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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2003



OR



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



For the transition period from
                     to



Commission file number 0-27501



The TriZetto Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)



|                                                              |  |                                       
|------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                      |  | 33-0761159                            
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification Number)
|                                                              | 
|567 San Nicolas Drive, Suite 360Newport Beach, California     |  | 92660                                 
|(Address of Principal Executive Offices)                      |  | (Zip Code)                            



Registrants telephone number,
including area code: (949) 719-2200



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



Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.001 par value, and Series A Junior Participating Preferred Stock, $0.001 par value



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



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



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



As of June 30, 2003, the aggregate market value of voting stock held
by non-affiliates of the registrant, based upon the closing sales price for the registrants Common Stock, as reported in the Nasdaq National Market System, was $154.5 million. Shares of Common Stock held by each officer and director and by
each person who owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.



The number of shares of the registrants Common Stock outstanding as of
February 19, 2004 was 46,889,450.



Documents Incorporated by
Reference



Part III of this Report incorporates by reference information
from the definitive Proxy Statement for the registrants 2004 Annual Meeting of Stockholders.



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THE TRIZETTO GROUP, INC.

ANNUAL REPORT ON

FORM 10-K



For the Fiscal Year Ended December 31, 2003



TABLE OF CONTENTS



|           |  |                                                                                                                 |  |     
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                 |  | Page
|PART I    
|           |  |                                                                                                                
|Item 1     |  | Business                                                                                                        |  | 1   
|Item 2     |  | Properties                                                                                                      |  | 16  
|Item 3     |  | Legal Proceedings                                                                                               |  | 16  
|Item 4     |  | Submission of Matters to a Vote of Security Holders                                                             |  | 16  
|          
|PART II   
|           |  |                                                                                                                
|Item 5     |  | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6     |  | Selected Consolidated Financial Data                                                                            |  | 18  
|Item 7     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 19  
|Item 7A    |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 32  
|Item 8     |  | Financial Statements and Supplementary Data                                                                     |  | 32  
|Item 9     |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 32  
|Item 9A    |  | Disclosure Controls and Procedures                                                                              |  | 32  
|          
|PART III  
|           |  |                                                                                                                
|Item 10    |  | Directors and Executive Officers of the Registrant                                                              |  | 33  
|Item 11    |  | Executive Compensation                                                                                          |  | 33  
|Item 12    |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 33  
|Item 13    |  | Certain Relationships and Related Transactions                                                                  |  | 33  
|Item 14    |  | Principal Accountant Fees and Services                                                                          |  | 33  
|          
|PART IV   
|           |  |                                                                                                                
|Item 15    |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                                 |  | 33  
|SIGNATURES |  | 37                                                                                                             



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CAUTIONARY STATEMENT



This report contains forward-looking statements that have been made pursuant to the provisions of the Private Securities
Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, will, should,
forecasts, expects, plans, anticipates, believes, estimates, predicts, potential, or continue or the negative of such terms and other
comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined below under the caption
Risk Factors. These factors may cause our actual events to differ materially from any forward-looking statement. We do not undertake to update any forward-looking statement.



PART I



Item 1 Business



OVERVIEW



We offer a broad portfolio of healthcare information technology products
and services that can be provided individually or combined to create a comprehensive solution. Focused exclusively on healthcare, we offer: proprietary enterprise software, including Facets® and QicLink; outsourced business services, including software hosting, business process outsourcing, and IT outsourcing; and
consulting services. We provide products and services for three healthcare markets: health plans (payers), benefits administrators and physician groups (providers). In 2003, these markets represented 81%, 15%, and 4% of our total revenue,
respectively. As of December 31, 2003, we served approximately 433 customers.



The TriZetto Group, Inc. was incorporated in Delaware in May 1997 with the merger of two organizations: System One, a provider of online electronic-funds transfer technology, and Margolis Health Enterprises, a
provider of technology consulting to healthcare organizations. The combination created a company dedicated to healthcare information technology products and services.



We completed our initial public offering in October 1999 and since that time, we have completed six acquisitions: Novalis
Corporation, Finserv Health Care Systems, Inc., Healthcare Media Enterprises, Inc., Erisco Managed Care Technologies, Inc. (Erisco), Resource Information Management Systems, Inc. (RIMS), and Infotrust Company.



Of the six acquisitions, the Erisco and RIMS acquisitions, completed in the
fourth quarter of 2000, were the most significant. Eriscos main product, Facets®, is the leading administrative system for managed health plans in the country. QicLink, developed by RIMS, is the leading automated claims-processing system for benefits administrators. With these two acquisitions, TriZetto obtained a
customer base with more than 100 million enrollees (40% of the U.S. insured population) and attained a leadership position in two of its target markets, payers and benefits administrators.



FINANCIAL INFORMATION



Please refer to Item 6, Selected Financial Data, and Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, for a review of revenue, net loss, and total assets for the last three years.



OUR STRATEGY



Rising healthcare costs are causing employers to shift more of the cost of healthcare benefits to employees. In turn, employees are demanding better
service from their health plans, more information about doctors, hospitals and other providers, and more help navigating the healthcare delivery system. We believe that many health plans lack the technology and operational efficiency to operate in a
more consumer-driven environment. Our strategy is to provide the healthcare expertise, technology and services that our customers need today and in the future. Key elements of our strategy include:



