Companys shares of
common stock are held by brokers and other institutions on
behalf of stockholders, the Company is unable to estimate the
total number of stockholders represented by these record holders.

We have not declared or paid any cash dividends
on our common stock or other securities since January 1996 when
we were an S corporation. We currently anticipate that we will
retain all of our future earnings for

11



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##### Table of Contents



use in the expansion and operation of our
business and do not anticipate paying any cash dividends in the
foreseeable future.







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

The consolidated statements of operations data
below for the years ended December 31, 2002, 2001 and 2000
and the consolidated balance sheet data as of December 31,
2002 and 2001, are derived from and are qualified by reference
to the Companys consolidated financial statements which
are included elsewhere in this Annual Report. The consolidated
statements of operations data for the years ended
December 31, 1999 and 1998 and the consolidated balance
sheet data as of December 31, 2000, 1999 and 1998 are
derived from the Companys consolidated financial
statements, which are not included in this Annual Report, but
can be derived from other filings with the Securities and
Exchange Commission.

|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------------------- | -------- | ---- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                                                   |  |                                      
|                                                                   |  | Year Ended December 31,              
|                                                                   |  |                                      
|                                                                   |  | 2002                                  |          | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                   |  |                                       |          |      |  |      |        |      |  |     
|                                                                   |  |                                      
|                                                                   |  | (In thousands, except per share data)
|Statement of Operations Data:                                      |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|Total revenue                                                      |  | $                                     | 63,658   |      |  | $    | 52,180 |      |  | $    | 10,834  |   |  | $ | 4,853  |   |  | $ | 2,270  |  
|Total costs and expenses                                           |  |                                       | 75,807   |      |  |      | 59,550 |      |  |      | 33,178  |   |  |   | 7,974  |   |  |   | 5,915  |  
|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|Loss from operations                                               |  |                                       | (12,149  | )    |  |      | (7,370 | )    |  |      | (22,344 | ) |  |   | (3,121 | ) |  |   | (3,645 | )
|Gain on sale of assets                                             |  |                                       | 87       |      |  |      |       |      |  |      |        |   |  |   |       |   |  |   |       |  
|Goodwill impairment                                                |  |                                       | (93,085  | )    |  |      |       |      |  |      |        |   |  |   |       |   |  |   |       |  
|Interest income, net                                               |  |                                       | 1,035    |      |  |      | 3,101  |      |  |      | 5,027   |   |  |   | (67    | ) |  |   | (437   | )
|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|Net loss                                                           |  | $                                     | (104,112 | )    |  | $    | (4,269 | )    |  | $    | (17,317 | ) |  | $ | (3,188 | ) |  | $ | (4,082 | )
|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|Net loss per common share  basic and
    diluted                  |  | $                                     | (3.47    | )    |  | $    | (0.20  | )    |  | $    | (1.20   | ) |  | $ | (6.91  | ) |  | $ | (10.64 | )
|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  
|Weighted average common shares
    outstanding  basic and diluted |  |                                       | 29,987   |      |  |      | 21,308 |      |  |      | 14,399  |   |  |   | 472    |   |  |   | 390    |  
|                                                                   |  |                                       |          |      |  |      |        |      |  |      |         |   |  |   |        |   |  |   |        |  

|                                                   |  |                |         |      |  |      |         |      |  |      |        |  |  |   |         |   |  |   |         |  
|-------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------- | - |  | - | ------- | -
|                                                   |  |               
|                                                   |  | December 31,  
|                                                   |  |               
|                                                   |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                   |  |                |         |      |  |      |         |      |  |     
|                                                   |  |               
|                                                   |  | (In thousands)
|Balance Sheet Data:                                |  |                |         |      |  |      |         |      |  |      |        |  |  |   |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments  |  | $              | 47,621  |      |  | $    | 63,486  |      |  | $    | 78,319 |  |  | $ | 7,455   |   |  | $ | 198     |  
|Working capital                                    |  |                | 52,754  |      |  |      | 62,659  |      |  |      | 82,759 |  |  |   | 8,138   |   |  |   | (5,335  | )
|Total assets                                       |  |                | 104,609 |      |  |      | 214,704 |      |  |      | 96,908 |  |  |   | 13,183  |   |  |   | 2,805   |  
|Long-term debt                                     |  |                |        |      |  |      |        |      |  |      |       |  |  |   |        |   |  |   | 284     |  
|Mandatorily redeemable convertible preferred stock |  |                |        |      |  |      |        |      |  |      |       |  |  |   | 23,842  |   |  |   | 6,827   |  
|Stockholders equity (deficit)                     |  |                | 86,948  |      |  |      | 188,887 |      |  |      | 92,839 |  |  |   | (13,172 | ) |  |   | (10,620 | )

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 1999, we completed a sale of Series B
    convertible preferred stock with net proceeds totaling
    $13.7 million.                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Our registration statement on Form S-1
    covering our initial public offering (the Offering)
    of 5,750,000 shares of common stock (including the
    underwriters over-allotment option of 750,000 shares
    of common stock) at $18.00 per share was declared effective
    on February 9, 2000. The net proceeds to us from the sale
    of shares of our common stock in the offering after deducting
    expenses of $2.1 million and underwriting discounts and
    commissions of $7.2 million, were $94.2 million.

12



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In October 2000, the Company entered into a
    Software License and Services Agreement (the
    Agreement) with MedUnite, Inc.
    (MedUnite) to provide software development services
    related to a pilot program. In connection with the Agreement,
    the Company issued to MedUnite warrants to
    purchase 1,350,000 shares of Quovadxs common
    stock at an exercise price of $4.06. The warrants were
    immediately vested, exercisable and non-forfeitable for a period
    of eighteen months from the date of grant. The fair value of the
    warrants was calculated to be $3.1 million and was
    determined using the Black-Scholes option pricing model
    utilizing a volatility factor of 120%, risk-free interest rate
    of 6.0% and an expected life of 18 months. The amounts
    billed and billable to MedUnite up to the date that the first
    pilot was delivered (March 2001) were reduced by the fair value
    attributed to the warrants. For the year ended December 31,
    2000, the Company allocated $2.2 million of the warrant
    charge to billings and amounts billable. The remaining value of
    the warrants of $0.9 million was allocated to billings in
    the first quarter of 2001. In 2001, MedUnite exercised all the
    warrants and purchased 1,012,167 million shares of the
    Companys common stock.
|
| |  | In 2000, the Company purchased all the
    outstanding stock of Advica Health Resources
    (Advica) for 70,000 shares of common stock in a
    transaction accounted for as a purchase. The total purchase
    price of Advica was $2.2 million. We also acquired all of
    the outstanding stock of Integrated Media Inc. (Integrated
    Media) for $2.1 million in a transaction accounted
    for as a purchase. The acquisitions generated goodwill and
    intangible assets totaling $3.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In June 2001, the Company consummated the
    acquisition 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
    professional fees. In December 2001, the Company consummated the
    acquisition of the Pixel Group (Pixel). The purchase
    price, totaling $7.3 million, included $5.0 million in
    cash and 201,794 shares of Quovadx common stock in exchange
    for the outstanding shares of Pixel capital stock. The
    aforementioned business acquisitions were accounted for under
    the purchase method of accounting. The acquisitions generated
    goodwill and intangible assets totaling $118.8 million.                                                             
|
| |  | In March 2002, the Company completed the sale of
    certain assets of its Advica subsidiary to Royal Health Care of
    Long Island, LLC, d/b/a Royal Health Care
    (Royal) for $475,000 in cash and 4.6% of the
    outstanding equity in Royal. In conjunction with the sale,
    Quovadx will provide ASP services for seven years to Royal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | On March 27, 2002, the Company purchased all
    of the outstanding capital stock of Outlaw Technologies, Inc.
    (Outlaw). The purchase price, totaling
    $2.7 million, included 138,575 shares of Quovadx
    common stock and $1.8 million in cash and professional fees
    directly related to the acquisition. Assets acquired included
    $1.7 million in goodwill, $0.8 in software and
    $0.7 million in other intangible assets. The transaction
    was accounted for as a purchase. Outlaws balance sheet
    included $0.3 million in current assets and
    $0.6 million in liabilities upon acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In the third quarter of 2002, the Company
    performed an assessment of the carrying value of the
    Companys goodwill recorded in connection with its various
    acquisitions. The assessment was performed pursuant to
    SFAS 142 because of the significant negative Company,
    industry and economic trends affecting the market value of the
    Companys common stock. As a result, the Company recorded a
    charge of $93.1 million to reduce goodwill during the third
    quarter of 2002, based on the amount by which the carrying
    amount of these assets exceeded their estimated fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

13



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

Overview

Quovadx provides software and services to enable
companies to achieve competitive process advantage.
QDXTM Platform V is an application development
software that allows our customers to leverage the processes and
data in existing legacy applications and databases while they
develop new composite applications. The key to attaining a
competitive process advantage is owning a software platform that
provides software components that customers can easily modify to
react to changing business processes. QDXTM
Platform V software speeds development and deployment of
our customers process and integration applications to
improve their business processes and to achieve competitive
process advantage. In addition, Quovadx adds extensive
professional service capabilities, including consulting,
implementation, hosting, transaction services and operations
management. We believe our model creates value for our customers
by allowing them to automate and extend valuable business
processes and transact business in real-time with their trading
partners (customers, suppliers, business partners), while
preserving the significant investments they have made in their
legacy systems. We believe our key differentiator is proven by
the complex business applications we have built on
QDXTM Platform V. We have nine of these
applications called Adaptive Applications: QDX HIPAA Express;
the INSURENET® Solution; QDX Case Management; QDX
Utilization Management; QDX Disease Management; QDX Quick
Trials; QDX Trading Partner Manager; QDX Customer Focus; and the
QDX Payer Solution Suite. These applications demonstrate that
QDXTM Platform V is a complete toolset, capable
of undertaking the most complex application integration and
business process management problems. Our Adaptive Applications
offer our customers an alternative to the high cost of
developing a custom application and the inflexibility of
implementing a packaged application. Adaptive Applications,
built on QDXTM Platform V, include 50% to 75% of
the required out-of-the-box business process
functionality that an enterprise needs. Our Adaptive
Applications enable our customers to incorporate their best
practices into the software to gain competitive process
advantages and allow an organization to rapidly tailor and tune
business processes in response to evolving requirements,
regulations and policies. The result is a quickly deployable,
customized solution.

Operating Segments

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

Business Acquisitions and
Dispositions

On March 1, 2002, the Company completed the
sale of certain assets of its Advica Health Resources 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 and Royal signed a seven-year application service
provider (ASP) agreement.

Under the terms of the asset sale agreement,
Royal assumed Advicas medical management services
business, including personnel, property, key contracts, and
equipment. Quovadx retained Advicas core systems and
information technology, which it continues to operate in
conjunction with its service obligations to Royal under the ASP
agreement. The Company recorded a gain on the sale of assets of
$87,000.

During 2002 and 2001, the Company purchased the
outstanding stock of Healthcare.com, Confer Software, Inc.,
Pixel Group Ltd and Outlaw. The total purchase price for these
acquisitions was $110.0 million, including
11,634,865 shares of Quovadx common stock and
$13.1 million in cash and professional fees related to the
acquisitions. Goodwill, software and intangible assets recorded
as a result of the acquisitions were $92.2 million,
$19.8 million and $9.4 million, respectively.

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Critical Accounting Policies and
Estimates

The consolidated financial statements are
prepared in conformity with accounting principles generally
accepted in the United States which require management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. The Company relied on significant estimates in preparing
the financial statements to evaluate the adequacy of the
allowance for bad debt, the percentage of completion of fixed
priced professional service contracts, the recoverability of
deferred tax assets and the recoverability of capitalized
software costs. Actual results could differ from those
estimates. The Company believes that of its significant
accounting policies, the following involve a higher degree of
judgment and complexity.



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

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

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

The methodology the Company uses to recognize
software license and related services revenue is dependent on
whether the Company has established vendor-specific objective
evidence (VSOE) of fair value for the separate
elements of a multiple-element agreement.

If an agreement includes both license and service
elements, the license fee is recognized on delivery of the
software if the remaining services are not essential to the
functionality of the software, the collection of the fees is
probable, the fees are fixed and determinable, an agreement is
signed and the Company has established VSOE of fair value for
the remaining services. Revenue from the related services is
recognized as the services are provided.

When the related services are essential to the
functionality of the base product or when the Company has not
established VSOE of fair value for the remaining services, the
software license fees are deferred and the entire contract is
recognized as the services are provided.

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

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

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

When collection of fees is not probable, revenue
is recognized as cash is collected. The Company does not require
collateral from its customers and an allowance for doubtful
accounts is maintained for credit losses.

When revenue is recognized using the
percentage-of-completion basis of accounting, the Companys
management estimates the costs to complete the services to be
provided under the contract. The Company may encounter budget
and schedule overruns caused by increased material, labor or
overhead costs.

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Adjustments to cost estimates are made in the
period in which the facts requiring such revisions become known.
Estimated losses, if any, are recorded in the period in which
the current estimates of the costs to complete the services
exceed the revenue to be recognized under the contract.




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

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
certain customers to pay their accounts receivable balances. The
Company assesses the financial condition of its customers to
determine if there is an impairment of their ability to make
payments and additional allowances may be required if the
financial condition of the Companys customers deteriorates.



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

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



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

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

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##### Table of Contents



Results of Operations

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

|                       |                                            |                          |        |      |       |      |       |      |       |  |        |       |       | 
|---------------------- | ------------------------------------------ | ------------------------ | ------ | ---- | ----- | ---- | ----- | ---- | ----- |  | ------ | ----- | ----- | 
|                       |                                            |                         
|                       |                                            | Year Ended December 31, 
|                       |                                            |                         
|                       |                                            | 2002                     |        | 2001 |       | 2000
|                       |                                            |                          |        |      |       |     
|Total revenue          |                                            |                          | 100.0  | %    |       |      | 100.0 | %    |       |  | 100.0  | %    
|Costs and expenses:    |                                            |                          |        |      |       |      |       |      |       |  |        |      
|                       | Cost of revenue                            |                          |        | 52.9 |       |      |       | 61.0 |       |  |        | 132.1 |      
|                       | Software amortization                      |                          |        | 8.6  |       |      |       | 4.0  |       |  |        |      |      
|                       | Sales and marketing                        |                          |        | 20.9 |       |      |       | 16.8 |       |  |        | 48.1  |      
|                       | General and administrative                 |                          |        | 21.4 |       |      |       | 19.2 |       |  |        | 85.0  |      
|                       | Research and development                   |                          |        | 11.3 |       |      |       | 9.2  |       |  |        | 27.2  |      
|                       | Amortization of acquired intangible assets |                          |        | 3.6  |       |      |       | 3.0  |       |  |        | 0.9   |      
|                       | Stock compensation expense                 |                          |        | 0.4  |       |      |       | 0.9  |       |  |        | 12.7  |      
|                       |                                            |                          |        |      |       |      |       |      |       |  |        |      
|                       |                                            | Total costs and expenses |        |      | 119.1 |      |       |      | 114.1 |  |        |       | 306.2 | 
|                       |                                            |                          |        |      |       |      |       |      |       |  |        |      
|Loss from operations   |                                            |                          | (19.1  | )    |       |      | (14.1 | )    |       |  | (206.2 | )    
|Gain on sale of assets |                                            |                          | 0.1    |      |       |      |      |      |       |  |       |      
|Goodwill impairment    |                                            |                          | (146.2 | )    |       |      |      |      |       |  |       |      
|Interest income, net   |                                            |                          | 1.7    |      |       |      | 5.9   |      |       |  | 46.4   |      
|                       |                                            |                          |        |      |       |      |       |      |       |  |        |      
|Net loss               |                                            |                          | (163.5 | )%   |       |      | (8.2  | )%   |       |  | (159.8 | )%   
|                       |                                            |                          |        |      |       |      |       |      |       |  |        |      



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

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

Cost of revenue.Cost of revenue, including software
amortization, increased $5.3 million, or 16%, to
$39.2 million for the year ended December 31, 2002
from $33.9 million in 2001. Software amortization increased
$3.4 million over the twelve months ended December 31,
2002 primarily due to an increase in the Companys
capitalized software balance from the continued development of
the Companys software products and a full year of
amortization in 2002 compared to a partial year in 2001 related
to software acquired in the Healthcare.com and Confer
acquisitions. Partially offsetting the 2002 increase in cost of
revenue expense was a decrease in expenses related to Advica.
Certain assets of the subsidiary were sold in March 2002. As a
percentage of revenue, cost of revenue decreased from 65% for
the twelve months ended December 31, 2001 to 62% for the
twelve months ended December 31, 2002. Gross margins may
increase over time based on the shift in revenue to higher
margin software license revenue.