| |  | Help customers anticipate change and migrate toward a successful future. In 2003, we continued to articulate our vision of the future for three customer segments:
health plans, benefits administrators, and preferred provider organizations (PPOs). We named these futures Health Plan 5.0, Benefits Administrator 5.0, and PPO 5.0. 5.0 continues to be the centerpiece of our sales strategy,
supported by TriZettos comprehensive portfolio of solutions and a clear migration path for customers. Over the course of 2003, we rolled out a series of products and services that provide our customers with the solution components to achieve
5.0.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Offer a compelling value proposition. We are focused on offering a quantified, compelling value proposition that includes such advantages as reduced or more
predictable information technology costs, more cost effective business processes, lower administrative costs, and more rapid return on investment. Our internal estimates, based on industry benchmarks and customer data, show that return on investment
increases with the use of our proprietary software in combination with one or more of our outsourced services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Offer market-leading enterprise software for health plans. In 2003, we successfully launched Facets Extended Enterprise(or Facets e2) into the marketplace. Facets e2
is a major expansion of our flagship Facets®
software for health plans, enabling us to continue to maintain and expand our lead in the marketplace. Facets e2 provides significant new
business and technology enhancements aimed at helping health plans meet emerging market demands, including customer driven market requirements, integrated e-business functionality, regulatory compliance, and advanced open architecture and web
services technologies. In the benefits administration market, we have made significant investments to extend the market leadership position of our QicLink product line. The new QicLink Extended Enterprise product, which is expected to be released in 2004, will address consumer market requirements and integration e-business and provide an updated
user interface for improved useability.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deliver our technology in concert with a continuum of services that can transform a customers business. In addition to offering leading enterprise
software, TriZetto offers complementary services that assist customers in achieving business success, including: overall IT strategy, software hosting, business process re-engineering, transaction processing (including claims, billing, enrollment,
member services, physician credentialing, accounts receivable and collections), and IT outsourcing. These services, in combination with TriZettos technology and delivery capabilities, can transform a customers business.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Organize products and services around the customers main business cycles. Our solutions are being aligned with the way our customers operate internally. We have
products and services that address the main business cycles of a health plan, which are: product development, revenue management, reimbursement management, customer service, network management, care management, risk management, and general finance
and administration.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leverage our strategic relationships. We intend to leverage our current strategic relationships and enter into new relationships to expand our customer base and
service offerings. We have established co-marketing and sales arrangements with third-party systems integrators and software vendors. As our customer base grows, we intend to expand and strengthen these relationships.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Selectively pursue acquisitions. We continually evaluate acquisitions of companies that could expand our market share, product offerings or our
technical capabilities. Since our initial public offering in 1999, we have made six acquisitions. We may pursue additional acquisitions that create shareholder value.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OUR PRODUCTS AND SERVICES



Outsourced Business Services



In 2003, we derived approximately 34% of our total revenue from outsourced business services. Our outsourced business services fall into three categories,
described in more detail below: software hosting and management, business process outsourcing, and IT outsourcing.



Software Hosting. Software hosting includes integrating, hosting, monitoring and managing our proprietary Facets® and QicLink applications and other software applications from third party vendors. We deliver software on a cost-predictable
subscription basis, through multi-year contracts that include guaranteed service levels.



Our hosted solutions free customers from capital investment in information technology, the operating costs associated with owning software and hardware, and the cost of managing their information infrastructure. Other
advantages include rapid deployment, reliability, scalability, lower implementation risk and preservation of legacy systems.



Through our data centers in Colorado and Illinois, we host and maintain software for our customers on most of the widely used computing, networking and
operating platforms. We provide access to our hosted applications across high-speed electronic communications channels, such as frame relay, virtual private networks or the Internet. Each center operates with state-of-the-art environmental
protection systems to maintain high availability to host systems and wide area network access. Connection to our host application servers and services is provided using the industry standard TCP/IP protocol. We believe this provides the most
efficient and cost-effective transport for information systems services, as well as simplified support



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and management. Our network connectivity infrastructure eliminates our customers need to manage and support their own computer systems, network and
software.



Our hosted solutions provide complete,
professionally managed information technology systems that include desktop and network connections, primary software applications that are essential to running the business, ancillary software, and information access and reporting capabilities to
aid in data analysis and decision-making. Customers can choose the combination of our products and services to best meet their business requirements.



Vendor Partner Relationships. We have acquired rights to license and/or deploy numerous commercially available software applications from a
variety of healthcare software vendors. These relationships range from perpetual, reusable software licenses and contracts to preferred installer agreements to informal co-marketing arrangements. We enter into relationships with software vendors in
order to offer our customers a variety of solutions tailored to their unique information technology needs. Our relationships with our vendor partners are designed to provide both parties with numerous mutual benefits.



Business Process Outsourcing. To complement our software hosting services, we
also provide payers and benefits administrators with transaction processing services for typical back office functions, including claims, billing and enrollment. Customers typically outsource to us for the following reasons: to improve or maintain
service, for more predictable costs, to take advantage of our larger scale, to reduce risk through our performance guarantees, to gain access to our technical and healthcare business expertise, and to become HIPAA compliant.



Our processing services include:



| |  | Benefit and Provider Configuration Rule Set-Up: We configure the customers software according to the customers specific benefit plans and provider payment
arrangements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Document Imaging/Electronic Data Interchange (EDI) Processing. We process claim forms, enrollment documents and other documents submitted via paper or EDI, and scan all
images for electronic retrieval.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Medical, Dental, and Specialty Claims Processing. We process claims submitted for services under a variety of products and lines of business, adjust payments and coordinate
benefits. We also generate, print and distribute claims payment checks and remittance notices to appropriate claimants.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Membership and Enrollment Processing. We set up employer group and individual membership information and process transactions regarding benefit plan selection, assignment of
primary care physicians, and membership changes. We also issue member identification cards and perform other related administrative tasks.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Premium Billing. We generate, print and mail invoices, post payments received on behalf of the health plan, and reconcile employer group and individual member accounts
against billed amounts.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Broker Commissions and Provider Capitation. We configure our customers software to ensure that insurance brokers and capitated provider groups are paid according to
their contracts. We also print and distribute commission checks and capitation payments.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Print and Mailing Services. We print and mail functional area output documents such as claims payment checks, remittance notices, premium invoices, broker commission checks
and capitation payments along with supporting documentation.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These business processing services can be provided at the customer site or in our centralized processing locations. Approximately 244 employees are located at our various processing sites, providing services for customers using Facets® and third-party systems.



IT Outsourcing. We provide a full range of IT management services to free
clients from the responsibility of managing their technology infrastructure and staff. The four major parts of IT outsourcing are:



| |  | Outsourced Management Servicesthe basic services provided to every customer. This includes managing the IT staff, processes, and technology.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Information Technology ServicesPC desktop support and service, telecommunications, basic systems security and centralized internal help desk operations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Infrastructure Management Servicesmanaging and operating the core technology infrastructure that supports a customers business. These services may be provided at
our central connectivity center, at the customer site or at a third party location.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Software Management Servicesmanaging, operating and supporting all or part of a set of software applications used by a customer. This service also includes data
warehousing and reporting.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Enterprise Software



In 2003, we derived approximately 37% of our total
revenue from proprietary software license and maintenance fees. We offer enterprise software on a licensed basis to healthcare payers and benefits administrators. The Facets®, Facts and QicLink applications are widely recognized in their respective markets for providing advanced solutions that create operational efficiencies and reduce costs. Our HealthWeb® modules allow customers to conduct electronic commerce
over the Internet. Our NetworX suite of products
allows electronic claims re-pricing across multiple provider networks for health plans and PPOs, as well as automated contract modeling. ClaimsExchange allows for the electronic exchange of information between health plans and PPOs. At December 31, 2003, our health plan software served
approximately 123 customers, and our software for benefits administrators and PPOs served approximately 282 customers.



Out of our total revenue in 2003, 2002, and 2001, we spent 13%, 13% and 10%, respectively, on software development (expensed and capitalized), primarily
for our proprietary software products.



Facets®. Facets® is a widely implemented, scalable client/server solution for healthcare
payers. Facets® allows payers to select from a
variety of modules to meet specific business requirementsincluding claims processing, claims re-pricing, capitation/risk fund accounting, premium billing, provider network management, group/membership administration, referral management,
hospital and medical pre-authorization, case management, customer service and electronic commerce.



Facets® can also be combined with complementary software to address the enterprise-wide needs of a managed care organization. Facets® has been expanded through alliances with complementary solutions for physician
credentialing, document imaging, workflow management, data warehousing, decision support, provider profiling, and Health Plan Employer Data Information set (HEDIS) reporting.



Facets® is available to customers on a license or hosted basis. In June 2003, we released a new product called Facets Extended Enterprise(or Facets e2), which was a major expansion of Facets®. Facets e2 includes the following features and benefits for health plans:



| |  | Flexible, integrated technology to support multiple lines of business and new consumer-oriented products, such as defined-contribution plans and healthcare spending accounts;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Simplified entry of benefit plan information;
| | - | ---------------------------------------------



| |  | Enhanced views of customer service data;
| | - | ----------------------------------------



| |  | Integrated HIPAA functionality to address standard electronic transactions and privacy regulations;
| | - | ---------------------------------------------------------------------------------------------------



| |  | Full suite of e-business applications to facilitate online business transactions with plan members, physicians, employers and brokers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| |  | New functions to support complex provider contracts and automated pricing of claims;
| | - | ------------------------------------------------------------------------------------



| |  | N-tiered, open architecture with a Web service layer and industry-standard protocols (e.g., SOAP, XML) to simplify integration of third-party applications; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Choice of leading databases  Oracle, Microsoft SQL and Sybase.
| | - | ---------------------------------------------------------------



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Facts. Introduced in 1980, Facts is designed for the indemnity insurance market, specifically managed indemnity and group insurance. Facts software, which we acquired in our acquisition of Erisco, is used for the essential
administrative transactions of an indemnity plan, including enrollment, rathing and premium calculation, billing and claims processing.



QicLink. We believe that QicLink is the nations most widely-used automated claims processing technology for benefits administrators. QicLink automates and simplifies the claims adjudication, re-pricing and payment process, and is available to customers on a licensed or hosted basis.



HealthWeb®. HealthWeb® allows health plans to exchange information and conduct business with physician groups, members, employers and brokers
on a secure basis over the Internet. HealthWeb® is
installed on the health plans web servers or offered on a hosted basis and then configured according to customer preferences.



HealthWeb® provides an effective way for health plans to reduce administrative costs and increase resources for medical services or other uses. Through its e-Service and e-Enroll
modules, HealthWeb® creates an on-line
self-service vehicle, reducing delays and phone calls and increasing customer satisfaction with prompt access to key information. HealthWeb®s business-to-business transaction capabilities improve workflow and reduce costs throughout the healthcare system.



HealthWeb®s electronic desktop is easy to use and personalized for each customer, providing
access to the business applications and content needed to perform typical healthcare tasks. HealthWeb® modules are designed to manage online eligibility, authorizations, referrals, benefit verification, claims status, claims adjudication and many other transactions benefiting physician
offices. The modules also support enrollment, demographic changes, primary care physician selection, identification card requests and other transactions for employers, brokers and health plan members.



Several new HealthWeb® modules have recently been released, including e-Quote, which automates rate
quotes and proposals, and eBill, which automates premium billing and reconciliation. All HealthWeb® modules are being offered on a standalone basis. They will also be integrated with and offered as part of Facets Extended Enterprise.



NetworX. NetworX was the first enterprise-wide management system and claims re-pricing solution for preferred provider organizations. The NetworX product line has been expanded to include a suite of products that addresses the
re-pricing needs of not only PPOs, but also the requirements of health plans for automated re-pricing of complex facility claims and modeling of contracts. The NetworXPricer product for healthplan claims re-pricing is sold as a separate application that can be
interfaced to legacy administration systems, as well as to Facets Extended Enteprise. The NetworXModeler product is a standalone application to support the automated modeling and analysis of provider contracts. NetworX complements ClaimsExchange, which provides Internet connections that allow preferred provider organizations and healthcare claims payers to exchange information online.
ClaimsExchange allows access to electronic
transaction routing between physician groups and payers 24 hours a day, seven days a week, such as exchange of re-priced claims, claims tracking and reporting capabililities.



Consulting Services



We derived 28% of our revenue from consulting services in 2003, mainly from implementations associated with our proprietary software, software hosting and
other outsourcing contracts. As of December 31, 2003, we had approximately 255 consultants. Our consultants:



| |  | Analyze customers information technology capabilities and business strategies and processes and assist customers in achieving competitive advantage by managing information and
data electronically.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Assist customers in installing and implementing software applications and technology products through systems analysis and planning, selection, design, construction, data
conversion, testing, business process development, training and systems support.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Design, develop and implement healthcare management programs using a combination of business intelligence software and consulting to reduce medical costs, improve the quality of
care delivered and increase member satisfaction.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Apply a proprietary methodology to assist customers in identifying deficiencies in complying with the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
and develop and implement solutions that assist customers in complying with HIPAA.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Assist customers in designing and implementing an effective electronic commerce strategy, including Internet portals, web sites, intranets and extranets that allow
business-to-business and business-to-consumer transactions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Assist customers in designing and implementing a business intelligence and data warehousing capability for the purpose of improving access to and organization of information
required for management decision-making.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Assist customers in designing an effective customer relationship management (CRM) strategy and implementing software applications focused on enhancing customer acquisition,
retention and expansion.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Through the Virtual Information Officer program, provide senior-level management services for customers who either do not employ their own information technology management or wish
to supplement it.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SALES AND MARKETING



Our sales and marketing approach is to promote TriZetto as the single source
for comprehensive healthcare information technology products and services. As of December 31, 2003, we had approximately 54 sales and marketing employees throughout the United States. Our professional sales force, comprised of experienced sales
executives with established track records, sells our entire range of offerings to current and prospective customers, including enterprise software, outsourced business services, and consulting services. Separate sales teams have been established for
the payer and benefits administration markets. The sales team for the payer market is divided into national and middle-market accounts. We have payer sales support teams for enterprise software and for outsourced business services. The support teams
are responsible for providing in-depth technical information to the customer or prospect, providing product demonstrations, and for negotiating customer contracts. To support the sales process, multi-disciplinary pursuit teams are established for
each major prospect, spearheaded by a member of executive management.