Sales and marketing.Sales and marketing expense increased
$4.5 million, or 51%, to $13.3 million for the year
ended December 31, 2002 from $8.8 million for the year
ended December 31, 2001. Sales and marketing expenses
increased due to an increase in the size of the Companys
sales force and product marketing professionals. The Company
also expanded its marketing efforts to introduce its new software

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products. As a percentage of revenue, sales and
marketing expense increased 4.1% from 16.8% for the twelve
months ended December 31, 2001 compared to 20.9% for the
twelve months ended December 31, 2002.


General and administrative.General and administrative expense
increased $3.6 million, or 35%, to $13.6 million for
the year ended December 31, 2002 from $10.0 million
for the prior year. The increase in general and administrative
expense was primarily due to personnel increases in the areas of
human resources, accounting, legal and administration. Increased
directors and officers insurance expense and outside legal
services also added to the overall increase in general and
administrative expense. As a percentage of revenue, general and
administrative expense increased 2.2% from 19.2% for the twelve
months ended December 31, 2001 compared to 21.4% for the
twelve months ended December 31, 2002.

Research and development.Research and development expense
increased $2.4 million, or 50%, to $7.2 million for
the year ended December 31, 2002 from $4.8 million for
the year ended December 31, 2001. The increase in research
and development expense reflects an increase in headcount to
support the continued development of our software and adaptive
applications. As a percentage of revenue, research and
development expenses increased 2.1% from 9.2% for the twelve
months ended December 31, 2001 to 11.3% for the twelve
months ended December 31, 2002. The Company capitalized
$3.7 million of software development costs in 2002.

Amortization of acquired intangibles.In accordance with the adoption of
Financial Accounting Standard (SFAS) No. 142 Goodwill
and Other Intangible Assets, the Company did not record
amortization expense related to goodwill for acquisitions
entered into after July 1, 2001 and for all acquisitions as
of January 1, 2002. The adoption of SFAS No. 142
had the effect of reducing amortization expense in 2002 from
2001 by $1.3 million. This decrease was more than offset by
an increase in the amortization of intangible assets as a result
of a full year of amortization for the Companys 2001
acquisitions and additional intangible assets recorded in the
acquisition of Outlaw in 2002.

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

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

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

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

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interest rates from the prior comparable period
and a decrease in cash, cash equivalents and short-term
investment balances to fund operations and acquisitions.


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

Segment margins.Segment results represent margins
which, for segment reporting purposes, exclude certain costs and
expenses, including corporate expenses, taxes other than income
and other non-recurring charges. See Note 9 to the
consolidated financial statements.

|                      |  |                         |          |           |  |            |         |   |  |   |          |  
|--------------------- |  | ----------------------- | -------- | --------- |  | ---------- | ------- | - |  | - | -------- | -
|                      |  |                         |          |          
|                      |  | Year Ended December 31, |          |          
|                      |  |                         |          | Increase/
|                      |  | 2002                    |          | 2001      |  | (Decrease)
|                      |  |                         |          |           |  |           
|Professional services |  | $                       | 7,843    |           |  | $          | 11,560  |   |  | $ | (3,717   | )
|Software license      |  |                         | 6,397    |           |  |            | 4,001   |   |  |   | 2,396    |  
|Recurring revenue     |  |                         | 10,258   |           |  |            | 2,736   |   |  |   | 7,522    |  
|Other                 |  |                         | (128,610 | )         |  |            | (22,566 | ) |  |   | (106,044 | )
|                      |  |                         |          |           |  |            |         |   |  |   |          |  
|                      |  | $                       | (104,112 | )         |  | $          | (4,269  | ) |  | $ | (99,843  | )
|                      |  |                         |          |           |  |            |         |   |  |   |          |  

Margins from the professional services segment
decreased 32% due to the winding down of several large
development contracts in 2002. Margins from the software license
segment increased due to higher revenue from the Company closing
more software sales in 2002 than in 2001. The increase in
revenue from the software license segment was partially offset
by an increase in software amortization expense. The increase in
software amortization expense was due to an increase in the
Companys capitalized software balance from the continued
development of the Companys software products and a full
year of amortization in 2002 compared to a partial year in 2001
related to software acquired in the Healthcare.com and Confer
acquisitions. Margins from the recurring revenue segment
increased due to a $12.0 million increase in revenue. The
increase in recurring revenue segment was primarily related to
an increase in the Companys outsourcing revenue, which was
acquired in the Healthcare.com acquisition. Additionally,
revenue from the transaction processing and maintenance
businesses increased in 2002 over 2001.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
    to Year Ended December 31, 2000

Total Revenue.Total
revenue increased $41.5 million, or 382%, to
$52.2 million for the year ended December 31, 2001
from $10.8 million for the year ended December 31,
2000. Revenue from the professional services segment increased
$21.5 million, or 311%, due to professional services
projects that were higher in value over professional services
projects in production in the prior year. The Company also
experienced an increase of $6.4 million in revenue
generated from its software license segment. Increased revenue
generated from the software license segment is primarily related
to the acquisition of Healthcare.com and amortization of
deferred license revenue. Revenue derived from the recurring
revenue segment increased $14.1 million, or 442%, due to an
increase in transaction processing revenue and maintenance
revenue. Professional services revenue in 2001 and 2000 were
offset by $0.9 million and $2.2 million, respectively,
due to amortization of a deferred warrant charge, which relates
to the fair value of the warrants issued to MedUnite in
connection with a software license and services agreement signed
in the fourth quarter of 2000.

Cost of revenue.Cost of revenue, including software
amortization, increased $19.8 million, or 137%, to
$33.9 million for the year ended December 31, 2001
from $14.3 million in 2000. The increase in the cost of
revenue is related to higher payroll and payroll related expense
due to the cost of additional personnel to support the revenue
growth in our professional services and maintenance segments. As
a percentage of revenue, cost of revenue has decreased to 65%
for the twelve months ended December 31, 2001 from 132%
from the twelve months ended December 31, 2000 due to a
shift in the Companys product mix to reflect a

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higher percentage of revenue from the higher
margin software license segment. Cost of revenue also includes
the amortization of software costs totaling $2.1 million
for the year ended December 31, 2001.


Sales and marketing.Sales and marketing expense increased
$3.6 million, or 68%, to $8.8 million for the year
ended December 31, 2001 from $5.2 million for the year
ended December 31, 2000. Sales and marketing expenses
increased due an increase in the size of the Companys
sales force and product marketing professionals. Additionally,
increased expenditures related to the rebranding and
repositioning of the organization after the Healthcare.com and
Confer acquisitions also added to the increase in sales and
marketing expense.

General and administrative.General and administrative expense
increased $0.8 million, or 9.1%, to $10.0 million for
the year ended December 31, 2001 from $9.2 million for
the year earlier period. The increase in general and
administrative expenses was primarily due to an increase in
personnel in the areas of legal, human resources, accounting and
administration, increased costs from outside legal firms and
accounting fees due to the increased size of the Company, higher
insurance expense, particularly directors and officers
insurance, and higher rent and facility costs related to
expansion of our facilities.

Research and development.Research and development expense
increased $1.8 million, or 62%, to $4.8 million for
the year ended December 31, 2001 from $3.0 million for
the year ended December 31, 2000. The increase in research
and development expenses reflects an increase in headcount in
the research and development department to develop our
transaction platform and the continued development of our
adaptive applications. The Company capitalized $1.9 million
of software development costs in 2001.

Amortization of acquired
intangibles.In accordance with the
adoption of SFAS No. 142 the Company did not record
amortization expense related to goodwill for acquisitions
entered into after July 1, 2001. The increase in
amortization expense is primarily related to intangible assets
recorded in the acquisitions of Healthcare.com and Confer during
2002 and a full year of amortization for intangible assets
acquired in the acquisitions of Advica and Integrated Media.

Stock compensation expense.During 1999 and through
February 10, 2000, the effective date of the Companys
initial public offering, in connection with stock options
granted to certain employees and a consultant under the stock
plan, we have recorded unearned stock compensation representing
the difference between the exercise price of the options and the
deemed fair value of our common stock at the date of grant. We
recorded aggregate unearned compensation of $2.8 million in
connection with these stock options. This stock compensation was
amortized to expense over the period during which the options or
common stock subject to repurchase vest, generally four years,
using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28. Amortization of
stock compensation expense was $0.5 million for the year
ended December 31, 2001 compared to $1.4 million in
2000. The remaining unearned compensation for the aforementioned
grants of $0.2 million was amortized in 2002.

Interest income, net.Interest income, net includes interest
income on cash and investments partially offset by interest
expense. Interest income decreased $1.9 million, to
$3.1 million for the year ended December 31, 2001 from
$5.0 million for the prior year. The decrease in interest
income is primarily due to a decrease in interest rates from the
prior comparable period and a decrease in our cash, cash
equivalents and short-term investments balances to fund our
operations and acquisitions.

Income tax benefit.No provision for federal and state
income taxes has been recorded for the years ended
December 31, 2001 or 2000, as we have incurred net
operating losses for each of these periods. We believe that,
based on the history of losses and other factors, the weight of
available evidence indicates that it is not likely that we will
be able to realize our deferred tax assets, and thus a full
valuation allowance has been recorded against such assets as of
December 31, 2001.

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Segment results.Segment results represent margins
which, for segment reporting purposes, exclude certain costs and
expenses, including corporate expenses, taxes other than income
and other non-recurring charges. See Note 9 to the
consolidated financial statements.

|                      |  |                         |         |           |  |            |         |   |  |   |        |  
|--------------------- |  | ----------------------- | ------- | --------- |  | ---------- | ------- | - |  | - | ------ | -
|                      |  |                         |         |          
|                      |  | Year Ended December 31, |         |          
|                      |  |                         |         | Increase/
|                      |  | 2001                    |         | 2000      |  | (Decrease)
|                      |  |                         |         |           |  |           
|Professional services |  | $                       | 11,560  |           |  | $          | (3,216  | ) |  | $ | 14,776 |  
|Software license fees |  |                         | 4,001   |           |  |            |        |   |  |   | 4,001  |  
|Recurring revenue     |  |                         | 2,736   |           |  |            | (276    | ) |  |   | 3,012  |  
|Other                 |  |                         | (22,566 | )         |  |            | (13,825 | ) |  |   | (8,741 | )
|                      |  |                         |         |           |  |            |         |   |  |   |        |  
|                      |  | $                       | (4,269  | )         |  | $          | (17,317 | ) |  | $ | 13,048 |  
|                      |  |                         |         |           |  |            |         |   |  |   |        |  

The increase in margin for the professional
services and recurring revenue segments are primarily related to
the revenue growth in 2001 over the prior year. Revenue for the
professional services and recurring revenue segments increased
270% and 442%, respectively, over the prior year. The growth in
the software license fees segment is primarily related to the
acquisition of Healthcare.com and amortization of deferred
license revenue. The Companys product mix has shifted to
reflect a higher percentage of revenue from the higher margin
software license segment.

Liquidity and Capital Resources

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

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

Net cash used in operating activities was
$10.1 million in 2002, $4.6 million in 2001 and
$17.3 million in 2000. The increase in net cash used in
operating activities in 2002 compared to 2001 is primarily
attributable to the increase in net losses compared to 2001. The
decrease in net cash used in operating activities in 2001
compared to 2000 is primarily related to the decrease in net
losses compared to 2000 and increase in unearned revenue related
to the receipt of license and maintenance fees.

Net cash provided by (used in) investing
activities was ($14.7) million in 2002, $20.7 million
in 2001 and ($48.2) million in 2000. Net cash used in
investing activities in 2002 was primarily related to net
short-term securities purchases of $7.9 million and the
purchase and capitalization of software of $3.7 million.
The net cash provided by investing activities in 2001 is
primarily attributable to the net sales of short-term
investments of $32.5 million. In 2000, net cash used in
investing activities is primarily attributable to the net
purchases of short term investments of $41.0 million.

Net cash provided by financing activities was
$1.0 million in 2002 from the exercise of stock options and
the sale of stock through our employee stock purchase plan. Net
cash provided by financing activities was $1.7 million in
2001 from the exercise of stock options and the sale of stock
through our employee stock purchase plan totaling
$4.6 million, which was partially offset by a
$3.0 million payment to extinguish a Healthcare.com line of
credit. Net cash provided by financing activities of
$95.4 million for the twelve months ended December 31,
2000 was primarily related to the net proceeds received from our
initial public offering.

21



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In February 2000, we completed our initial public
offering and issued 5,750,000 shares of common stock
(including the underwriters over-allotment of
750,000 shares of common stock) at an initial public
offering price of $18.00 per share. We received
$95.3 million in cash proceeds, net of underwriting
discounts, commissions, and other offering costs.


The Company has commitments pursuant to certain
equipment and real property lease obligations. The following is
a schedule by year of future minimum lease payments under
operating leases, at December 31, 2002 (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 3,194 | 
|2004 |  |   | 3,005 | 
|2005 |  |   | 2,699 | 
|2006 |  |   | 776   | 
|2007 |  |   | 308   | 
|     |  |   |       | 
|     |  | $ | 9,982 | 
|     |  |   |       | 

We expect our current cash resources will be
sufficient to meet our requirements for the next 18 months.
We may need to raise additional capital to support expansion, to
develop new or enhanced applications, services and product
offerings, to respond to competitive pressures, to acquire
complementary businesses or technologies or to take advantage of
unanticipated opportunities. If we need additional capital, we
will try to raise the additional funds by selling debt or equity
securities, by entering into strategic relationships or through
other arrangements. We cannot be assured that we would be able
to raise any additional amounts on reasonable terms, or at all,
if they are needed.

Recently Issued Accounting
Pronouncements

In 2002, the Company adopted the Emerging Issues
Task Force (EITF) Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. This
pronouncement requires that reimbursements received for
out-of-pocket expenses should be characterized as
revenue and corresponding expense in the Statements of
Operations. Prior to the adoption of this EITF, the Company
reflected the reimbursement of out-of-pocket expenses as an
offsetting reduction to operating expenses. The Company incurs
incidental expenses in the delivery of services to its clients.
These out-of-pocket expenses include, but are not
limited to, transportation, lodging and related charges.
Accordingly, the Company has adjusted the periods ended
December 31, 2002, 2001 and 2002 to reflect an increase in
revenue, and an equal and offsetting increase in operating
expenses, of $701,000, $762,000 and $153,000, respectively,
related to reimbursable expenses. This change in classification
has not had an effect on current or previously reported net
loss, or net loss per share.

In 2002, the FASB issued SFAS No. 148,
Accounting for Stock Based Compensation 
Transition and Disclosure. SFAS No. 148 provides
transition methods for entities that adopt the fair value method
of accounting for stock based compensation. Further, the
statement requires disclosure of comparable information for all
companies regardless of whether, when, or how an entity adopts
the fair value method of accounting for stock based
compensation. These disclosures are now required for interim
periods in addition to the traditional annual disclosure.
SFAS No. 148 is effective for fiscal periods ending
after December 15, 2002. The Company has elected to
continue accounting for the stock based compensation using the
intrinsic value method.

In November 2002, the FASB issued Interpretation
No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Direct and Indirect
Guarantees of the Indebtedness of Others (FIN 45).
FIN 45, which requires that certain guarantees be recorded
at fair value, which differs from current practice, which is to
record a liability only when a loss is probable and reasonably
estimable. FIN 45 also requires new disclosures. The
Company adopted the disclosure provisions of FIN 45 as of
December 31, 2002. The Company does not expect the
accounting provisions of FIN 45 to have a material impact
on the financial statement upon its adoption on January 1,
2003.

22



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Risk Factors

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



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

Although we have had profitable quarters, we
incurred losses for the years ended December 31, 2002, 2001
and 2000. As of December 31, 2002, we had an accumulated
deficit of $140 million. Since our IPO in February of 2000,
we have funded our business primarily from the cash generated
from the sale of our stock and cash flow from operations. We
expect to continue to incur significant sales and marketing,
research and development and general and administrative expenses
that may exceed our revenue. As a result, we may experience
losses and negative cash flows in the future. Failure to achieve
and maintain profitability may cause our stock price to decline
and impair our business and financial prospects.



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

Our quarterly operating results have fluctuated
significantly in the past and are likely to fluctuate in the
future. Moreover, our operating results in some quarters may not
meet the expectations of stock market analysts and investors. In
that event, our stock price would likely decline. Further
declines in our stock price may impair our business prospects
and our financial condition. As a result of our limited history
of profitable operations, our business strategy, and the
evolving nature of the markets in which we compete, we may have
difficulty accurately forecasting our revenue in any given
period. In addition to the factors discussed elsewhere in this
section, a number of factors may cause our revenue to fall short
of our expectations or cause fluctuations in our operating
results, including:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | delay in our introduction of new applications,
    services and products offerings and enhancements of our existing
    solutions;
|
| |  | the capital and expense budgeting decisions of
    our existing and prospective customers;                                        
|
| |  | the loss of a major customer;                                                                                                     
|
| |  | the amount and timing of operating costs and
    capital expenditures relating to the implementation of our
    business strategy;
|
| |  | increased product development and engineering
    expenditures required to keep pace with technological changes;                  
|
| |  | the announcement or introduction of new or
    enhanced products or services by our competitors.                                  