Our marketing organization is organized by target market and is closely aligned with the sales force to provide market specific campaigns and lead generation initiatives for our enterprise software, outsourced business services, and
consulting services. These initiatives include direct mail campaigns, marketing collateral, trade shows, seminars and events. The marketing organization also develops and supports our corporate positioning and branding, coordinates market research,
and handles all tradeshows, customer conferences and events.



Our consulting services group works closely with the sales organization to provide a consultative, executive selling approach that complements our sales program. This team of healthcare information technology professionals is trained in a
proprietary assessment methodology that allows a quick and comprehensive analysis of a customers information technology capabilities and requirements. In conjunction with their consulting responsibilities, our consulting services group
identifies opportunities to introduce customers to the broad range of applications and technology solutions available to them, including those that we offer.



CUSTOMER SERVICE



We believe that a high level of support is necessary to maintain long-term relationships with our customers. An account manager is assigned to each of our
customers and is responsible for proactively monitoring customer satisfaction, providing customers with additional training and process-improvement opportunities, and coordinating issue resolution. We employ functional and technical support
personnel who work directly with our account management team and customers to resolve technical, operational and application problems or questions. Our service desk provides a wide range of customer support functions. Our customers may contact the
service desk through a toll-free number 24 hours a day, seven days a week. For non-urgent issues, customers can also enter incidents directly into the customer support system via the Internet.



Because we support multiple applications and technology solutions, our
functional and technical support staff are grouped and trained by specific application and by application type. These focused staff groups have concentrated expertise that we can deploy as needed to address customer needs. We cross-train employees
to support multiple applications and technology solutions to create economies-of-scale in our support staff.



We further leverage the capabilities of our support staff through the use of sophisticated software that tracks solutions to common computer and
software-related problems. This allows our support staff to learn from the experience of other people within the organization and reduces the time it takes to solve problems. In addition, we provide customer support for our business process
outsourcing services.



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COMPETITION



The market for healthcare information technology services is intensely competitive, rapidly evolving, highly fragmented and subject to rapid technological
change. By using proprietary technologies and methods, we develop, integrate and deliver packaged software applications, Internet connections, electronic communications infrastructure and IT consulting services. Our competitors provide some or all
of the services that we provide. Our competitors can be categorized as follows:



| |  | information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, Computer Sciences Corporation, and Electronic Data Systems
Corporation;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | healthcare software application vendors, such as Quality Care Solutions, Inc., Amisys Synertech Inc. and deNovis, Inc.;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | healthcare information technology consulting firms, such as First Consulting Group, Inc., Superior Consultant Holdings Corporation and the consulting divisions or former affiliates
of the major accounting firms, such as Deloitte Consulting and Accenture;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | healthcare e-commerce and portal companies, such as WebMD Corporation, NaviMedix and HealthTrio; and
| | - | ----------------------------------------------------------------------------------------------------



| |  | enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego and M2.
| | - | ------------------------------------------------------------------------------------------



Each of these types of companies can be expected to compete with us within various segments of the healthcare information
technology market. Furthermore, major software information systems companies and other entities, including those specializing in the healthcare industry that are not presently offering applications that compete with our products and services, may
enter our markets. In addition, some of our third-party software vendors compete with us from time to time by offering their software on a licensed or hosted basis.



We believe companies in our industry primarily compete based on performance, price, software functionality, customer
awareness, ease of implementation and level of service. Although our competitive position is difficult to characterize due principally to the variety of current and potential competitors and the evolving nature of our market, we believe that we
presently compete favorably with respect to all of these factors. While our competition comes from many industry segments, we believe no single segment offers the integrated, single-source solution that we provide to our customers.



To be competitive, we must continue to enhance our products and services, as
well as our sales, marketing and distribution channels to respond promptly and effectively to:



| |  | changes in the healthcare industry, including consolidation;
| | - | ------------------------------------------------------------



| |  | constantly evolving standards and government regulation affecting healthcare transactions;
| | - | ------------------------------------------------------------------------------------------



| |  | the challenges of technological innovation and adoption;
| | - | --------------------------------------------------------



| |  | evolving business practices of our customers;
| | - | ---------------------------------------------



| |  | our competitors new products and services;
| | - | -------------------------------------------



| |  | new products and services developed by our vendor partners and suppliers; and
| | - | -----------------------------------------------------------------------------



| |  | challenges in hiring and retaining information technology professionals.
| | - | ------------------------------------------------------------------------



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BACKLOG



Our total backlog is defined as the revenue we expect to generate in future periods from existing customer contracts. Our 12-month backlog is defined as
the revenue we expect to generate from existing customer contracts over the next 12 months. Most of the revenue in our backlog is derived from multi-year recurring revenue contracts (including software hosting, business process outsourcing, IT
outsourcing, and software maintenance). We classify revenue from software license and consulting contracts as non-recurring. Such revenue is included in the backlog when the term of the software license or consulting contract exceeds 12 months.



Our total backlog at December 31, 2003, was approximately
$496.2 million. The 12-month backlog at December 31, 2003, was approximately $170.0 million. We recently received Altius notice to terminate our services agreement effective May 31, 2004. Included in our twelve-month backlog and total backlog
is recurring revenue of $10.4 million related to Altius. For a breakout of total and 12-month backlog by recurring and non-recurring revenue, see Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.



Backlog can change due to a number of
factors, including unforeseen changes in implementation schedules, contract cancellations (subject to penalties paid by the customer), or customer financial difficulties. Unless we enter into new customer agreements that generate enough revenue to
replace or exceed the revenue that is recognized in any given quarter, our backlog will decline. Our backlog at any date may not indicate demand for our products and services and may not reflect actual revenue for any period in the future.