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

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

23



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

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



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

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



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

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

24



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

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

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



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

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



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

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



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

Participants in the healthcare industry are
subject to extensive and frequently changing regulation under
numerous laws administered by governmental entities at the
federal, state and local levels, some of which are, and others
of which may be, applicable to our business. Furthermore, our
healthcare service provider, payer and plan customers are also
subject to a wide variety of laws and regulations that could
affect the nature and scope of their relationships with us.

The healthcare market itself is highly regulated
and subject to changing political, economic and regulatory
influences. These factors affect the purchasing practices and
operations of healthcare organizations. Changes in current
healthcare financing and reimbursement systems, such as
modifications which may be required by the Health Insurance
Portability and Accountability Act of 1996, may cause us to make
unplanned enhancements of software applications or services,
result in delays or cancellations of orders, or

25



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result in the revocation of endorsement of our
applications and services by healthcare participants. The effect
of HIPAA is difficult to predict and there can be no assurances
that we will adequately address the business risks created by
HIPAA and its implementation or that we will be able to take
advantage of any resulting business opportunities.


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



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

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



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

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



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

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



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

In order to increase our customer base and expand
our online traffic, we must establish, maintain and strengthen
our brand. For us to be successful in establishing our brand,
professionals in the healthcare and

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other targeted markets must perceive us as
offering quality, cost-effective, communications, information
and administrative services. Our reputation and brand name could
be harmed if we experience difficulties in introducing new
applications, services and product offerings, if these
applications, services and product offerings are not accepted by
customers, if we are required to discontinue existing
applications, services and product offerings or if our products
and services do not function properly.




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

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

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

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






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

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






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

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

27



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##### Table of Contents








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

On April 11, 2001, the Company filed a
Current Report on Form 8-K disclosing the dismissal of
PricewaterhouseCoopers LLP as our independent accountants and
hiring of Ernst & Young LLP. The decision to change
accountants was approved by our Board of Directors upon
recommendation by our Audit Committee. The reports of
PricewaterhouseCoopers LLP on our financial statements as of
December 31, 2000 and for the year ended December 31,
2000, contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the year ended December 31,
2000 and through April 11, 2001, there were no
disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have
caused them to make reference thereto in their report on the
financial statements for such year. Prior to April 11,
2001, the Company had not consulted with Ernst & Young
LLP on items that involved our accounting principles or the form
of audit opinion to be issued on our financial statements.




PART III






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

The information required by this item concerning
the Companys directors is incorporated by reference to the
information set forth in the sections entitled Information
About Nominees and Other Directors, Directors
Compensation, and Section 16(a) Beneficial
Ownership Compliance in our Proxy Statement for the 2003
Annual Meeting of Stockholders (2003 Proxy
Statement) to be filed with the Commission within
120 days after the end of the Companys fiscal year
ended December 31, 2002.






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

The information required by this item regarding
executive compensation is incorporated by reference to the
information set forth in the section entitled Executive
Compensation in our 2003 Proxy Statement to be filed with
the Commission by April 30, 2003.






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

The information required by this item regarding
security ownership of certain beneficial owners and management
and regarding the securities authorized for issuance under our
equity compensation plans is incorporated by reference to the
information set forth in the section entitled Security
Ownership of Certain Beneficial Holders and Management and
Securities Authorized for Issuance Under Equity
Compensation Plans in our 2003 Proxy Statement to be filed
with the Commission by April 30, 2003.






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

The information required by this item regarding
security ownership of certain relationships and related
transactions is incorporated by reference to the information set
forth in the section entitled Certain Relationships and
Related Transactions in our 2003 Proxy Statement to be
filed with the Commission by April 30, 2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Chief Executive Officer and Chief Financial
    Officer evaluated the effectiveness of the Companys
    disclosure controls and procedures (as defined in the Exchange
    Act Rules 13a-14 and 15d-14) as of a date within
    90 days prior to the filing of this report (the
    Evaluation Date). Based on this evaluation, our
    Chief Executive Officer and Chief Financial Officer have each
    concluded that as of the Evaluation Date our disclosure controls
    and procedures are effective to provide reasonable assurance

28



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| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | that information required to be disclosed by the
    Company in the reports that it files or submits under the
    Exchange Act is recorded, processed, summarized and reported
    within the time periods specified by the Securities and Exchange
    Commissions rules and forms.

(b) Changes in internal controls.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were no significant changes in our internal
    controls or in other factors that could significantly affect the
    internal controls subsequent to the Evaluation Date.




PART IV






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

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

1. Consolidated Financial Statements



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

|                                                                         |  |        |     | 
|------------------------------------------------------------------------ |  | ------ | --- | 
|                                                                         |  | Page  
|                                                                         |  | Number
|                                                                         |  |       
|Index to Consolidated Financial Statements                               |  |        | F-1 | 
|Report of Independent Auditors and Report of
    Independent Accountants |  |        | F-2 | 
|Consolidated Balance Sheets                                              |  |        | F-4 | 
|Consolidated Statements of Operations                                    |  |        | F-5 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) |  |        | F-6 | 
|Consolidated Statements of Cash Flows                                    |  |        | F-7 | 
|Notes to the Consolidated Financial Statements                           |  |        | F-8 | 

2. Consolidated Financial Statement
Schedules. The following consolidated financial statement
schedule of the Company for each of the years ended
December 31, 2002, 2001 and 2000, is filed as part of this
Annual Report on Form 10-K and should be read in
conjunction with the Consolidated Financial Statements, and the
related notes thereto, of the Company.

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

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

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

(b) Reports on Form 8-K

On October 15, 2002, we filed a Current
Report on Form 8-K to report that on October 2, 2002
we announced our preliminary financial results for the quarterly
period ended September 30, 2002.

On October 24, 2002, we filed a Current
Report on Form 8-K to report that on October 23, 2002
we announced our financial results for the quarterly period
ended September 30, 2002.

On November 5, 2002, we filed a Current
Report on Form 8-K in connection with the filing of our
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2002 stating that our principal
executive officer and our principal financial officer certified
our report pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002.

29



---



##### Table of Contents



On December 17, 2002, we filed a Current
Report on Form 8-K to announce the appointment of Charles
J. Roesslein to fill the vacancy on the Quovadx Board of
Directors and the resignation of Robert I. Murrie from the
Quovadx Board of Directors effective as of December 11,
2002.

(c) Index to Exhibits

|        |       |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ----- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |        
|Number  |       | Exhibit
|        |       |        
|        | 2.1*  |         |  | Agreement and Plan of Merger and Reorganization,
    dated as of May 14, 2001, by and among XCare.net, Inc., Orbit
    Acquisition Corp., and Healthcare.com Corporation (incorporated
    by reference to Exhibit 2.1 to the Current Report on
    Form 8-K of the Company, filed as of May 18, 2001,
    Commission File No. 000-29273).                                                                                                                              
|        | 3.1*  |         |  | Amended and Restated Certificate of Incorporation
    of XCare.net, Inc. (incorporated by reference as
    Exhibit 3.2 to Amendment No. 2 to the Registration
    Statement on Form S-1 of the Company, filed as of
    January 12, 2000, Registration No. 333-90165).                                                                                                                                                                                                  
|        | 3.2*  |         |  | Certificate of Amendment of Restated Certificate
    of Incorporation of XCare.net, Inc. (incorporated by reference
    as Exhibit 3.4 to Amendment No. 2 to the Registration
    Statement on Form S-1 of the Company, filed as of
    January 12, 2000, Registration No. 333-90165).                                                                                                                                                                                  
|        | 3.3*  |         |  | Bylaws of XCare.net, Inc. (incorporated by
    reference to Exhibit 3.3 to the Registration Statement on
    Form S-1 of the Company, filed as of November 2, 1999,
    Registration No. 333-90165).                                                                                                                                                                                                                                                                    
|        | 4.1*  |         |  | Specimen stock certificate representing shares of
    Common Stock of Quovadx, Inc. (incorporated by reference to
    Exhibit 4.1 to the Current Report on Form 8-K of the
    Company, filed as of October 16, 2001, Commission File
    No. 000-29273).                                                                                                                                                                                                               
|        | 4.2*  |         |  | Registration Rights Agreement, dated as of
    June 7, 2001, between XCare.net, Inc. and certain
    Shareholders (as identified therein) of Confer Software, Inc.
    (incorporated by reference to Exhibit 4.3 to the
    Registration Form of S-1 of the Company, filed as of
    July 17, 2001, Registration No. 333-65280).                                                                                                                                        
|        | 4.3*  |         |  | Registration Rights Agreement, dated as of
    December 14, 2001, between Quovadx and Francis Carden
    (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-3 of the Company, filed as
    of January 23, 2002, Registration No. 333-81210).                                                                                                                                                                                         
|        | 10.1* |         |  | Amended and Restated 1997 Stock Plan and related
    agreements (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-8 of the Company, filed as
    of May 16, 2002, Registration No. 333-88408).***                                                                                                                                                                                                                                   
|        | 10.2* |         |  | 1999 Employee Stock Purchase Plan and related
    agreements (incorporated by reference to Exhibit 4.2 to the
    Registration Statement on Form S-8 of the Company, filed as
    of May 16, 2002, Registration No. 333-88408).***                                                                                                                                                                                                                                      
|        | 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 Company, filed as of May 16, 2002, Registration
    No. 333-88408).***                                                                                                                                                                                                                     
|        | 10.4* |         |  | Amended and Restated 2000 Nonstatutory Stock
    Option Plan and related agreements (incorporated by reference to
    Exhibit 4.4 to the Registration Statement on Form S-8
    of the Company, filed as of May 16, 2002, Registration
    No. 333-88408).***                                                                                                                                                                                                           
|        | 10.5* |         |  | Amended and Restated Healthcare.com Corporation
    Non-Employee Director Stock Option Plan (filed as of
    August 13, 1999, as Exhibit 10 to the Quarterly Report on
    Form 10-Q of Healthcare.com Corporation for the quarter
    ended June 30, 1999, Commission File No. 0-27056, and
    incorporated by reference to Exhibit 10.42 to the
    Registration Statement on Form S-4 of the Company, filed as
    of June 29, 2001, Registration No. 333-64282).***
|        | 10.6* |         |  | Healthcare.com Corporation Adjustment Stock
    Option Plan (filed as of October 24, 1995, as
    Exhibit 10.5 to Amendment No. 1 to the Registration
    Statement on Form S-1 of Healthcare.com Corporation,
    Registration No. 33-96478, and incorporated by reference to
    Exhibit 10.43 to the Registration Statement on Form S-4 of
    the Company, filed as of June 29, 2001, Registration
    No. 333-64282).***                                           

30



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##### Table of Contents



|        |        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ------ | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |        
|Number  |        | Exhibit
|        |        |        
|        | 10.7*  |         |  | Healthcare.com Corporation Restated Stock Option
    Plan Two (filed as of May 11, 1998, as Exhibit 10.2 to
    the Quarterly Report on Form 10-Q of Healthcare.com Corporation
    for the quarter ended March 31, 1998, Commission File
    No. 0-27056, and incorporated by reference to
    Exhibit 10.44 to the Registration Statement on
    Form S-4 of the Company, filed as of June 29, 2001,
    Registration No. 333-64282).***
|        | 10.8** |         |  | Offer letter, dated as of February 20, 2002,
    with David E. Nesvisky.                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.9*  |         |  | Office Lease Agreement, effective as of
    November 8, 1999, between Mountain States Mutual Casualty
    Company and the Company (incorporated by reference to Amendment
    1 to the Registration Statement on Form S-1 of the Company,
    filed as of December 17, 1999, Registration
    No. 333-90165).                                                                                                                             
|        | 10.10* |         |  | Sublease, dated as of August 24, 2001,
    between Echo Bay Management Corp. and XCare.net, Inc.
    (incorporated by reference to Exhibit 12.1 to the Annual Report
    on Form 10-K of the Company for the year ended
    December 31, 2001, filed as of March 26, 2002,
    Commission File No. 000-29273).                                                                                                                            
|        | 10.11* |         |  | Form of Healthcare.com Corporation Severance
    Compensation and Restrictive Covenant Agreement (incorporated by
    reference to Exhibit 2.6 to the Current Report on
    Form 8-K of the Company, filed as of May 18, 2001,
    Commission File No. 000-29273).                                                                                                                                                                        
|        | 10.12* | *       |  | Consulting Agreement, dated as of
    December 12, 2000, between Healthcare.com Corporation and
    Joseph G. Bleser.                                                                                                                                                                                                                                                                                                                     
|        | 10.13* | *       |  | Amendment No. 1, dated as of August 10,
    2001, to Consulting Agreement, dated as of December 12,
    2002, between Healthcare.com Corporation and Joseph G. Bleser.                                                                                                                                                                                                                                                                    
|        | 10.14* |         |  | Form of Indemnification Agreement entered into by
    Quovadx, Inc. 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 Company for the year ended
    December 31, 2001, filed as of March 26, 2002,
    Commission File No. 000-29273).                                                                                                       
|        | 16.1*  |         |  | Letter, dated as of April 17, 2001, from
    PricewaterhouseCoopers LLP to the United States Securities and
    Exchange Commission (incorporated by reference to
    Exhibit No. 16.1 to the Current Report on
    Form 8-K of the Company, filed as of April 18, 2001,
    Commission File No. 000-29273).                                                                                                                              
|        | 21**   |         |  | Subsidiaries of Quovadx, Inc.                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 23.1** |         |  | Consent of Ernst & Young, LLP, Independent
    Auditors.                                                                                                                                                                                                                                                                                                                                                                                  
|        | 23.2** |         |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                       
|        | 99.1** |         |  | Certifications pursuant to 18 U.S.C. 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                                                                                                                                  



---



|  |                           
|- | --------------------------
|* | Incorporated by reference.



|   |               
|-- | --------------
|** | Filed herewith



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

31



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Englewood, State of Colorado, on this
27th day of March, 2003.



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



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

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS that each
person whose signature appears below constitutes and appoints,
jointly and severally, Lorine R. Sweeney and Gary T. Scherping
and each one of them, his true and lawful attorney-in-fact and
agents, each with full power of substitution, for his and in his
name, place and stead, in any and all capacities, to sign any
and all amendments to this report on Form 10-K, and to file
the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as
they might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or
any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof.

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

|                                       |  |                                                                                                      |  |                |  | 
|-------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                       |  |                                                                                                      |  |               
|Signatures                             |  | Title                                                                                                |  | Date          
|                                       |  |                                                                                                      |  |               
|                                      
|/s/ LORINE R. SWEENEYLorine R. Sweeney |  | Director, President and Chief Executive Officer
    (Principal
    Executive Officer)                |  | March 27, 2003
|                                      
|/s/ GARY T. SCHERPINGGary T. Scherping |  | Executive VP of Finance and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | March 27, 2003
|                                      
|/s/ JEFFREY M. KRAUSSJeffrey M. Krauss |  | Chairman of the Board                                                                                |  | March 27, 2003
|                                      
|/s/ FRED L. BROWNFred L. Brown         |  | Director                                                                                             |  | March 27, 2003
|                                      
|/s/ ANDREW COWHERDAndrew Cowherd       |  | Director                                                                                             |  | March 27, 2003
|                                      
|/s/ JAMES B. HOOVERJames B. Hoover     |  | Director                                                                                             |  | March 27, 2003

32



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|                                             |  |          |  |                |  | 
|-------------------------------------------- |  | -------- |  | -------------- |  | 
|                                             |  |          |  |               
|Signatures                                   |  | Title    |  | Date          
|                                             |  |          |  |               
|                                            
|/s/ CHARLES J. ROESSLEINCharles J. Roesslein |  | Director |  | March 27, 2003
|                                            
|/s/ JAMES GILBERTJames Gilbert               |  | Director |  | March 27, 2003
|                                            
|/s/ JOSEPH BLESERJoseph Bleser               |  | Director |  | March 27, 2003

33



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##### Table of Contents



QUOVADX, INC.




INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                         |  |      |     | 
|------------------------------------------------------------------------ |  | ---- | --- | 
|                                                                         |  | Page
|                                                                         |  |     
|Report of Independent Auditors and Report of
    Independent Accountants |  |      | F-2 | 
|Consolidated Balance Sheets                                              |  |      | F-4 | 
|Consolidated Statements of Operations                                    |  |      | F-5 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficit) |  |      | F-6 | 
|Consolidated Statements of Cash Flows                                    |  |      | F-7 | 
|Notes to the Consolidated Financial Statements                           |  |      | F-8 | 

F-1



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors

Quovadx, Inc.


We have audited the accompanying consolidated
balance sheets of Quovadx, Inc. (the Company) as of
December 31, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders equity
(deficit) and cash flows for each of the years then ended.
Our audits also include the financial statement schedule listed
in the index at Item 15(a)2. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of the Company at
December 31, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the years then
ended in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related
financial schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects the financial information set forth therein.