INTELLECTUAL PROPERTY



Our intellectual property is important to our business. We rely on certain
developed software assets and internal methodologies for performing customer services. Our consulting services group develops and utilizes information technology life-cycle methodology and related paper-based and software-based toolsets to perform
customer assessments, planning, design, development, implementation, and support services. We rely primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect our
intellectual property.



Our efforts to protect our intellectual
property may not be adequate. Our competitors may independently develop similar technology or duplicate our products or services. Unauthorized parties may infringe upon or misappropriate our products, services or proprietary information. In
addition, the laws of some foreign countries do not protect proprietary rights as well as the laws of the United States. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of
the proprietary rights of others. Any such litigation could be time consuming and costly.



We could be subject to intellectual property infringement claims as we expand our product and service offerings and the number of competitors increases. Defending against these claims, even if not meritorious, could
be expensive and divert our attention from operating our company. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay a substantial damage award and be forced to develop
non-infringing technology, obtain a license or cease using the applications that contain the infringing technology or content. We may be unable to develop non-infringing technology or content or obtain a license on commercially reasonable terms, or
at all.



We also rely on a variety of technologies that are
licensed from third parties to perform key functions. These third-party licenses are an essential element of our hosted solutions business. These third-party licenses may not be available to us on commercially reasonable terms in the future. The
loss of or inability to maintain any of these licenses could delay the introduction of software enhancements and other features until equivalent technology can be licensed or developed. Any such delay could materially adversely affect our ability to
attract and retain customers.



SIGNIFICANT CUSTOMERS



As of December 31, 2003, we served approximately 433 customers. Blue Cross
Blue Shield of Michigan, Altius Health Plans, Inc., UnitedHealth Group, Inc., and QualChoice of Arkansas, Inc. represented approximately 8%, 8%, 7% and 5%, respectively, of our total revenue for the twelve months ended December 31, 2003.



EMPLOYEES



As of December 31, 2003, we had approximately 1,774 employees. Our employees are not subject to any collective bargaining
agreements, and we generally have good relations with our employees.



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AVAILABLE INFORMATION



Our website is located at www.trizetto.com. We make available free of charge through this website all of our SEC filings including our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after those reports are electronically filed with the SEC.



RISK FACTORS



Our business is changing rapidly, which could cause our quarterly operating results to vary and our stock price to fluctuate.



Our quarterly operating results have varied in the past,
and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as our mix of non-recurring and recurring revenue, our ability to add new customers, renew
existing accounts, sell additional products and services to existing customers, meet project milestones and customer expectations, and the timing of new customer sales. The variation in our quarterly operating results could affect the market price
of our common stock in a manner that may be unrelated to our long-term operating performance.



We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively
fixed in the short-term. If we record lower revenue, we may not be able to reduce our short-term spending in response. Any shortfall in revenue would have a direct impact on our results of operations. For these and other reasons, we may not meet the
earnings estimates of securities analysts or investors, and our stock price could decline.



Our sales cycles are long and unpredictable.



We have experienced long and unpredictable sales cycles, particularly for contracts with large customers, or customers purchasing multiple products and services. Enterprise software typically requires significant
capital expenditures by customers, and the decision to outsource IT-related services is complicated and time-consuming. Major purchases by large payer organizations typically range from 9 to 12 months or more from initial contact to contract
execution. There can be no assurance that the prospects currently in our pipeline will sign contracts within a reasonable period of time or at all.



In addition, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales
cycle and the implementation cycle, we will expend substantial time, effort and financial resources preparing contract proposals, negotiating the contract and implementing the solution. We may not realize any revenue to offset these expenditures,
and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our
revenues.



We have a history of operating losses and cannot predict when, or
if, we will achieve positive net income.



We have
generated net losses in 18 of our past 20 quarters (through December 31, 2003). Although our revenue has grown in recent periods, we cannot assure you that our revenue will be maintained at the current level or increase in the future. In addition,
we have a limited operating history and it is difficult to evaluate our business. Our stockholders must consider the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development,
particularly companies in rapidly evolving markets. We cannot assure you that we will achieve or sustain positive earnings on either a quarterly or annual basis.



We currently derive our revenue primarily from providing hosted solutions, software licensing and maintenance, and other
services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and
acquisitions. As a result, we may never sustain positive net income.



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Revenue from a limited number of customers comprises a significant portion of our total revenue, and if these
customers terminate or modify existing contracts or experience business difficulties, it could adversely affect our earnings.



As of December 31, 2003, we were providing services to approximately 433 customers. Four of our customers, Blue Cross Blue Shield of Michigan, Altius
Health Plans, Inc., UnitedHealth Group, Inc., and QualChoice of Arkansas, represented an aggregate of approximately 28% of our total revenue for the twelve months ended December 31, 2003.



Although we typically enter into multi-year customer agreements, a majority of our customers are able to reduce or cancel
their use of our services before the end of the contract term, subject to monetary penalties. We also provide services to some hosted customers without long-term contracts. In addition, many of our contracts are structured so that we generate
revenue based on units of volume, which include the number of members, number of physicians or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we
will generate less revenue under these contracts and our operating results may be materially and adversely impacted.



Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As
a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition, operating results and cash flows.



We are growing rapidly, and our inability to manage this growth could harm
our business.



We have rapidly and significantly expanded
our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, and financial resources and information systems. As of December 31, 2003, we had grown
to approximately 1,774 employees, from approximately 75 employees and independent contractors in December 1997. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition,
operating results and cash flows.



Our acquisition strategy may disrupt our
business and require additional financing.



Since
inception, we have made several acquisitions and may continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses, making it difficult to acquire suitable companies on favorable terms
or at all.



We may be unable to successfully integrate
companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In
addition, the failure to successfully integrate acquisitions may divert managements attention from our existing business and may damage our relationships with our key customers and employees.



To finance future acquisitions, we may issue equity securities that could be
dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may
significantly reduce our profitability and have a material adverse effect on our business, financial condition, operating results and cash flows.



Our need for additional financing is uncertain as is our ability to raise capital if required.



If we continue to incur losses, we may need additional financing to fund operations or growth. We cannot assure you that we
will be able to raise additional funds through public or private financings, at any particular point in the future or on favorable terms. Future financings could adversely affect your ownership interest in comparison with those of other
stockholders.