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



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

Denver, Colorado

February 3, 2003


F-2



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Quovadx, Inc.

In our opinion, the consolidated statements of
operations, changes in stockholders equity (deficit) and
cash flows for the year ended December 31, 2000, listed in
the index appearing under Item 15(a)(1) on page 29
present fairly, in all material respects, the results of their
operations and their cash flows of Quovadx, Inc. (formerly
XCare.net, Inc.) and its subsidiaries for the year ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the consolidated financial statement schedule
listed in the index appearing under item 15(a)(2) on
page 29 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

Denver, Colorado

March 23, 2001


F-3



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED BALANCE SHEETS

|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |         |         | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------- |  | ------ | ------- | ------- | 
|                                                 |                                                                                                                                             |                                           
|                                                 |                                                                                                                                             | December 31,                              
|                                                 |                                                                                                                                             |                                           
|                                                 |                                                                                                                                             | 2002                                       |        | 2001    
|                                                 |                                                                                                                                             |                                            |        |         
|                                                 |                                                                                                                                             |                                           
|                                                 |                                                                                                                                             | (In thousands, except                     
|                                                 |                                                                                                                                             | share and per share                       
|                                                 |                                                                                                                                             | amounts)                                  
|ASSETS                                          
|Current assets:                                  |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 | Cash and cash equivalents                                                                                                                   |                                            | $      | 31,244   |         |  | $      | 55,030  |        
|                                                 | Short-term investments                                                                                                                      |                                            |        | 16,377   |         |  |        | 8,456   |        
|                                                 | Accounts receivable, net of allowance of $2,370
    and $1,932, respectively                                                                |                                            |        | 10,980   |         |  |        | 10,104  |        
|                                                 | Unbilled accounts receivable                                                                                                                |                                            |        | 5,571    |         |  |        | 7,816   |        
|                                                 | Other current assets                                                                                                                        |                                            |        | 1,904    |         |  |        | 3,048   |        
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total current assets                       |        |          | 66,076  |  |        |         | 84,454  | 
|Property and equipment, net                      |                                                                                                                                             |                                            | 5,326  |          |         |  | 7,443  |        
|Software, net                                    |                                                                                                                                             |                                            | 20,465 |          |         |  | 18,295 |        
|Other intangible assets, net                     |                                                                                                                                             |                                            | 6,266  |          |         |  | 11,021 |        
|Goodwill, net                                    |                                                                                                                                             |                                            |       |          |         |  | 92,202 |        
|Other assets                                     |                                                                                                                                             |                                            | 6,476  |          |         |  | 1,289  |        
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total assets                               |        | $        | 104,609 |  |        | $       | 214,704 | 
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY        
|Current liabilities:                             |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 | Accounts payable                                                                                                                            |                                            | $      | 1,288    |         |  | $      | 1,654   |        
|                                                 | Accrued liabilities                                                                                                                         |                                            |        | 6,007    |         |  |        | 11,646  |        
|                                                 | Unearned revenue                                                                                                                            |                                            |        | 8,241    |         |  |        | 8,495   |        
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total current liabilities                  |        |          | 15,536  |  |        |         | 21,795  | 
|Deferred revenue and other long-term liabilities |                                                                                                                                             |                                            | 2,125  |          |         |  | 4,022  |        
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total liabilities                          |        |          | 17,661  |  |        |         | 25,817  | 
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|Commitments and contingencies (Note 7)           |                                                                                                                                             |                                            |        |          |         |  |        |        
|Stockholders equity:                            |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 | Preferred stock, $0.01 par value;
    5,000,000 shares authorized; no shares issued and
    outstanding                                     |                                            |        |         |         |  |        |        |        
|                                                 | Common stock, $0.01 par value;
    100,000,000 shares authorized; 30,176,159 and
    29,688,133 shares issued and outstanding, respectively |                                            |        | 302      |         |  |        | 297     |        
|                                                 | Additional paid-in capital                                                                                                                  |                                            |        | 226,685  |         |  |        | 224,748 |        
|                                                 | Unearned compensation                                                                                                                       |                                            |        |         |         |  |        | (231    | )      
|                                                 | Accumulated deficit                                                                                                                         |                                            |        | (140,039 | )       |  |        | (35,927 | )      
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total stockholders equity                 |        |          | 86,948  |  |        |         | 188,887 | 
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        
|                                                 |                                                                                                                                             | Total liabilities and stockholders equity |        | $        | 104,609 |  |        | $       | 214,704 | 
|                                                 |                                                                                                                                             |                                            |        |          |         |  |        |        

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

F-4



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |        |        | 
|------------------------------------------------------------------ | ------------------------------------------ | ---------------------------------------- | -------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                   |                                            |                                         
|                                                                   |                                            | Year Ended December 31,                 
|                                                                   |                                            |                                         
|                                                                   |                                            | 2002                                     |          | 2001   |        | 2000
|                                                                   |                                            |                                          |          |        |        |     
|                                                                   |                                            |                                         
|                                                                   |                                            | (In thousands, except per share amounts)
|Revenue:                                                           |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|                                                                   | Professional Services                      |                                          | $        | 22,459 |        |      | $      | 28,449 |        |   | $       | 6,925  |       
|                                                                   | Software License                           |                                          |          | 11,854 |        |      |        | 6,416  |        |   |         |       |       
|                                                                   | Recurring Services                         |                                          |          | 29,345 |        |      |        | 17,315 |        |   |         | 3,193  |       
|                                                                   | Professional Services from Affiliates      |                                          |          |       |        |      |        |       |        |   |         | 716    |       
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|                                                                   |                                            | Total revenue                            |          |        | 63,658 |      |        |        | 52,180 |   |         |        | 10,834 | 
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|Costs and expenses:                                                |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|                                                                   | Cost of revenue                            |                                          |          | 33,702 |        |      |        | 31,804 |        |   |         | 14,326 |       
|                                                                   | Software amortization                      |                                          |          | 5,458  |        |      |        | 2,079  |        |   |         |       |       
|                                                                   | Sales and marketing                        |                                          |          | 13,292 |        |      |        | 8,785  |        |   |         | 5,216  |       
|                                                                   | General and administrative                 |                                          |          | 13,608 |        |      |        | 10,045 |        |   |         | 9,207  |       
|                                                                   | Research and development                   |                                          |          | 7,209  |        |      |        | 4,792  |        |   |         | 2,952  |       
|                                                                   | Amortization of acquired intangible assets |                                          |          | 2,307  |        |      |        | 1,585  |        |   |         | 96     |       
|                                                                   | Stock compensation expense (Note 5)        |                                          |          | 231    |        |      |        | 460    |        |   |         | 1,381  |       
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|                                                                   |                                            | Total costs and expenses                 |          |        | 75,807 |      |        |        | 59,550 |   |         |        | 33,178 | 
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|Loss from operations                                               |                                            |                                          | (12,149  | )      |        |      | (7,370 | )      |        |   | (22,344 | )     
|Gain on sale of assets                                             |                                            |                                          | 87       |        |        |      |       |        |        |   |        |       
|Goodwill impairment                                                |                                            |                                          | (93,085  | )      |        |      |       |        |        |   |        |       
|Interest income, net                                               |                                            |                                          | 1,035    |        |        |      | 3,101  |        |        |   | 5,027   |       
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|Net loss                                                           |                                            | $                                        | (104,112 | )      |        | $    | (4,269 | )      |        | $ | (17,317 | )     
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|Net loss per common share  basic and
    diluted                  |                                            | $                                        | (3.47    | )      |        | $    | (0.20  | )      |        | $ | (1.20   | )     
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       
|Weighted average common shares
    outstanding  basic and diluted |                                            |                                          | 29,987   |        |        |      | 21,308 |        |        |   | 14,399  |       
|                                                                   |                                            |                                          |          |        |        |      |        |        |        |   |         |       

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

F-5



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY (DEFICIT)

(In thousands)


|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |       |  |   |        |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---------- |  | -------- | --- | ------------ |  | ------- | ------- | ----- |  | - | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                                        |  |              |        |            |  |          |     |              |  |        
|                                                                                                        |  | Common Stock |        | Additional |  |          |     |              |  |        
|                                                                                                        |  |              |        | Paid-in    |  | Unearned |     | Accumulated  |  |        
|                                                                                                        |  | Shares       |        | Amount     |  | Capital  |     | Compensation |  | Deficit |         | Total
|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |      
|Balance at December 31, 1999                                                                            |  |              | 578    |            |  | $        | 6   |              |  | $       | 3,432   |       |  | $ | (2,269 | ) |  | $ | (14,341  | ) |  | $ | (13,172  | )
|Conversion of preferred stock into common stock
    and exercise of warrants at Initial Public Offering |  |              | 9,811  |            |  |          | 98  |              |  |         | 23,743  |       |  |   |       |   |  |   |         |   |  |   | 23,841   |  
|Common stock issued at Initial Public Offering,
    net of offering costs                               |  |              | 5,750  |            |  |          | 57  |              |  |         | 94,176  |       |  |   |       |   |  |   |         |   |  |   | 94,233   |  
|Stock option exercises and issuances under
    employee stock purchase plan                             |  |              | 199    |            |  |          | 2   |              |  |         | 305     |       |  |   |       |   |  |   |         |   |  |   | 307      |  
|Common stock warrants issued to customer                                                                |  |              |       |            |  |          |    |              |  |         | 3,058   |       |  |   |       |   |  |   |         |   |  |   | 3,058    |  
|Stock compensation                                                                                      |  |              |       |            |  |          |    |              |  |         | (231    | )     |  |   | 1,612  |   |  |   |         |   |  |   | 1,381    |  
|Shares issued for acquisitions                                                                          |  |              | 70     |            |  |          | 1   |              |  |         | 507     |       |  |   |       |   |  |   |         |   |  |   | 508      |  
|Net loss                                                                                                |  |              |       |            |  |          |    |              |  |         |        |       |  |   |       |   |  |   | (17,317  | ) |  |   | (17,317  | )
|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |       |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2000                                                                            |  |              | 16,408 |            |  |          | 164 |              |  |         | 124,990 |       |  |   | (657   | ) |  |   | (31,658  | ) |  |   | 92,839   |  
|Common stock warrant exercises                                                                          |  |              | 1,023  |            |  |          | 10  |              |  |         | (10     | )     |  |   |       |   |  |   |         |   |  |   |         |  
|Shares issued for acquisitions                                                                          |  |              | 11,496 |            |  |          | 115 |              |  |         | 95,191  |       |  |   |       |   |  |   |         |   |  |   | 95,306   |  
|Stock option exercises and issuances under
    employee stock purchase plan                             |  |              | 761    |            |  |          | 8   |              |  |         | 4,543   |       |  |   |       |   |  |   |         |   |  |   | 4,551    |  
|Stock compensation                                                                                      |  |              |       |            |  |          |    |              |  |         | 34      |       |  |   | 426    |   |  |   |         |   |  |   | 460      |  
|Net loss                                                                                                |  |              |       |            |  |          |    |              |  |         |        |       |  |   |       |   |  |   | (4,269   | ) |  |   | (4,269   | )
|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |       |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2001                                                                            |  |              | 29,688 |            |  |          | 297 |              |  |         | 224,748 |       |  |   | (231   | ) |  |   | (35,927  | ) |  |   | 188,887  |  
|Shares issued for acquisitions                                                                          |  |              | 139    |            |  |          | 1   |              |  |         | 919     |       |  |   |       |   |  |   |         |   |  |   | 920      |  
|Stock option exercises and issuances under
    employee stock purchase plan                             |  |              | 349    |            |  |          | 4   |              |  |         | 1,018   |       |  |   |       |   |  |   |         |   |  |   | 1,022    |  
|Stock compensation                                                                                      |  |              |       |            |  |          |    |              |  |         |        |       |  |   | 231    |   |  |   |         |   |  |   | 231      |  
|Net loss                                                                                                |  |              |       |            |  |          |    |              |  |         |        |       |  |   |       |   |  |   | (104,112 | ) |  |   | (104,112 | )
|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |       |  |   |        |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2002                                                                            |  |              | 30,176 |            |  | $        | 302 |              |  | $       | 226,685 |       |  | $ |       |   |  | $ | (140,039 | ) |  | $ | 86,948   |  
|                                                                                                        |  |              |        |            |  |          |     |              |  |         |         |       |  |   |        |   |  |   |          |   |  |   |          |  

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

F-6



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##### Table of Contents



QUOVADX, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |       |        |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------- | ------------------------------------------------------- | ------ | ------ | ------- | ------ | ----- | ------ | ------ | ------- | ----- | ------ | ------- | -
|                                                                                |                                                                                |                              
|                                                                                |                                                                                | Year Ended December 31,      
|                                                                                |                                                                                |                              
|                                                                                |                                                                                | 2002                          |                                                         | 2001   |        | 2000   
|                                                                                |                                                                                |                               |                                                         |        |        |        
|                                                                                |                                                                                |                              
|                                                                                |                                                                                | (In thousands)               
|CASH FLOWS FROM OPERATING ACTIVITIES                                            |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Net loss                                                                        |                                                                                | $                             | (104,112                                                | )      |        | $       | (4,269 | )     |        | $      | (17,317 | )    
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|                                                                                | Depreciation and amortization                                                  |                               |                                                         | 8,673  |        |         |        | 6,099 |        |        |         | 1,602 |       
|                                                                                | Amortization of acquired intangible assets                                     |                               |                                                         | 2,307  |        |         |        | 1,585 |        |        |         | 96    |       
|                                                                                | Goodwill impairment                                                            |                               |                                                         | 93,085 |        |         |        |      |        |        |         |      |       
|                                                                                | Gain on sale of assets                                                         |                               |                                                         | (87    | )      |         |        |      |        |        |         |      |       
|                                                                                | Charge related to issuance of warrants                                         |                               |                                                         |       |        |         |        | 876   |        |        |         | 2,182 |       
|                                                                                | Provision for losses on accounts receivable                                    |                               |                                                         | 474    |        |         |        | 97    |        |        |         | 636   |       
|                                                                                | Loss on impairment and disposal of assets                                      |                               |                                                         |       |        |         |        | 503   |        |        |         | 295   |       
|                                                                                | Stock compensation expense                                                     |                               |                                                         | 231    |        |         |        | 460   |        |        |         | 1,381 |       
|                                                                                | Other operating activities                                                     |                               |                                                         |       |        |         |        | 386   |        |        |         | (43   | )     
|                                                                                | Change in assets and liabilities: (net of assets
    and liabilities acquired) |                               |                                                         |        |        |         |        |       |        |        |         |       |       
|                                                                                |                                                                                | Accounts receivable           |                                                         |        | (4,456 | )       |        |       | 1,234  |        |         |       | (2,015 | )      
|                                                                                |                                                                                | Receivable from affiliate     |                                                         |        |       |         |        |       |       |        |         |       | 453    |        
|                                                                                |                                                                                | Unbilled accounts receivable  |                                                         |        | 2,245  |         |        |       | (4,167 | )      |         |       | (1,298 | )      
|                                                                                |                                                                                | Other assets                  |                                                         |        | 204    |         |        |       | (609   | )      |         |       | (2,576 | )      
|                                                                                |                                                                                | Accounts payable              |                                                         |        | (477   | )       |        |       | (1,995 | )      |         |       | 539    |        
|                                                                                |                                                                                | Accrued liabilities           |                                                         |        | (6,445 | )       |        |       | (7,629 | )      |         |       | (1,218 | )      
|                                                                                |                                                                                | Deferred and unearned revenue |                                                         |        | (1,715 | )       |        |       | 2,821  |        |         |       | (16    | )      
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|                                                                                |                                                                                |                               | Net cash used in operating activities                   |        |        | (10,073 | )      |       |        | (4,608 | )       |       |        | (17,299 | )
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|CASH FLOWS FROM INVESTING ACTIVITIES                                            |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Purchase of property and equipment                                              |                                                                                |                               | (1,457                                                  | )      |        |         | (2,892 | )     |        |        | (3,631  | )    
|Purchased and capitalized software                                              |                                                                                |                               | (3,733                                                  | )      |        |         | (1,903 | )     |        |        | (50     | )    
|Business acquisitions, net of cash acquired                                     |                                                                                |                               | (1,633                                                  | )      |        |         | (6,784 | )     |        |        | (2,871  | )    
|Purchase of short-term investments                                              |                                                                                |                               | (63,805                                                 | )      |        |         | (8,000 | )     |        |        | (41,000 | )    
|Sale of short-term investments                                                  |                                                                                |                               | 55,884                                                  |        |        |         | 40,544 |       |        |        |        |      
|Other investing activities                                                      |                                                                                |                               | 9                                                       |        |        |         | (300   | )     |        |        | (681    | )    
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|                                                                                |                                                                                |                               | Net cash provided by (used in) investing
    activities |        |        | (14,735 | )      |       |        | 20,665 |         |       |        | (48,233 | )
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|CASH FLOW FROM FINANCING ACTIVITIES                                             |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Principal payments on debt and capital leases                                   |                                                                                |                               |                                                        |        |        |         | (2,960 | )     |        |        | (35     | )    
|Proceeds from Initial Public Offering, net                                      |                                                                                |                               |                                                        |        |        |         |       |       |        |        | 95,326  |      
|Proceeds from issuance of common stock                                          |                                                                                |                               | 1,022                                                   |        |        |         | 4,551  |       |        |        | 307     |      
|Other financing activities                                                      |                                                                                |                               |                                                        |        |        |         | 63     |       |        |        | (202    | )    
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|                                                                                |                                                                                |                               | Net cash provided by financing activities               |        |        | 1,022   |        |       |        | 1,654  |         |       |        | 95,396  |  
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Net increase (decrease) in cash and cash
    equivalents                        |                                                                                |                               | (23,786                                                 | )      |        |         | 17,711 |       |        |        | 29,864  |      
|Cash and cash equivalents at beginning of period                                |                                                                                |                               | 55,030                                                  |        |        |         | 37,319 |       |        |        | 7,455   |      
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Cash and cash equivalents at end of period                                      |                                                                                | $                             | 31,244                                                  |        |        | $       | 55,030 |       |        | $      | 37,319  |      
|                                                                                |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
    FINANCING TRANSACTIONS    |                                                                                |                               |                                                         |        |        |         |        |       |        |        |         |      
|Issuance of common stock in business acquisitions                               |                                                                                | $                             | 920                                                     |        |        | $       | 95,306 |       |        | $      | 508     |      
|Issuance of common stock warrants to customer                                   |                                                                                |                               |                                                        |        |        |         |       |       |        |        | 3,058   |      

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

F-7



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##### Table of Contents



QUOVADX, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



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



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

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



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

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

The Company has operations in the United Kingdom
which have not been significant to date.