Our business will suffer if our software products contain
errors.



The proprietary and third party software products
we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in current versions, new versions or enhancements of our products. Significant technical challenges also arise with our products
because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products
or require significant amounts of customer support, our



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costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet
our customers expectations. As a result of the foregoing, we could experience:



| |  | loss of or delay in revenue and loss of market share;
| | - | -----------------------------------------------------



| |  | loss of customers;
| | - | ------------------



| |  | damage to our reputation;
| | - | -------------------------



| |  | failure to achieve market acceptance;
| | - | -------------------------------------



| |  | diversion of development resources;
| | - | -----------------------------------



| |  | increased service and warranty costs;
| | - | -------------------------------------



| |  | legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and
| | - | -----------------------------------------------------------------------------------------------------------------------------



| |  | increased insurance costs.
| | - | --------------------------



Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software
from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective or incompatible with future versions
of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or
develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as
currently provided to us or may be more expensive than products we currently use.



We could lose customers and revenue if we fail to meet the performance standards and other obligations in our contracts.



Many of our service agreements contain performance standards. If we fail to meet these standards or breach other material obligations under our
agreements, our customers could terminate their agreements with us or require that we refund part or all of the fees charged under those agreements. The termination of any of our material services agreements and/or any associated refunds could have
a material adverse effect on our business, financial condition, operating results and cash flows.



If our ability to expand our network infrastructure is constrained in any way, we could lose customers and damage our operating results.



We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased
transaction volumes and changing customer requirements. We may not be able to accurately project the rate or timing of increases, if any, in the use of our hosted solutions or be able to expand and upgrade our systems and infrastructure to
accommodate such increases. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers changing needs on a timely basis, at a commercially reasonable cost or at all. Our current information
systems, procedures and controls may not continue to support our operations while maintaining acceptable overall performance and may hinder our ability to exploit the market for healthcare applications and services. Service lapses could cause our
users to switch to the services of our competitors.



Performance or security
problems with our systems could damage our business.



Our
customers satisfaction and our business could be harmed if we, or our customers experience any system delays, failures or loss of data.



Although we devote substantial resources to meeting these demands, errors may occur. Errors in the processing of customer data may result in loss of data,
inaccurate information and delays. Such errors could cause us to lose customers and be liable for damages. We currently process substantially all of our customers transactions and data at our data centers in Colorado and Illinois. Although we
have safeguards for emergencies and we have contracted backup processing for our customers critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or
result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers that have had periodic operational problems or experienced outages.



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A material security breach could damage our reputation or result in liability to us. We retain
confidential customer and patient information in our data 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.



Our services agreements generally contain limitations on liability, and we
maintain insurance with coverage limits of $25 million for general liability and $10 million for professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance
coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage
could have a material adverse effect on our business, financial condition, operating results and cash flows. Even unsuccessful claims could result in litigation or arbitration costs and may divert managements attention from our existing
business.



Our success depends on our ability to attract, retain and
motivate management and other key personnel.



Our success
will depend in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience
in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key
personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition, operating results and cash flows. Although we currently experience relatively low rates
of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations, and our needs for additional management and key personnel will increase. Our continued ability
to compete effectively in our business depends on our ability to attract, retain and motivate these individuals.



We depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business
difficulties, or if we are unable to establish new relationships with additional software application vendors, it could harm our business.



We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends
significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing
agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We cannot assure you that we will be able to maintain relationships with our vendors or establish
relationships with new vendors. We cannot assure you that the software, products or services of our third-party vendors will achieve or maintain market acceptance or commercial success. Accordingly, we cannot assure you that our existing
relationships will result in sustained business partnerships, successful product or service offerings or the generation of significant revenue for us.



Our arrangements with third-party software application vendors are not exclusive. We cannot assure you that these third-party vendors regard our
relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services.
If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain
any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition, operating results and cash flows.



Our licenses for the use of third-party software applications are
essential to the technology solutions we provide for our customers. Loss of any one of our major vendor agreements may have a material adverse effect on our business, financial condition, operating results and cash flows.



We rely on an adequate supply and performance of computer hardware and related equipment
from third parties to provide services to larger customers and any significant interruption in the availability or performance of third-party hardware and related equipment could adversely affect our ability to deliver our products to certain
customers on a timely basis.



As we offer our hosted
solution services and software to a greater number of customers and particularly to larger customers, we may require specialized computer equipment that can be difficult to obtain on short notice. Any delay in



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obtaining such equipment may prevent us from delivering large systems to our customers on a timely basis. We also rely on such equipment to meet required
performance standards. If such performance standards are not met, we may be adversely impacted under our service agreements with our customers.



Any failure or inability to protect our technology and confidential information could adversely affect our business.



Our success depends in part upon proprietary software and other confidential
information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We do not own any patents. We rely on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and contractual provisions to protect our intellectual property. However, these protections may not be sufficient, and they do not prevent independent third-party development of competitive products
or services.



We believe that our proprietary rights do not
infringe upon the proprietary rights of third parties. However, third parties may assert infringement claims against us in the future, and we could be required to enter into a license agreement or royalty arrangement with the party asserting the
claim. We may also be required to indemnify customers for claims made against them.



If our consulting services revenue does not grow substantially, our revenue growth could be adversely impacted.



Our consulting services revenue represents a significant component of our total revenue and we anticipate that it will continue to represent a significant
percentage of total revenue in the future. The level of consulting services revenue depends upon the healthcare industrys demand for outsourced information technology services and our ability to deliver products that generate implementation
and follow-on consulting services revenue. Our ability to increase services revenue will depend in part on our ability to increase the capacity of our consulting group, including our ability to recruit, train and retain a sufficient number of
qualified personnel.



If we fail to meet the changing demands of technology,
we may not continue to be able to compete successfully with other providers of software applications.



The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. We
believe our ability to compete in this market will depend in part upon our ability to:



| |  | maintain and continue to develop partnerships with vendors;
| | - | -----------------------------------------------------------



| |  | enhance our current technology and services;
| | - | --------------------------------------------



| |  | respond effectively to technological changes;
| | - | ---------------------------------------------



| |  | introduce new technologies; and
| | - | -------------------------------



| |  | meet the increasingly sophisticated needs of our customers.
| | - | -----------------------------------------------------------



Competitors may develop products or technologies that are better or more attractive than those offered by us or that may render our technology and
services obsolete. Many of our current and potential competitors are larger and offer broader services and have significantly greater financial, marketing and other competitive resources than us.