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

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



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

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

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

The methodology the Company uses to recognize
software license and related services revenue is dependent on
whether the Company has established vendor specific objective
evidence (VSOE) of fair value for the separate
elements of the multiple-element agreement.

If an agreement includes both license and service
elements, the license fee is recognized on delivery of the
software if the remaining services are not essential to the
functionality of the software, the collection of the fees is
probable, the fees are fixed and determinable, agreement is
signed and the Company has established VSOE of fair value for
the remaining services. Revenue from the related services is
recognized as the services are provided.

When the related services are essential to the
functionality of the base product or the Company has not
established VSOE of fair value for the remaining services, the
fees are deferred and the entire contract is recognized as the
services are provided.

F-8



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

When collection of the fees is not probable,
revenue is recognized as cash is collected. The Company does not
require collateral from its customers and an allowance for
doubtful accounts is maintained for credit losses.

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



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

All liquid investments with maturities of three
months or less when purchased are considered cash equivalents.
Short-term investments consist of U.S. government and
U.S. government agency debt securities with maturities less
than 12 months. The Company has classified
$11.8 million of its portfolio of corporate debt securities
as held to maturity as defined in Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities
based on the Companys intent to hold such securities to
maturity and those securities are carried at cost, which
approximates fair market value. Investment securities classified
as available for sale are measured at market value and net
unrealized gains and losses are recorded as comprehensive
income. At December 31, 2002, the Company did not hold
investment securities classified as available for sale. Any
gains and losses on sales of investments are computed on
specific identification. As of December 31, 2002, 2001, and
2000 net unrealized gains and losses on investments available
for sale were not material.



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

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



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

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

F-9



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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



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

The Company issues warranties to customers for
product performance in accordance with specifications that are
short term in nature, generally 90 days or less. The
Companys obligations under these warranties have not been
significant and are generally covered under customer maintenance
agreements. The Company also indemnifies customers against
patent infringement claims. As of December 31, 2002 and
2001, there were no liabilities recorded in the financial
statements related to indemnifications or warranties.



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

The Company had the following customers which
accounted for greater than 10% of revenue in any of the years
ended December 31, 2002, 2001 and 2000:

|         |  |              |    |      |  |      |    |   |  |  |    |  
|-------- |  | ------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|         |  |             
|         |  | Year Ended  
|         |  | December 31,
|         |  |             
|Customer |  | 2002         |    | 2001 |  | 2000
|         |  |              |    |      |  |     
|A        |  |              | 22 | %    |  |      | 9  | % |  |  |   |  
|B        |  |              | 11 | %    |  |      | 31 | % |  |  |   |  
|C        |  |              | 7  | %    |  |      | 14 | % |  |  | 17 | %
|D        |  |              |   |      |  |      |   |   |  |  | 10 | %

One customer accounted for 25% of the accounts
receivable balance at December 31, 2002. Three customers
accounted for 43% of the accounts receivable balance at
December 31, 2001.



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

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



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

Capitalized software costs consist of purchased
software, software development costs and software acquired
through acquisitions. Purchased software is used with the
Companys existing software as well as held for resale
under an exclusive license and is capitalized and amortized
ratably over a three-year estimated useful life. Software
development costs are required to be expensed until the point
that technological feasibility of the product is established
which the Company has determined to be when a detailed program
design is complete. Once technological feasibility is
established, such costs are capitalized until general
availability of the product. The establishment of technological
feasibility and continuing evaluation of the recoverability of
the capitalized software development costs requires
managements judgment with respect to the impact of
external factors such as future revenue, estimated economic life
and changes in software and hardware technologies. Capitalized
software development costs are amortized on a straight-line
basis over an

F-10



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated life, which is generally three to five
years. The Company capitalizes internal and external labor
incurred in developing the software once technological
feasibility is attained. Capitalized software acquired through
business acquisitions totaled $19.9 million, net of
$5.2 million of accumulated amortization. The Company
capitalized $3.7 million and $1.9 million of software
development costs in 2002 and 2001, respectively. Software
amortization expense for the years ended December 31, 2002
and 2001 was $5.5 million and $2.1 million,
respectively. The Company did not capitalize costs in 2000
because the period between achieving technological feasibility
and general availability of such software was relatively short.
Costs otherwise capitalizable after technological feasibility
were immaterial during 2000 and therefore expensed as incurred.



| |                                                  
| | -------------------------------------------------
| | Goodwill and Other Acquired Intangible
    Assets

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

In accordance with SFAS No. 142, the
Company did not record amortization expense related to goodwill
for acquisitions entered into after July 1, 2001 and for
all acquisitions as of January 1, 2002. Had this provision
of SFAS No. 142 been in effect as of January 1, 2000,
the Companys net loss for the years ended
December 31, 2001 and 2000 would have been $2,909,000 and
$17,241,000, respectively, and the Companys net loss per
common share would have been $0.14 and $1.20, respectively.

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

Intangible assets recognized in the
Companys acquisitions are being amortized over their
estimated lives ranging from three to eight years. Amortization
expense related to intangible assets was $2,307,000, $225,000
and $20,000 for the years ended December 31, 2002, 2001 and
2000, respectively. The Company expects amortization expense to
be $1,413,000, $993,000, $793,000, $748,000, and $716,000 for
the years ended December 31, 2003, 2004, 2005, 2006 and
2007, respectively.



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

On January 1, 2002, the Company adopted
SFAS 144 and the effect of the adoption did not have an
impact on the Companys financial results. The Company
periodically evaluates the carrying value of long-lived assets,
including, but not limited to, property and equipment, software,
and intangible assets when events and circumstances warrant such
a review. The carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with
the risk involved. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are
reduced for the cost to dispose of the assets.

F-11



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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



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

The Company expenses advertising costs as
incurred. Advertising expense for the years ended
December 31, 2002, 2001 and 2000 was $312,000, $493,000 and
$648,000, respectively.



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

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



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

At December 31, 2002, the Company had four
stock option plans and an employee stock purchase plan, which
are described more fully in Note 5. The Company has elected
to account for stock-based compensation arrangements using the
intrinsic value method under the provisions of Accounting
Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees. Under this
method, stock compensation is recognized to the extent that the
exercise price is less than the market price for the underlying
stock on the date of grant. The following table illustrates the
effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation.

|                           |                                                                            |                                      |   |          |   |      |   |         |   |  |   |         |  
|-------------------------- | -------------------------------------------------------------------------- | ------------------------------------ | - | -------- | - | ---- | - | ------- | - |  | - | ------- | -
|                           |                                                                            |                                     
|                           |                                                                            | Year Ended December 31,             
|                           |                                                                            |                                     
|                           |                                                                            | 2002                                 |   | 2001     |   | 2000
|                           |                                                                            |                                      |   |          |   |     
|                           |                                                                            |                                     
|                           |                                                                            | (In thousands except per share data)
|Net loss:                  |                                                                            |                                      |   |          |   |      |   |         |   |  |   |        
|                           | As reported                                                                |                                      | $ | (104,112 | ) |      | $ | (4,269  | ) |  | $ | (17,317 | )
|                           | Plus: stock based compensation recognized under
    intrinsic value method |                                      |   | 231      |   |      |   | 460     |   |  |   | 1,381   |  
|                           | Less: stock based compensation under fair value
    method                 |                                      |   | (8,760   | ) |      |   | (7,555  | ) |  |   | (1,747  | )
|                           |                                                                            |                                      |   |          |   |      |   |         |   |  |   |        
|                           | Pro forma net loss                                                         |                                      |   | (112,641 | ) |      |   | (11,364 | ) |  |   | (17,683 | )
|Net loss per common share: |                                                                            |                                      |   |          |   |      |   |         |   |  |   |        
|                           | As reported                                                                |                                      | $ | (3.47    | ) |      | $ | (0.20   | ) |  | $ | (1.20   | )
|                           | Pro forma                                                                  |                                      |   | (3.77    | ) |      |   | (0.53   | ) |  |   | (1.23   | )



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

Net income (loss) per common share
(EPS) is calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128,
Earnings per Share. Under the provisions of
SFAS No. 128, basic EPS is computed by dividing the
net loss for the period by the weighted average number of common

F-12



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if stock
options were exercised, resulting in the issuance of common
stock that would share in the earnings (loss) of the Company.
Potential dilution of the stock options exercisable into common
stock is computed using the treasury stock method based on the
average fair market value of the stock. In periods where the
Company has a net loss the effect of common stock equivalents is
excluded from the computation of diluted EPS since their effect
would decrease the loss per share. In 2002, 2001 and 2000,
508,109, 1,546,010, and 3,940,072 options and warrants to
purchase common stock were excluded from the calculation.

The following table sets forth the computation of
the numerators and denominators in the basic and diluted net
income (loss) per common share calculations for the periods
indicated:

|             |                                                                    |                                       |   |          |   |      |   |        |   |  |   |         |  
|------------ | ------------------------------------------------------------------ | ------------------------------------- | - | -------- | - | ---- | - | ------ | - |  | - | ------- | -
|             |                                                                    |                                      
|             |                                                                    | Year Ended December 31,              
|             |                                                                    |                                      
|             |                                                                    | 2002                                  |   | 2001     |   | 2000
|             |                                                                    |                                       |   |          |   |     
|             |                                                                    |                                      
|             |                                                                    | (In thousands, except per share data)
|Numerator:   |                                                                    |                                       |   |          |   |      |   |        |   |  |   |        
|             | Net loss available to common stockholders                          |                                       | $ | (104,112 | ) |      | $ | (4,269 | ) |  | $ | (17,317 | )
|             |                                                                    |                                       |   |          |   |      |   |        |   |  |   |        
|Denominator: |                                                                    |                                       |   |          |   |      |   |        |   |  |   |        
|             | Weighted average common shares
    outstanding  basic and diluted |                                       |   | 29,987   |   |      |   | 21,308 |   |  |   | 14,399  |  
|             |                                                                    |                                       |   |          |   |      |   |        |   |  |   |        



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

SFAS No. 130, Reporting
Comprehensive Income establishes standards for reporting
comprehensive income and its components in financial statements.
Comprehensive income includes all changes in equity during a
period from non-owner sources. During each of the three years
ended December 31, 2002, the Company has not had any
significant transactions that are required to be reported as
adjustments to determine comprehensive income.



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

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



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

In 2002, the Company adopted the Emerging Issues
Task Force (EITF) Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred. This
pronouncement requires that reimbursements received for
out-of-pocket expenses should be characterized as
revenue and corresponding expense in the Statements of
Operations. Prior to the adoption of this EITF, the Company
reflected the reimbursement of out-of-pocket expenses as an
offsetting reduction to operating expenses. The Company incurs
incidental expenses in the delivery of services to its clients.
These out-of-pocket expenses include, but are not
limited to, transportation, lodging and related charges.
Accordingly, the Company has adjusted the periods ended
December 31, 2002, 2001 and 2000 to reflect an increase in
revenue, and an equal and offsetting increase in operating
expenses, of $701,000, $762,000 and $153,000, respectively,
related to reimbursable expenses. This change in classification
has not had an effect on current or previously reported net
loss, or net loss per share.

In 2002, the FASB issued SFAS No. 148,
Accounting for Stock Based Compensation 
Transition and Disclosure. SFAS No. 148 provides
transition methods for entities that adopt the fair value method
of accounting for stock based compensation. Further, the
statement requires disclosure of comparable information for all
companies regardless of whether, when, or how an entity adopts
the fair value method of accounting for stock based
compensation. These disclosures are now required for interim
periods in addition to

F-13



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the traditional annual disclosure.
SFAS No. 148 is effective for fiscal periods ending
after December 15, 2002. The Company has elected to
continue accounting for the stock based compensation using the
intrinsic value method.

In November 2002, the FASB issued Interpretation
No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Direct and Indirect
Guarantees of the Indebtedness of Others (FIN 45).
FIN 45, which requires that certain guarantees be recorded
at fair value, which differs from current practice, which is to
record a liability only when a loss is probable and reasonably
estimable. FIN 45 also requires new disclosures. The
Company adopted the disclosure provisions of FIN 45 as of
December 31, 2002. The Company does not expect the
accounting provisions of FIN 45 to have a material impact
on the financial statement upon its adoption on January 1,
2003.



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

On March 1, 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).
Under the terms of the asset sale agreement, Royal acquired the
medical management services business, including personnel,
property, key contracts and equipment. The Company retained the
core systems and information technology of Advica and entered
into an agreement to provide application service provider
(ASP) services to Royal for a period of seven years. As
consideration for the sale of assets and services to be
provided, the Company received cash of $475,000 and a 4.6%
equity interest in Royal valued at $2.7 million based on an
independent appraisal. Based on the warranty provisions and
payment milestones associated with the services agreement, the
Company allocated $1.2 million of the consideration
received to the services agreement which will be recognized into
revenue on a straight line basis over the term of the services
agreement. The remaining $2.0 million of consideration
received was allocated to the sale of assets and the Company
recorded a gain of $87,000 as a result of the sale. The equity
interest in Royal is recorded at cost in other assets as the
Company does not have significant influence on the operations of
Royal.

On March 27, 2002, the Company purchased all
of the outstanding stock of Outlaw Technologies, Inc. (Outlaw).
The Company purchased Outlaw to add a customer relationship
management application to our suite of Adaptive Applications.
The purchase price, totaling $2.7 million included
138,575 shares of the Companys common stock and
$1.8 million in cash and professional fees directly related
to the acquisition. The Company allocated the purchase price
based on the fair value of assets and liabilities acquired
determined in an independent appraisal as follows:
$1.7 million in goodwill, $0.8 million in software,
$0.7 million in other intangible assets, $0.3 million
in cash and other current assets, and $0.6 million in
liabilities.

During 2001, the Company purchased the
outstanding stock of Healthcare.com, Confer Software, Inc. and
Pixel Group Ltd. The total purchase price for these acquisitions
was $107.0 million, including 11,496,290 shares of
Quovadx common stock and $11.3 million in cash and
professional fees related to the acquisitions. Goodwill,
software and intangibles assets recorded as a result of the
acquisitions were $90.6 million, $19.0 million and
$8.7 million, respectively.

The Company retained an independent appraiser to
assist with the assigning of fair values to the identifiable
intangibles acquired in its acquisitions. The valuations relied
on methodologies that most closely related to the fair market
value assignment with the economic benefits provided by each
asset and risks associated with the assets. Operating results
have been included in the consolidated financial results from
the date of acquisitions.

F-14



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The unaudited pro forma results of operations as
though the Healthcare.com Corporation, Confer Software, Inc.,
Pixel Group Ltd. and Outlaw acquisitions had been completed as
of January 1, 2001 are as follows (in thousands except for
per share amounts):

|                   |  |                   |          |                   |  |   |         |  
|------------------ |  | ----------------- | -------- | ----------------- |  | - | ------- | -
|                   |  | Year Ended        |          | Year Ended       
|                   |  | December 31, 2002 |          | December 31, 2001
|                   |  |                   |          |                  
|Revenue            |  | $                 | 63,829   |                   |  | $ | 70,768  |  
|Net loss           |  |                   | (104,068 | )                 |  |   | (15,204 | )
|Net loss per share |  |                   | (3.47    | )                 |  |   | (0.54   | )

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



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

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

|                     |                                 |              |       |      |  |   |       |       | 
|-------------------- | ------------------------------- | ------------ | ----- | ---- |  | - | ----- | ----- | 
|                     |                                 |             
|                     |                                 | December 31,
|                     |                                 |             
|                     |                                 | 2002         |       | 2001
|                     |                                 |              |       |     
|Other Current Assets |                                 |              |       |      |  |   |       |      
|                     | Prepaid maintenance and support |              | $     | 247  |  |   | $     | 1,070 | 
|                     | Prepaid rent                    |              |       | 497  |  |   |       | 586   | 
|                     | Deferred costs                  |              |       | 270  |  |   |       | 416   | 
|                     | Other                           |              |       | 890  |  |   |       | 976   | 
|                     |                                 |              |       |      |  |   |       |      
|                     |                                 | $            | 1,904 |      |  | $ | 3,048 |      
|                     |                                 |              |       |      |  |   |       |      

|                       |                                                |              |        |         |   |   |        |         |  
|---------------------- | ---------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                       |                                                |             
|                       |                                                | December 31,
|                       |                                                |             
|                       |                                                | 2002         |        | 2001   
|                       |                                                |              |        |        
|Property and Equipment |                                                |              |        |         |   |   |        |        
|                       | Furniture, fixtures and equipment              |              | $      | 3,915   |   |   | $      | 4,033   |  
|                       | Computer hardware                              |              |        | 12,251  |   |   |        | 10,741  |  
|                       | Computer software                              |              |        | 3,919   |   |   |        | 6,225   |  
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                |              | 20,085 |         |   |   | 20,999 |        
|                       | Less accumulated depreciation and amortization |              |        | (14,759 | ) |   |        | (13,556 | )
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                | $            | 5,326  |         |   | $ | 7,443  |        
|                       |                                                |              |        |         |   |   |        |        
|Intangible Assets      |                                                |              |        |         |   |   |        |        
|                       | Customer Base                                  |              | $      | 5,966   |   |   | $      | 5,725   |  
|                       | Customer Lists                                 |              |        | 603     |   |   |        |        |  
|                       | Tradename                                      |              |        | 618     |   |   |        | 618     |  
|                       | Other                                          |              |        | 2,326   |   |   |        | 6,546   |  
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                |              | 9,513  |         |   |   | 12,889 |        
|                       | Accumulated Amortization                       |              |        | (3,247  | ) |   |        | (1,868  | )
|                       |                                                |              |        |         |   |   |        |        
|                       |                                                | $            | 6,266  |         |   | $ | 11,021 |        
|                       |                                                |              |        |         |   |   |        |        

F-15



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                     |                                        |              |        |        |   |   |        |        |  
|-------------------- | -------------------------------------- | ------------ | ------ | ------ | - | - | ------ | ------ | -
|                     |                                        |             
|                     |                                        | December 31,
|                     |                                        |             
|                     |                                        | 2002         |        | 2001  
|                     |                                        |              |        |       
|Capitalized Software |                                        |              |        |        |   |   |        |       
|                     | Software acquired through acquisitions |              | $      | 19,910 |   |   | $      | 17,804 |  
|                     | Purchased software                     |              |        | 2,294  |   |   |        | 2,948  |  
|                     | Software development costs             |              |        | 5,632  |   |   |        | 1,902  |  
|                     |                                        |              |        |        |   |   |        |       
|                     |                                        |              | 27,836 |        |   |   | 22,654 |       
|                     | Accumulated Amortization               |              |        | (7,371 | ) |   |        | (4,395 | )
|                     |                                        |              |        |        |   |   |        |       
|                     |                                        |              | $      | 20,465 |   |   | $      | 18,295 |  
|                     |                                        |              |        |        |   |   |        |       
|Accrued Liabilities  |                                        |              |        |        |   |   |        |       
|                     | Accrued compensation                   |              | $      | 1,366  |   |   | $      | 2,353  |  
|                     | Accrued rent                           |              |        | 1,197  |   |   |        | 1,414  |  
|                     | Accrued severance                      |              |        | 151    |   |   |        | 2,804  |  
|                     | Accrued professional fees              |              |        | 866    |   |   |        | 761    |  
|                     | Other                                  |              |        | 2,427  |   |   |        | 4,314  |  
|                     |                                        |              |        |        |   |   |        |       
|                     |                                        | $            | 6,007  |        |   | $ | 11,646 |       
|                     |                                        |              |        |        |   |   |        |       



|   |         
|-- | --------
|4. | Warrants



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

In connection with the acquisition of
Healthcare.com, the Company converted warrants to
purchase 395,000 shares of Healthcare.coms
common stock to warrants to purchase 148,000 shares of
the Companys stock, 32,000 of which were exercised during
2001. At December 31, 2002, 116,000 warrants remain
outstanding. Of the warrants outstanding at December 31,
2002, 98,000 may be exercised any time on or before
March 13, 2004 at an exercise price of $4.21 per share
and 18,000 may be exercised any time on or before
December 31, 2004 at an exercise price of $3.19 per
share. The fair value of Healthcare.com warrants was calculated
to be $0.8 million using the Black-Scholes option pricing
model and included in the purchase price.

In October 2000, the Company entered into a
Software License and Services Agreement (the
Agreement) with MedUnite, Inc.
(MedUnite) to provide software development services
related to a pilot program. In connection with the Agreement,
the Company issued warrants to MedUnite to
purchase 1,350,000 shares of Quovadxs common
stock at an exercise price of $4.06. The warrants were
immediately vested, exercisable and non-forfeitable for a period
of eighteen months from the date of grant. The fair value of the
warrants was calculated to be $3.1 million and was
determined using the Black-Scholes option pricing model
utilizing a volatility factor of 120%, risk-free interest rate
of 6.0% and an expected life of 18 months. The amounts
billed to MedUnite up to the date that the first pilot was
delivered (March 2001) were reduced by the fair value attributed
to the warrants. For the year ended December 31, 2000, the
Company allocated $2.2 million of the warrant charge to
billings. The remaining value of the warrants of
$0.9 million was allocated to billings in the first quarter
of 2001. In 2001, MedUnite exercised all of their warrants and
purchased 1.0 million shares of the Companys common
stock.

F-16



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                               
|-- | ------------------------------
|5. | Stockholders Equity (Deficit)



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

During 1997, the Company adopted a stock option
plan (the 1997 Plan) which provided for the grant of
up to 2,200,000 stock options to directors, key employees, and
consultants. The 1997 Plan has a term of ten years, unless
terminated by the board of directors. 1,400,000 shares were
added to the 1997 Plan in November 2000, 820,414 were added in
May 2001 and 1,224,000 shares were added in May 2002. The
total number of shares authorized under the 1997 Plan was
5,644,414 at December 31, 2002. Plan provides for the
granting of incentive stock options to employees or nonqualified
options to employees, directors and consultants.

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

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

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

During 1999, the Company issued stock options to
certain employees under the 1997 Plan with exercise prices below
the deemed fair value of the Companys common stock at the
date of grant. The Company has recorded unearned stock
compensation for the difference between the exercise price of
the stock options and the deemed fair value of the
Companys common stock at the date of grant. This unearned
stock compensation was amortized to expense over the vesting
period, using an accelerated method as described in Financial
Accounting Standards Board Interpretation No. 28. In 1999,
the Company recorded $2,773,000 of unearned compensation related
to these options, of which $231,000, $460,000 and $1,381,000 has
been amortized to expense in the years ended December 31,
2002, 2001 and 2000, respectively. As of December 31, 2002,
the unearned compensation balance was fully amortized.

If stock compensation expense for the years ended
December 31, 2002, 2001 and 2000 had been allocated across
all relevant functional expense categories within operating
expenses, it would have been allocated as follows (in thousands):

|                           |  |                         |     |      |  |      |     |  |  |   |       |  
|-------------------------- |  | ----------------------- | --- | ---- |  | ---- | --- |  |  | - | ----- | -
|                           |  |                        
|                           |  | Year Ended December 31,
|                           |  |                        
|                           |  | 2002                    |     | 2001 |  | 2000
|                           |  |                         |     |      |  |     
|Cost of revenue            |  | $                       | 21  |      |  | $    | 41  |  |  | $ | 124   |  
|Sales and marketing        |  |                         | 33  |      |  |      | 65  |  |  |   | 194   |  
|General and administrative |  |                         | 177 |      |  |      | 354 |  |  |   | 1,089 |  
|Research and development   |  |                         |    |      |  |      |    |  |  |   | (26   | )
|                           |  |                         |     |      |  |      |     |  |  |   |       |  
|                           |  | $                       | 231 |      |  | $    | 460 |  |  | $ | 1,381 |  
|                           |  |                         |     |      |  |      |     |  |  |   |       |  

The Companys board of directors adopted a
1999 Director Option Plan in October 1999 (the Director
Plan) and authorized 250,000 shares under the
Director Plan. The Director Plan was approved by the
Companys Stockholders in January 2000, and became
effective upon completion of our Initial Public

F-17



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Offering. 164,083 shares were added to the
Director Plan in May 2001 and 200,000 shares were added in
May 2002. The total number of shares authorized under the
Director Plan was 614,083 at December 31, 2002. The
Director Plan has a term of ten years, unless terminated by our
board of directors. Options granted under the Director Plan vest
over a one year vesting period beginning on the date of grant.
Members of the board of directors who are not employees of
Quovadx are eligible to participate in the Director Plan. The
Director Plan provides for an automatic initial grant of an
option to purchase 25,000 shares of common stock (the
Initial Grant) upon the later of the effective date
of the Director Plan or the date a person first becomes a
non-employee director. After the initial grant, a non-employee
director will automatically be granted options to purchase
10,000 shares of common stock each year on the date of our
annual shareholders meeting.

In September 2000, the board of directors of the
Company adopted the 2000 Nonstatutory Stock Option Plan (the
NSO Plan) and authorized 600,000 shares under
the NSO Plan. Under the NSO Plan, the board of directors may
issue options to non-executive employees of the Company. The NSO
Plan has a term of ten years, unless terminated by our board of
directors. Options granted under the NSO Plan vest ratably at
25% per year, beginning on the date of grant. No options
will be issued under the NSO Plan to directors or executive
officers of the Company. 600,000 shares were added to the
NSO Plan in May 2001 and 800,000 shares were added in May
2002. The total number of shares authorized under the NSO Plan
was 2,000,000 at December 31, 2002.

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

The Company records compensation expense related
to stock options granted to employees using the intrinsic value
method and includes a pro forma disclosure in Note 1 for
compensation value measured using the fair value accounting
treatment. For the years ended December 31, 2002, 2001 and
2000 the fair value of each option on the date of grant was
determined using the Black-Scholes valuation model. The
following assumptions were used for grants in 2002, 2001 and
2000: risk-free rates corresponding to government securities
with original maturities similar to the expected option lives of
3.0% for 2002, 5.0% for 2001 and 5.5% for 2000; expected
dividend yield of 0% for all periods; volatility factor of 118%
for 2002, 118% for 2001 and 120% for 2000; and expected lives of
5.0 years for 2002, 4.5 years for 2001 and
3.4 years for 2000.

The weighted-average fair value of options at
grant date was $5.18, $9.71 and $5.10 in 2002, 2001 and 2000,
respectively.

F-18



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total stock options outstanding and exercisable
under the option plans as of December 31, 2002 are as
follows:

|                |  |           |           |                           |  |               |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|--------------- |  | --------- | --------- | ------------------------- |  | ------------- | ---- | --------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |           |           |                           |  |               |      |          
|                |  |           |           |                           |  | Stock Options
|                |  |           |           | Stock Options Outstanding |  | Exercisable  
|                |  |           |           |                           |  |              
|                |  |           |           | Weighted Average          |  | Weighted      |      |           |  | Weighted
|                |  |           |           | Remaining                 |  | Average       |      |           |  | Average 
|Range of        |  | Number of |           | Contractual Life          |  | Exercise      |      | Number of |  | Exercise
|Exercise Prices |  | Shares    |           | (Years)                   |  | Price         |      | Shares    |  | Price   
|                |  |           |           |                           |  |               |      |           |  |         
|$0.25-2.50      |  |           | 664,384   |                           |  |               | 6.56 |           |  | $        | 0.57  |  |  |  | 515,237   |  |  | $ | 0.25  | 
|2.51-2.70       |  |           | 1,070,401 |                           |  |               | 8.66 |           |  |          | 2.64  |  |  |  | 341,454   |  |  |   | 2.70  | 
|2.72-5.94       |  |           | 896,334   |                           |  |               | 6.79 |           |  |          | 5.14  |  |  |  | 590,940   |  |  |   | 5.22  | 
|6.00-6.40       |  |           | 666,471   |                           |  |               | 8.91 |           |  |          | 6.11  |  |  |  | 79,980    |  |  |   | 6.19  | 
|6.48-8.53       |  |           | 952,236   |                           |  |               | 7.92 |           |  |          | 7.76  |  |  |  | 395,472   |  |  |   | 7.48  | 
|8.70-10.00      |  |           | 292,172   |                           |  |               | 6.94 |           |  |          | 9.47  |  |  |  | 183,421   |  |  |   | 9.58  | 
|10.20           |  |           | 744,187   |                           |  |               | 8.43 |           |  |          | 10.20 |  |  |  | 305,436   |  |  |   | 10.20 | 
|10.30-11.00     |  |           | 174,689   |                           |  |               | 6.98 |           |  |          | 10.74 |  |  |  | 109,174   |  |  |   | 10.59 | 
|11.19           |  |           | 687,500   |                           |  |               | 8.72 |           |  |          | 11.19 |  |  |  | 240,626   |  |  |   | 11.19 | 
|12.62-21.42     |  |           | 318,737   |                           |  |               | 8.03 |           |  |          | 13.35 |  |  |  | 166,911   |  |  |   | 13.89 | 
|                |  |           |           |                           |  |               |      |           |  |          |       |  |  |  |           |  |  |   |       | 
|$0.25-$21.42    |  |           | 6,467,111 |                           |  |               | 7.93 |           |  | $        | 6.72  |  |  |  | 2,928,651 |  |  | $ | 6.36  | 
|                |  |           |           |                           |  |               |      |           |  |          |       |  |  |  |           |  |  |   |       | 

Activity of the Plans are summarized in the
following table:

|                                       |                                  |           |           |                |   |             |      |                |  |  |           |  |  |   |      |  | 
|-------------------------------------- | -------------------------------- | --------- | --------- | -------------- | - | ----------- | ---- | -------------- |  |  | --------- |  |  | - | ---- |  | 
|                                       |                                  |           |           | Weighted       |   |             |      | Weighted      
|                                       |                                  | Number of |           | Average        |   | Options     |      | Average       
|                                       |                                  | Shares    |           | Exercise Price |   | Exercisable |      | Exercise Price
|                                       |                                  |           |           |                |   |             |      |               
|Options outstanding, December 31, 1999 |                                  |           | 1,611,893 |                |   | $           | 1.85 |                |  |  | 1,611,893 |  |  | $ | 1.85 | 
|                                       | Options granted                  |           |           | 1,461,020      |   |             |      | 6.92           |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (185,429       | ) |             |      | 1.22           |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (297,412       | ) |             |      | 5.88           |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                |   |             |      |                |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2000 |                                  |           | 2,590,072 |                |   |             | 4.30 |                |  |  | 2,248,897 |  |  |   | 4.03 | 
|                                       | Converted Healthcare.com options |           |           | 1,262,796      |   |             |      | 7.68           |  |  |           |  |  |   |      |  | 
|                                       | Options granted                  |           |           | 3,165,899      |   |             |      | 9.71           |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (677,140       | ) |             |      | 6.22           |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (433,819       | ) |             |      | 6.33           |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                |   |             |      |                |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2001 |                                  |           | 5,907,808 |                |   |             | 7.55 |                |  |  | 4,896,516 |  |  |   | 7.24 | 
|                                       | Options granted                  |           |           | 1,718,096      |   |             |      | 4.60           |  |  |           |  |  |   |      |  | 
|                                       | Less: options exercised          |           |           | (151,622       | ) |             |      | 1.98           |  |  |           |  |  |   |      |  | 
|                                       | Less: options forfeited          |           |           | (1,007,171     | ) |             |      | 8.70           |  |  |           |  |  |   |      |  | 
|                                       |                                  |           |           |                |   |             |      |                |  |  |           |  |  |   |      | 
|Options outstanding, December 31, 2002 |                                  |           | 6,467,111 |                |   | $           | 6.72 |                |  |  | 2,928,651 |  |  | $ | 6.36 | 
|                                       |                                  |           |           |                |   |             |      |                |  |  |           |  |  |   |      | 



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

The Company has adopted an employee savings and
retirement plan (the 401(k) Plan) covering
substantially all of the Companys employees. Pursuant to
the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the statutory prescribed limit and
have the amount of such reduction contributed to the 401(k)
Plan. The Company may make contributions to the 401(k) Plan on

F-19



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

behalf of eligible employees. The Company had not
made any contributions to the 401(k) Plan prior to the
acquisition of Healthcare.com on August 13, 2001. In
connection with the acquisition of Healthcare.com, the Company
assumed the 401(k) plan of Healthcare.com and made contributions
totaling $169,000. Healthcare.coms 401(k) plan matched 50%
of the first 6% contributed by each employee. The Healthcare.com
401(k) plan was merged into Companys plan in 2002. In
2002, the Company amended its 401(k) plan to match 50% of the
first 6% contributed by employees. The Company contributed
$649,000 to its employees 401(k) accounts in 2002. Company
contributions vest over a two-year period.