Part of our business will suffer if health plan customers do not accept Internet
solutions.



The success of Facets® e-business functions and individual
HealthWeb® modules depend in part on the adoption
of Internet solutions by health plan customers and their constituents (enrollees, employers, physicians and other providers). Adoption requires the acceptance of a new way of conducting business and exchanging information.



We expect Internet use to continue to grow in number of users and volume of
traffic. The Internet infrastructure may be unable to support the demands placed on it by this continued growth. Our business could suffer substantially if Internet solutions are not accepted or not perceived to be effective. The Internet may not
prove to be a viable commercial marketplace for a number of reasons, including:



| |  | inadequate development of the necessary infrastructure for communication speed, access and server reliability;
| | - | --------------------------------------------------------------------------------------------------------------



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| |  | security and confidentiality concerns;
| | - | --------------------------------------



| |  | lack of development of complementary products, such as high-speed modems and high-speed communication lines;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | implementation of competing technologies;
| | - | -----------------------------------------



| |  | delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | government regulation.
| | - | ----------------------



The intensifying competition we face from both established entities and new entries in the market may adversely affect our revenue and profitability.



We face intense competition. Many of our competitors and potential
competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than we have. Many of our competitors also have, or may develop or acquire, substantial installed customer
bases in the healthcare industry. As a result, our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their
applications or services than we can devote.



Our competitors
can be categorized as follows:



| |  | information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, Computer Sciences Corporation, and Electronic Data Systems
Corporation;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | healthcare information software vendors, such as Quality Care Solutions, Inc., Amisys Synertech Inc. and deNovis, Inc.;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | healthcare information technology consulting firms, such as First Consulting Group, Inc., Superior Consultant Holdings Corporation and the consulting divisions or former affiliates
of the major accounting firms, such as Deloitte Consulting and Accenture;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | healthcare e-commerce and portal companies, such as WebMD Corporation, NaviMedix and HealthTrio; and
| | - | ----------------------------------------------------------------------------------------------------



| |  | enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego and M2.
| | - | ------------------------------------------------------------------------------------------



Each of these types of companies can be expected to compete with us within the various segments of the healthcare
information technology market. In addition, some of our third party software vendors may compete with us from time to time by offering their software on a licensed or hosted basis. Further, other entities that do not presently compete with us may do
so in the future, including major software information systems companies, financial services entities or health plans.



We cannot assure you that we will be able to compete successfully against current and future competitors or that competitive pressures faced by us will
not have a material adverse effect on our business, financial condition, operating results and cash flows.



The insolvency of our customers or the inability of our customers to pay for our services could negatively affect our financial condition.



Healthcare payers are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios
promulgated by state regulatory agencies. In addition, healthcare payers are subject to risks that physician groups or associations within their organizations become subject to costly litigation or become insolvent, which may adversely affect the
financial stability of the payer. If healthcare payers are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered
would be impaired and our financial condition could be adversely affected.



Consolidation of healthcare payer organizations could decrease the number of our existing and potential customers.



There has been and continues to be acquisition and consolidation activity among healthcare payers. Mergers or consolidations of payer organizations in the
future could decrease the number of our existing and potential customers. The acquisition of a customer could have a negative impact on our financial condition. A smaller overall market for our products and services could result in lower revenue.



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Changes in government regulation of the healthcare industry could adversely affect our business.



During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. In addition, proposals to substantially reform Medicare, Medicaid, and the healthcare system in general have been or are being
considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates and otherwise adversely affect the healthcare industry which could adversely impact our business. The impact of
regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations.



Participants in the healthcare industry, such as our payer and provider
customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of patient medical records and other healthcare information. Legislators
at both the state and federal levels have proposed and enacted additional legislation relating to the use and disclosure of medical information, and the federal government is likely to enact new federal laws or regulations in the near future.
Pursuant to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Department of Health and Human Services (DHHS) has issued a series of regulations setting forth security, privacy and transactions
standards for all health plans, clearinghouses and healthcare providers to follow with respect to individually identifiable health information. DHHS has issued final regulations mandating the use of standard transactions and code sets which became
effective October 16, 2003. DHHS has also issued final HIPAA privacy regulations which became effective on April 14, 2003, and final HIPAA security regulations. Many of our customers will also be subject to state laws implementing the federal
Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information and nonpublic personal financial information by insurers and health plans.



Our payer and provider customers must comply with HIPAA, its regulations and other applicable healthcare laws and
regulations. In addition, we may be deemed to be a covered entity subject to HIPAA because we offer our customers products that convert data to a HIPAA compliant format. Accordingly, we must comply with certain provisions of HIPAA and in order for
our products and services to be marketable, they must contain features and functions that allow our customers to comply with HIPAA and other healthcare laws and regulations. We believe our products currently allow our customers to comply with
existing laws and regulations. However, because HIPAA and its regulations have yet to be fully interpreted, our products may require modification in the future. If we fail to offer solutions that permit our customers to comply with applicable laws
and regulations, our business will suffer.



We perform billing
and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has imposed heightened scrutiny on billing and collection practices of healthcare providers and related entities,
particularly with respect to potentially fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines,
imprisonment or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for our customers and for us. Any of these results could have a material adverse effect on our business, financial condition, operating
results and cash flows.



Federal and state consumer protection
laws may apply to us when we bill patients directly for the cost of physician services provided. Failure to comply with any of these laws or regulations could result in a loss of licensure or other fines and penalties. Any of these results could
have a material adverse effect on our business, financial condition, operating results and cash flows.



In addition, laws governing healthcare payers and providers are often not uniform among states. This could require us to undertake the expense and
difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.



Part of our business is subject to government regulation relating to the Internet that could impair our operations.



The Internet and its associated technologies are subject to increasing
government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for
information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Many existing laws and regulations, when enacted, did not anticipate the methods of the
Internet-based hosted, software and information technology solutions we offer. We believe, however, that these laws may be applied to us. We expect our products and services to be in substantial compliance with all material federal, state and local
laws and regulations governing our operations. However, new legal requirements or interpretations applicable to the Internet could decrease the growth in the use of the Internet, limit the use of the Internet for our products and services or
prohibit the sale of a particular product or service, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial conditions. To



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the extent that we market our products and services outside the United States, the international regulatory environment relating to the Internet and
healthcare services could also have an adverse effect on our business.