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

In October 1999, the board of directors adopted
an employee stock purchase plan (the ESPP) subject
to shareholder approval, which became effective immediately on
the effective date of the IPO. A total of 350,000 shares of
common stock were initially reserved for issuance under the
ESPP. 328,165 shares were added to the ESPP in May 2001 and
500,000 shares were added in May 2002. The total number of
shares authorized under the ESPP was 1,178,165 at
December 31, 2002. The ESPP permits eligible employees to
purchase common stock totaling up to 20% of an employees
compensation through payroll deductions. The ESPP for
U.S. employees is intended to qualify under
Section 423 of the Internal Revenue Service Code and
contains consecutive overlapping twelve-month offering periods.
Each offering period includes two six-month purchase periods.
The price of common stock to be purchased will be 85% of the
lower of the fair market value of the common stock either at the
beginning of the offering period or at the end of that purchase
period. The Company issued 72,372 shares at $6.37 per
share in May 2002 and 125,157 shares at $1.32 per
share in October 2002. The Company issued 37,544 shares at
$4.68 in May 2001 and 39,098 shares at $5.51 per share
in October 2001. In connection with the acquisition of
Healthcare.com, the Company assumed the employee stock purchase
plan of Healthcare.com. In September 2001, the Company issued
7,256 shares at $10.25 per share related to the
Healthcare.com plan.



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

The provision for income taxes includes
(i) income taxes currently payable; (ii) income taxes
deferred because of temporary timing differences between when
certain income or expense items are recognized in the financial
statements versus when these items are recognized for tax
purposes and; (iii) any increase or decrease in the
valuation allowance for deferred income tax assets.

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

|                                         |  |                         |         |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  |                        
|                                         |  | Year Ended December 31,
|                                         |  |                        
|                                         |  | 2002                    |         | 2001 |  | 2000
|                                         |  |                         |         |      |  |     
|Federal income tax benefit               |  | $                       | (34,943 | )    |  | $    | (1,494 | ) |  | $ | (6,061 | )
|State income tax, net of federal benefit |  |                         | (248    | )    |  |      | (101   | ) |  |   | (545   | )
|Change in valuation allowance            |  |                         | 3,495   |      |  |      | 652    |   |  |   | 5,492  |  
|Unearned compensation                    |  |                         | 81      |      |  |      | 161    |   |  |   | 483    |  
|Value attributed to warrants             |  |                         |        |      |  |      |       |   |  |   | 764    |  
|Goodwill amortization                    |  |                         | 31,565  |      |  |      | 723    |   |  |   |       |  
|Other                                    |  |                         | 50      |      |  |      | 59     |   |  |   | (133   | )
|                                         |  |                         |         |      |  |      |        |   |  |   |        |  
|Income tax expense                       |  | $                       |        |      |  | $    |       |   |  | $ |       |  
|                                         |  |                         |         |      |  |      |        |   |  |   |        |  

F-20



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the net deferred tax assets
and liabilities at December 31, 2002 and 2001 are presented
below (in thousands):

|                               |                                              |                                      |                           |        |   |        |         |        |   |        | 
|------------------------------ | -------------------------------------------- | ------------------------------------ | ------------------------- | ------ | - | ------ | ------- | ------ | - | ------ | 
|                               |                                              |                                     
|                               |                                              | December 31,                        
|                               |                                              |                                     
|                               |                                              | 2002                                 |                           | 2001  
|                               |                                              |                                      |                           |       
|Deferred tax assets:           |                                              |                                      |                           |        |   |        |         |       
|                               | Deferred revenue                             |                                      | $                         | 1,690  |   |        | $       | 2,344  |  
|                               | Employee benefits                            |                                      |                           | 213    |   |        |         | 283    |  
|                               | Allowance for Doubtful Accounts              |                                      |                           | 923    |   |        |         | 586    |  
|                               | Accrued liabilities                          |                                      |                           | 595    |   |        |         |       |  
|                               | Tax credits                                  |                                      |                           | 134    |   |        |         | 942    |  
|                               | Investment impairment                        |                                      |                           | 195    |   |        |         | 193    |  
|                               | Other                                        |                                      |                           | 184    |   |        |         | 147    |  
|                               | Net operating loss carryforwards             |                                      |                           | 28,892 |   |        |         | 55,977 |  
|                               |                                              |                                      |                           |        |   |        |         |       
|                               |                                              |                                      | Total deferred tax assets |        |   | 32,826 |         |        |   | 60,472 | 
|                               |                                              |                                      |                           |        |   |        |         |       
|Deferred tax liabilities:      |                                              |                                      |                           |        |   |        |         |       
|                               | Sale of fixed assets, depreciation and other |                                      |                           | (454   | ) |        |         | (530   | )
|                               | Amortization                                 |                                      |                           | (3,447 | ) |        |         | (6,241 | )
|                               |                                              |                                      |                           |        |   |        |         |       
|Total deferred tax liabilities |                                              |                                      | (3,901                    | )      |   |        | (6,771  | )     
|                               |                                              |                                      |                           |        |   |        |         |       
|Net tax assets                 |                                              |                                      | 28,925                    |        |   |        | 53,701  |       
|Less: valuation allowance      |                                              |                                      | (28,925                   | )      |   |        | (53,701 | )     
|                               |                                              |                                      |                           |        |   |        |         |       
|                               |                                              | Net deferred tax asset/(liabilities) |                           | $      |  |        |         | $      |  |       
|                               |                                              |                                      |                           |        |   |        |         |       

Under SFAS 109, deferred tax assets and
liabilities are recognized because of temporary timing
differences between when certain income or expense items are
recognized in the financial statements versus when these items
are recognized for tax purposes. A valuation allowance is then
established to reduce the deferred tax assets to the level at
which it is more likely than not that any tax
benefits will be realized. At December 31, 2002 and 2001
the Company has determined that it is not more likely than
not that any tax benefits will be realized and therefore a
full valuation allowance has been recorded against the net
deferred tax asset. A reduction in this allowance and the
recognition of a deferred tax asset depends on having sufficient
evidence that the Company will generate taxable income within
the carryback and carryforward periods. Sources of taxable
income that may allow recognition of a net tax asset include
(i) taxable income in the current year or prior years that
is available through carryback; (ii) future taxable income
that will result from the reversal of existing taxable temporary
differences; and (iii) future taxable income generated by
operations. The valuation allowance for deferred income tax
assets at December 31, 2002 and 2001 was $28,925,000 and
$53,701,000 respectively.

The Internal Revenue Code of 1986, as amended,
contains provisions that may limit the tax net operating loss
(NOL) and tax credits available for use in any given
year upon the occurrence of certain events, including
significant changes in ownership interest. A change in ownership
of a company greater than 50% within a three-year period results
in an annual limitation on the companys ability to utilize
its NOL carryforwards from tax periods prior to the ownership
change. The Companys NOL and tax credit carryforwards as
of December 31, 2002 are subject to such limitations. The
NOL and tax credit carryforwards have been evaluated under the
provisions of the Internal Revenue Code, and amounts, that by
virtue of restrictions will never be available to offset either
taxable income or tax liability, have been deducted from the

F-21



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

deferred tax asset. The amount of NOL and tax
credit carryforwards removed during 2002 totaled approximately
$62,355,000 and $936,000 respectively.

The amount of NOL carryforwards available to the
Company at December 31, 2002 are $74,695,000. The amount of
tax credits available to the Company at December 31, 2002
are $134,000. Approximately $24,168,000 of the December 31,
2002 NOL carryforward relates to the exercise of stock options
and warrants to purchase the Companys common stock, which
creates the requirement for the reversal of the corresponding
valuation allowance to be credited to additional paid-in capital
rather than recognized as an income tax benefit on the statement
of operations. The actual amount of NOL carryforward to reverse
against additional paid-in-capital will be determined by the
amount and timing of future taxable income generated by the
Company, if any. Additionally, $6,107,000 of the
December 31, 2002 NOL carryforward is available until 2006
and can only be used to offset gains recognized on the sale of
certain assets acquired in the acquisition of Confer. The
Companys remaining NOL carryforward will expire beginning
in 2008.



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



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

The Company leases equipment and office space
under various long-term non-cancelable operating leases that
expire at various dates prior to December 31, 2007. The
following is a schedule by year of future minimum lease payments
under operating leases, at December 31, 2002 (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 3,194 | 
|2004 |  |   | 3,005 | 
|2005 |  |   | 2,699 | 
|2006 |  |   | 776   | 
|2007 |  |   | 308   | 
|     |  |   |       | 
|     |  | $ | 9,982 | 
|     |  |   |       | 

Total rent expense for the years ended
December 31, 2002, 2001 and 2000 was $3,865,000, $2,627,000
and $1,295,000, respectively.



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

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

F-22



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company, and its wholly owned subsidiary
Healthcare.com Corporation, are currently litigating a dispute
with Hawaii Employees Retirement System (HERS) regarding a
contract entered into in October 1999 between HERS and Thermo
Information Solutions, subsequently assigned to Healthcare.com.
On June 19, 2002, after exhausting its administrative
remedies under Hawaii state law, Healthcare.com filed a
complaint against HERS in the Circuit Court of the First
Circuit, State of Hawaii. The complaint asserts that HERS is in
breach of its obligations under the contract, and demands that
HERS pay to the Company a sum to be determined at trial. On
June 21, 2002, HERS filed a complaint in the same state
court, asserting that Quovadx, Inc. and Healthcare.com have
breached their performance obligations under the contract, and
seeking damages in an amount to be determined at trial. The two
lawsuits have been consolidated, discovery was initiated in July
2002, and no trial date has been set. In February 2003, The
Company and HERS agreed to suspend the litigation pending the
outcome of settlement discussions. If those discussions are not
successful, the Company intends to continue to prosecute its
claims, and defend the claims brought by HERS, vigorously;
however litigation is inherently uncertain and we can make no
assurance as to the outcome or effect.

Munshee.com, LLC (Munshee) commenced
an action in the Supreme Court of the State of New York, County
of New York on or about September 27, 2002, against
Quovadx, Inc., f/k/a XCare.net, Inc. and Lorine Sweeney.
Munshee purported to allege claims of breach of contract and
fraud against Quovadx, Inc. (Quovadx) and a claim of
fraud against Ms. Sweeney, a director and the President and
CEO of Quovadx, relating to a professional services agreement
entered into as of September 9, 1999, as amended, between
Munshee and XCare.net, Inc. Munshee sought to recover
restitution or compensatory damages of $966,000, plus
unspecified additional damages, including punitive damages, and
interest, costs and expenses. Quovadx and Sweeney filed a motion
seeking to dismiss the claims or stay the action and compel
arbitration. On January 2, 2003, the Court dismissed the
claims without prejudice. Should claims be reasserted in any
forum, Quovadx and Ms. Sweeney intend to vigorously contest
Munshees claims; however litigation is inherently
uncertain and we can make no assurance as to the outcome or
effect.

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

As of December 31, 2002 and 2001 the Company
had restricted cash of $0.7 million and $0.9 million,
respectively, included in other assets of the Companys
balance sheet. Restricted cash represents investments that
support a letter of credit related to an operating lease.



|   |                           
|-- | --------------------------
|8. | Related Party Transactions

For the year ended December 31, 2000,
revenue from related parties include $0.6 million from a
customer who is also a partner in an entity that is a
significant stockholder of the Company and $0.1 million
from Advica prior to the business acquisition. The accounts
receivable related to these transactions were settled as of
December 31, 2000.



|   |                    
|-- | -------------------
|9. | Segment Information

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

The Company operates in three segments:
professional services, software licenses and recurring revenue.
The professional services segment includes revenue generated
from software implementation, development

F-23



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##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and integration. The software license segment
includes revenue from software license sales and software
subscriptions. The recurring revenue segment includes revenue
generated from outsourcing, hosting maintenance, transactions,
and other recurring services.

Following is a breakout by segment (in
thousands). The margin for the segments excludes corporate
expenses. The Other category includes corporate
expenses and eliminations.

|                     |  |                |        |                 |  |           |        |       |  |              |        |   |  |   |          |      |  |   |          |  
|-------------------- |  | -------------- | ------ | --------------- |  | --------- | ------ | ----- |  | ------------ | ------ | - |  | - | -------- | ---- |  | - | -------- | -
|                     |  | Professional   |        | Software        |  | Recurring |        |       |  | Consolidated
|                     |  | Services       |        | License Revenue |  | Services  |        | Other |  | Total       
|                     |  |                |        |                 |  |           |        |       |  |             
|                     |  |               
|                     |  | (In thousands)
|2002                 |  |                |        |                 |  |           |        |       |  |              |        |   |  |   |          |      |  |   |          |  
|Total revenue        |  | $              | 22,459 |                 |  | $         | 11,854 |       |  | $            | 29,345 |   |  | $ |         |      |  | $ | 63,658   |  
|Margin               |  |                | 7,843  |                 |  |           | 6,397  |       |  |              | 10,258 |   |  |   | (128,610 | )(1) |  |   | (104,112 | )
|Assets               |  |                |       |                 |  |           |       |       |  |              |       |   |  |   | 104,609  | (2)  |  |   | 104,609  |  
|Capital expenditures |  |                |       |                 |  |           |       |       |  |              |       |   |  |   | 1,457    | (2)  |  |   | 1,457    |  
|2001                 |  |                |        |                 |  |           |        |       |  |              |        |   |  |   |          |      |  |   |          |  
|Total revenue        |  | $              | 28,449 |                 |  | $         | 6,416  |       |  | $            | 17,315 |   |  | $ |         |      |  | $ | 52,180   |  
|Margin               |  |                | 11,560 |                 |  |           | 4,001  |       |  |              | 2,736  |   |  |   | (22,566  | )(1) |  |   | (4,269   | )
|Assets               |  |                |       |                 |  |           |       |       |  |              |       |   |  |   | 214,704  | (2)  |  |   | 214,704  |  
|Capital expenditures |  |                |       |                 |  |           |       |       |  |              |       |   |  |   | 2,892    | (2)  |  |   | 2,892    |  
|2000                 |  |                |        |                 |  |           |        |       |  |              |        |   |  |   |          |      |  |   |          |  
|Total revenue        |  | $              | 7,641  |                 |  |           |       |       |  | $            | 3,193  |   |  | $ |         |      |  | $ | 10,834   |  
|Margin               |  |                | (3,216 | )               |  |           |       |       |  |              | (276   | ) |  |   | (13,825  | )(1) |  |   | (17,317  | )
|Assets               |  |                |       |                 |  |           |       |       |  |              |        |   |  |   | 96,908   | (2)  |  |   | 96,908   |  
|Capital expenditures |  |                |       |                 |  |           |       |       |  |              |        |   |  |   | 3,631    | (2)  |  |   | 3,631    |  



---



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents loss before income taxes. Adjustments
    that are made to the total of the segments income in order
    to arrive at income before income taxes include the following
    (in thousands):

|                                                                               |                                      |      |         |        |   |      |        |        |   |   |        |        |  
|------------------------------------------------------------------------------ | ------------------------------------ | ---- | ------- | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                               |                                      | 2002 |         | 2001   |   | 2000
|                                                                               |                                      |      |         |        |   |     
|Costs and adjustments to reconcile segment data
    to the consolidated total: |                                      |      |         |        |   |      |        |        |   |   |        |       
|                                                                               | Sales and marketing                  |      | $       | 13,292 |   |      | $      | 8,785  |   |   | $      | 5,216  |  
|                                                                               | General and administrative           |      |         | 13,608 |   |      |        | 10,045 |   |   |        | 9,207  |  
|                                                                               | Research and development             |      |         | 7,209  |   |      |        | 4,792  |   |   |        | 2,952  |  
|                                                                               | Amortization of acquired intangibles |      |         | 2,307  |   |      |        | 1,585  |   |   |        | 96     |  
|                                                                               | Stock compensation expense           |      |         | 231    |   |      |        | 460    |   |   |        | 1,381  |  
|                                                                               | Gain on sale of assets               |      |         | (87    | ) |      |        |       |   |   |        |       |  
|                                                                               | Goodwill impairment                  |      |         | 93,085 |   |      |        |       |   |   |        |       |  
|                                                                               | Interest income, net                 |      |         | (1,035 | ) |      |        | (3,101 | ) |   |        | (5,027 | )
|                                                                               |                                      |      |         |        |   |      |        |        |   |   |        |       
|                                                                               |                                      | $    | 128,610 |        |   | $    | 22,566 |        |   | $ | 13,825 |       
|                                                                               |                                      |      |         |        |   |      |        |        |   |   |        |       



---



|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | A breakout of assets and capital expenditures for
    all segments is not provided to the chief operating decision
    maker. The other column represents the amount to reconcile to
    the consolidated total.

F-24



---



##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|10. | Quarterly Results (Unaudited)

This information has been derived from unaudited
consolidated financial statements. The unaudited consolidated
financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, considered
necessary for a fair presentation of this information. These
unaudited quarterly results should be read in conjunction with
the audited financial statements and notes thereto. Operating
results are expected to vary significantly from quarter to
quarter and are not necessarily indicative of results for any
future period. Data relating to the results of operations for
the each quarter of the years ended December 31, 2002 and
2001 follows (in thousands except per share amounts):

|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |       |        | 
|---------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | - | ------- | ----- | ------ | - | ------ | ----- | ------ | 
|                                                           |                                      |                         
|                                                           |                                      | Three Months Ended      
|                                                           |                                      |                         
|                                                           |                                      | March 31,                |        | June 30, |        | September 30, |        | December 31,
|                                                           |                                      | 2002                     |        | 2002     |        | 2002          |        | 2002        
|                                                           |                                      |                          |        |          |        |               |        |             
|STATEMENT OF OPERATIONS DATA:                              |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Total revenue                                              |                                      | $                        | 17,769 |          |        | $             | 15,274 |              |        | $ | 14,973  |       |        | $ | 15,642 |      
|Costs and expenses:                                        |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|                                                           | Cost of revenue                      |                          |        | 8,803    |        |               |        | 9,078        |        |   |         | 8,071 |        |   |        | 7,750 |       
|                                                           | Software amortization                |                          |        | 1,083    |        |               |        | 1,415        |        |   |         | 1,375 |        |   |        | 1,585 |       
|                                                           | Sales and marketing                  |                          |        | 2,724    |        |               |        | 3,467        |        |   |         | 3,578 |        |   |        | 3,523 |       
|                                                           | General and administrative           |                          |        | 3,337    |        |               |        | 3,236        |        |   |         | 3,409 |        |   |        | 3,626 |       
|                                                           | Research and development             |                          |        | 1,432    |        |               |        | 1,777        |        |   |         | 1,807 |        |   |        | 2,193 |       
|                                                           | Amortization of acquired intangibles |                          |        | 570      |        |               |        | 553          |        |   |         | 599   |        |   |        | 585   |       
|                                                           | Stock compensation expense           |                          |        | 66       |        |               |        | 53           |        |   |         | 59    |        |   |        | 53    |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|                                                           |                                      | Total costs and expenses |        |          | 18,015 |               |        |              | 19,579 |   |         |       | 18,898 |   |        |       | 19,315 | 
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Loss from operations                                       |                                      |                          | (246   | )        |        |               | (4,305 | )            |        |   | (3,925  | )     |        |   | (3,673 | )    
|Gain on sale of assets                                     |                                      |                          | 87     |          |        |               |       |              |        |   |        |       |        |   |       |      
|Goodwill impairment                                        |                                      |                          |       |          |        |               |       |              |        |   | (93,085 | )     |        |   |       |      
|Interest income, net                                       |                                      |                          | 261    |          |        |               | 292    |              |        |   | 263     |       |        |   | 219    |      
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Net income (loss)                                          |                                      | $                        | 102    |          |        | $             | (4,013 | )            |        | $ | (96,747 | )     |        | $ | (3,454 | )    
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      
|Net income (loss) per common share 
    basic and diluted |                                      | $                        | 0.00   |          |        | $             | (0.13  | )            |        | $ | (3.22   | )     |        | $ | (0.11  | )    
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |         |       |        |   |        |      

F-25



---



##### Table of Contents



QUOVADX, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |        |        | 
|---------------------------------------------------------- | ------------------------------------ | ------------------------ | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | - | ------ | ----- | ------ | - | ------ | ------ | ------ | 
|                                                           |                                      |                         
|                                                           |                                      | Three Months Ended      
|                                                           |                                      |                         
|                                                           |                                      | March 31,                |        | June 30, |        | September 30, |        | December 31,
|                                                           |                                      | 2001                     |        | 2001     |        | 2001          |        | 2001        
|                                                           |                                      |                          |        |          |        |               |        |             
|STATEMENT OF OPERATIONS DATA:                              |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|Total revenue                                              |                                      | $                        | 7,685  |          |        | $             | 9,149  |              |        | $ | 15,498 |       |        | $ | 19,848 |       
|Costs and expenses:                                        |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|                                                           | Cost of revenue                      |                          |        | 6,448    |        |               |        | 6,328        |        |   |        | 8,874 |        |   |        | 10,154 |       
|                                                           | Software amortization                |                          |        |         |        |               |        |             |        |   |        | 424   |        |   |        | 1,655  |       
|                                                           | Sales and marketing                  |                          |        | 1,389    |        |               |        | 1,564        |        |   |        | 2,720 |        |   |        | 3,112  |       
|                                                           | General and administrative           |                          |        | 2,570    |        |               |        | 1,847        |        |   |        | 2,273 |        |   |        | 3,355  |       
|                                                           | Research and development             |                          |        | 1,141    |        |               |        | 945          |        |   |        | 1,253 |        |   |        | 1,453  |       
|                                                           | Amortization of acquired intangibles |                          |        | 303      |        |               |        | 361          |        |   |        | 485   |        |   |        | 436    |       
|                                                           | Stock compensation expense           |                          |        | 135      |        |               |        | 161          |        |   |        | 85    |        |   |        | 79     |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|                                                           |                                      | Total costs and expenses |        |          | 11,986 |               |        |              | 11,206 |   |        |       | 16,114 |   |        |        | 20,244 | 
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|Loss from operations                                       |                                      |                          | (4,301 | )        |        |               | (2,057 | )            |        |   | (616   | )     |        |   | (396   | )     
|Interest income, net                                       |                                      |                          | 1,100  |          |        |               | 872    |              |        |   | 674    |       |        |   | 455    |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|Net income (loss)                                          |                                      | $                        | (3,201 | )        |        | $             | (1,185 | )            |        | $ | 58     |       |        | $ | 59     |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       
|Net income (loss) per common share 
    basic and diluted |                                      | $                        | (0.20  | )        |        | $             | (0.07  | )            |        | $ | 0.00   |       |        | $ | 0.00   |       
|                                                           |                                      |                          |        |          |        |               |        |              |        |   |        |       |        |   |        |       

F-26



---



##### Table of Contents



QUOVADX, INC.






SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS


|                                |  |                     |       |            |  |           |     |           |  |               |          |  |  |   |       |     |  |   |       | 
|------------------------------- |  | ------------------- | ----- | ---------- |  | --------- | --- | --------- |  | ------------- | -------- |  |  | - | ----- | --- |  | - | ----- | 
|                                |  | Balance at          |       | Charged to |  |           |     |           |  | Balance at   
|Allowance for doubtful accounts |  | beginning of period |       | expense    |  | Deduction |     | Transfers |  | end of period
|                                |  |                     |       |            |  |           |     |           |  |              
|(Dollars in thousands)          |  |                     |       |            |  |           |     |           |  |              
|2002                            |  | $                   | 1,932 |            |  | $         | 474 |           |  | $             | (36)(a)  |  |  | $ |      |     |  | $ | 2,370 | 
|2001                            |  |                     | 546   |            |  |           | 97  |           |  |               | (518)(a) |  |  |   | 2,057 | (b) |  |   | 1,932 | 
|2000                            |  |                     | 141   |            |  |           | 636 |           |  |               | (231)(a) |  |  |   |      |     |  |   | 546   | 



---



|    |  |                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------
|(a) |  | Represents credit losses written off during the
    period, less collection of amounts previously written off.
|   
|(b) |  | Transfer of allowance balances from 2001 business
    acquisitions.                                           

S-1



---



##### Table of Contents






SARBANES-OXLEY SECTION 302(a)
CERTIFICATION

I, Lorine R. Sweeney, certify that:

1. I have reviewed this annual report on
Form 10-K of Quovadx, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ LORINE R. SWEENEY                    
| |                                          
| | Lorine R. Sweeney,                       
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

March 27, 2003



---



##### Table of Contents



SARBANES-OXLEY SECTION 302(a)
CERTIFICATION

I, Gary T. Scherping, certify that:

1. I have reviewed this annual report on
Form 10-K of Quovadx, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                    
| | -----------------------------------
| | /s/ GARY T. SCHERPING              
| |                                    
| | Gary T. Scherping,                 
| | Executive Vice President of Finance
| | and Chief Financial Officer        
| | (Principal Financial Officer)      

March 27, 2003



---



##### Table of Contents






INDEX TO EXHIBITS

|        |        |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ------ | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |        
|Number  |        | Exhibit
|        |        |        
|        | 2.1*   |         |  | Agreement and Plan of Merger and Reorganization,
    dated as of May 14, 2001, by and among XCare.net, Inc., Orbit
    Acquisition Corp., and Healthcare.com Corporation (incorporated
    by reference to Exhibit 2.1 to the Current Report on
    Form 8-K of the Company, filed as of May 18, 2001,
    Commission File No. 000-29273).                                                                                                                              
|        | 3.1*   |         |  | Amended and Restated Certificate of Incorporation
    of XCare.net, Inc. (incorporated by reference as
    Exhibit 3.2 to Amendment No. 2 to the Registration
    Statement on Form S-1 of the Company, filed as of
    January 12, 2000, Registration No. 333-90165).                                                                                                                                                                                                  
|        | 3.2*   |         |  | Certificate of Amendment of Restated Certificate
    of Incorporation of XCare.net, Inc. (incorporated by reference
    as Exhibit 3.4 to Amendment No. 2 to the Registration
    Statement on Form S-1 of the Company, filed as of
    January 12, 2000, Registration No. 333-90165).                                                                                                                                                                                  
|        | 3.3*   |         |  | Bylaws of XCare.net, Inc. (incorporated by
    reference to Exhibit 3.3 to the Registration Statement on
    Form S-1 of the Company, filed as of November 2, 1999,
    Registration No. 333-90165).                                                                                                                                                                                                                                                                    
|        | 4.1*   |         |  | Specimen stock certificate representing shares of
    Common Stock of Quovadx, Inc. (incorporated by reference to
    Exhibit 4.1 to the Current Report on Form 8-K of the
    Company, filed as of October 16, 2001, Commission File
    No. 000-29273).                                                                                                                                                                                                               
|        | 4.2*   |         |  | Registration Rights Agreement, dated as of
    June 7, 2001, between XCare.net, Inc. and certain
    Shareholders (as identified therein) of Confer Software, Inc.
    (incorporated by reference to Exhibit 4.3 to the
    Registration Form of S-1 of the Company, filed as of
    July 17, 2001, Registration No. 333-65280).                                                                                                                                        
|        | 4.3*   |         |  | Registration Rights Agreement, dated as of
    December 14, 2001, between Quovadx and Francis Carden
    (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-3 of the Company, filed as
    of January 23, 2002, Registration No. 333-81210).                                                                                                                                                                                         
|        | 10.1*  |         |  | Amended and Restated 1997 Stock Plan and related
    agreements (incorporated by reference to Exhibit 4.1 to the
    Registration Statement on Form S-8 of the Company, filed as
    of May 16, 2002, Registration No. 333-88408).***                                                                                                                                                                                                                                   
|        | 10.2*  |         |  | 1999 Employee Stock Purchase Plan and related
    agreements (incorporated by reference to Exhibit 4.2 to the
    Registration Statement on Form S-8 of the Company, filed as
    of May 16, 2002, Registration No. 333-88408).***                                                                                                                                                                                                                                      
|        | 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 Company, filed as of May 16, 2002, Registration
    No. 333-88408).***                                                                                                                                                                                                                     
|        | 10.4*  |         |  | Amended and Restated 2000 Nonstatutory Stock
    Option Plan and related agreements (incorporated by reference to
    Exhibit 4.4 to the Registration Statement on Form S-8
    of the Company, filed as of May 16, 2002, Registration
    No. 333-88408).***                                                                                                                                                                                                           
|        | 10.5*  |         |  | Amended and Restated Healthcare.com Corporation
    Non-Employee Director Stock Option Plan (filed as of
    August 13, 1999, as Exhibit 10 to the Quarterly Report on
    Form 10-Q of Healthcare.com Corporation for the quarter
    ended June 30, 1999, Commission File No. 0-27056, and
    incorporated by reference to Exhibit 10.42 to the
    Registration Statement on Form S-4 of the Company, filed as
    of June 29, 2001, Registration No. 333-64282).***
|        | 10.6*  |         |  | Healthcare.com Corporation Adjustment Stock
    Option Plan (filed as of October 24, 1995, as
    Exhibit 10.5 to Amendment No. 1 to the Registration
    Statement on Form S-1 of Healthcare.com Corporation,
    Registration No. 33-96478, and incorporated by reference to
    Exhibit 10.43 to the Registration Statement on Form S-4 of
    the Company, filed as of June 29, 2001, Registration
    No. 333-64282).***                                           
|        | 10.7*  |         |  | Healthcare.com Corporation Restated Stock Option
    Plan Two (filed as of May 11, 1998, as Exhibit 10.2 to
    the Quarterly Report on Form 10-Q of Healthcare.com Corporation
    for the quarter ended March 31, 1998, Commission File
    No. 0-27056, and incorporated by reference to
    Exhibit 10.44 to the Registration Statement on
    Form S-4 of the Company, filed as of June 29, 2001,
    Registration No. 333-64282).***                              
|        | 10.8** |         |  | Offer letter, dated as of February 20, 2002,
    with David E. Nesvisky.                                                                                                                                                                                                                                                                                                                                                                                                



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##### Table of Contents



|        |        |         |  |                                                                                                                                                                                                                                                                                                                                    
|------- | ------ | ------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |        
|Number  |        | Exhibit
|        |        |        
|        | 10.9*  |         |  | Office Lease Agreement, effective as of
    November 8, 1999, between Mountain States Mutual Casualty
    Company and the Company (incorporated by reference to Amendment
    1 to the Registration Statement on Form S-1 of the Company,
    filed as of December 17, 1999, Registration
    No. 333-90165).                      
|        | 10.10* |         |  | Sublease, dated as of August 24, 2001,
    between Echo Bay Management Corp. and XCare.net, Inc.
    (incorporated by reference to Exhibit 12.1 to the Annual Report
    on Form 10-K of the Company for the year ended
    December 31, 2001, filed as of March 26, 2002,
    Commission File No. 000-29273).                     
|        | 10.11* |         |  | Form of Healthcare.com Corporation Severance
    Compensation and Restrictive Covenant Agreement (incorporated by
    reference to Exhibit 2.6 to the Current Report on
    Form 8-K of the Company, filed as of May 18, 2001,
    Commission File No. 000-29273).                                                                 
|        | 10.12* | *       |  | Consulting Agreement, dated as of
    December 12, 2000, between Healthcare.com Corporation and
    Joseph G. Bleser.                                                                                                                                                                                                              
|        | 10.13* | *       |  | Amendment No. 1, dated as of August 10,
    2001, to Consulting Agreement, dated as of December 12,
    2002, between Healthcare.com Corporation and Joseph G. Bleser.                                                                                                                                                             
|        | 10.14* |         |  | Form of Indemnification Agreement entered into by
    Quovadx, Inc. 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 Company for the year ended
    December 31, 2001, filed as of March 26, 2002,
    Commission File No. 000-29273).
|        | 16.1*  |         |  | Letter, dated as of April 17, 2001, from
    PricewaterhouseCoopers LLP to the United States Securities and
    Exchange Commission (incorporated by reference to
    Exhibit No. 16.1 to the Current Report on
    Form 8-K of the Company, filed as of April 18, 2001,
    Commission File No. 000-29273).                       
|        | 21**   |         |  | Subsidiaries of Quovadx, Inc.                                                                                                                                                                                                                                                                                                      
|        | 23.1** |         |  | Consent of Ernst & Young, LLP, Independent
    Auditors.                                                                                                                                                                                                                                                                           
|        | 23.2** |         |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                                                                                                                                
|        | 99.1** |         |  | Certifications pursuant to 18 U.S.C. 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                                                                                                                                                                                                           



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|  |                           
|- | --------------------------
|* | Incorporated by reference.



|   |               
|-- | --------------
|** | Filed herewith



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