Item 2Properties



Facilities



As of December 31, 2003, we leased 26 facilities located
in the United States. Our principal executive and corporate offices are located in Newport Beach, California. The data centers we use to serve customers are located in Greenwood Village, Colorado and Naperville, Illinois. Our leases have expiration
dates ranging from 2004 to 2014. We believe that our facilities are adequate for our current operations and that additional leased space can be obtained if needed.



Item 3Legal Proceedings



In
the normal course of business, we may be involved in litigation relating to claims arising out of our operations. In managements opinion, we are not currently a party to any legal proceedings, the adverse outcome of which, individually or in
the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows.



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



No matters were submitted to a vote of our stockholders during the quarter ended December 31, 2003.



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PART II



Item 5Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities



Our common stock has been traded on the Nasdaq National Market under the symbol TZIX since October 8, 1999.



The following table shows the high and low closing prices of our common stock
as reported on the Nasdaq National Market for the periods indicated:



|                   |  |      |       |     |   |      
|------------------ |  | ---- | ----- | --- | - | -----
|Quarters Ended     |  | High |       | Low
|December 31, 2003  |  | $    | 7.35  |     | $ | 5.99 
|September 30, 2003 |  | $    | 7.95  |     | $ | 5.97 
|June 30, 2003      |  | $    | 6.60  |     | $ | 3.97 
|March 31, 2003     |  | $    | 5.99  |     | $ | 3.00 
|December 31, 2002  |  | $    | 7.80  |     | $ | 4.29 
|September 30, 2002 |  | $    | 8.00  |     | $ | 4.66 
|June 30, 2002      |  | $    | 12.54 |     | $ | 7.89 
|March 31, 2002     |  | $    | 14.33 |     | $ | 11.75



As of February 19,
2004, there were 159 holders of record based on the records of our transfer agent and approximately 4,583 beneficial owners of our common stock whose shares of our common stock are held in the names of various securities brokers, dealers and
registered clearing agencies.



We have never paid cash
dividends on our common stock. We currently anticipate that we will retain earnings, if any, to support operations and to finance the growth and development of our business and do not anticipate paying cash dividends in the foreseeable future. The
payment of cash dividends by us is restricted by our current bank credit facilities, which contain restrictions prohibiting us from paying any cash dividends without the banks prior approval.



The information required by this item regarding equity compensation plan
information is set forth in Part III, Item 12 of this Annual Report on Form 10-K.



Recent Sales of Unregistered Securities



The
following is a summary of transactions during 2003 involving sales of our securities that were not registered with the SEC:



| |  | On March 11, 2003, we issued 12,249 shares of common stock to a former stockholder of Finserv Health Care Systems, Inc. in connection with our acquisition on December 22, 1999.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On April 29, 2003, we issued 72,635 shares of common stock to Trustco Holdings, Inc. as a market guarantee in connection with our acquisition of Infotrust Company on April 12, 2001.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The sales of the securities listed above were
deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder. The recipients of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments representing such securities issued in such transactions. These sales were made
without general solicitation or advertising. Each recipient was either an accredited investor or a sophisticated investor.



17



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##### Table of Contents

Item 6Selected Financial Data



The following selected consolidated financial data, except as noted herein, has been taken or derived from our audited consolidated financial statements and should be read in conjunction with the full consolidated financial statements
included herein. We made acquisitions in 1999, 2000 and 2001, which affect comparability of all years.



|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|------------------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | -------- | - |  | - | ------- | -
|                                                                    |  | Years Ended December 31,                 |       
|                                                                    |  | 1999                                     |        |   | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |         
|                                                                    |  | (in thousands, except per share amounts) |       
|Consolidated statements of operations data:                         |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Revenue:                                                            |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Recurring revenue                                                   |  | $                                        | 19,448 |   |      | $ | 61,811  |      |  | $ | 142,706 |   |  | $    | 159,178  |   |  | $ | 160,973 |  
|Non-recurring revenue                                               |  |                                          | 13,478 |   |      |   | 27,245  |      |  |   | 75,466  |   |  |      | 105,972  |   |  |   | 129,356 |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Total revenue                                                       |  |                                          | 32,926 |   |      |   | 89,056  |      |  |   | 218,172 |   |  |      | 265,150  |   |  |   | 290,329 |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Cost of revenue:                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Recurring revenue                                                   |  |                                          | 17,350 |   |      |   | 54,929  |      |  |   | 103,854 |   |  |      | 114,509  |   |  |   | 115,812 |  
|Non-recurring revenue                                               |  |                                          | 10,037 |   |      |   | 20,089  |      |  |   | 42,806  |   |  |      | 63,311   |   |  |   | 93,244  |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|                                                                    |  |                                          | 27,387 |   |      |   | 75,018  |      |  |   | 146,660 |   |  |      | 177,820  |   |  |   | 209,056 |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Recurring revenue  loss on contracts (1)                           |  |                                          |       |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   | 11,271  |  
|Non-recurring revenue  loss on contracts (1)                       |  |                                          |       |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   | 3,680   |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|                                                                    |  |                                          |       |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   | 14,951  |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Total cost of revenue                                               |  |                                          | 27,387 |   |      |   | 75,018  |      |  |   | 146,660 |   |  |      | 177,820  |   |  |   | 224,007 |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Gross profit                                                        |  |                                          | 5,539  |   |      |   | 14,038  |      |  |   | 71,512  |   |  |      | 87,330   |   |  |   | 66,322  |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Operating expenses:                                                 |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Research and development                                            |  |                                          | 2,394  |   |      |   | 8,463   |      |  |   | 16,402  |   |  |      | 21,911   |   |  |   | 24,823  |  
|Selling, general and administrative                                 |  |                                          | 9,366  |   |      |   | 34,144  |      |  |   | 51,938  |   |  |      | 53,966   |   |  |   | 52,138  |  
|Amortization of goodwill and other intangible assets (2)            |  |                                          | 783    |   |      |   | 18,622  |      |  |   | 69,076  |   |  |      | 28,027   |   |  |   | 10,908  |  
|Write-off of acquired in-process technology (3)                     |  |                                          | 1,407  |   |      |   | 1,426   |      |  |   |        |   |  |      |         |   |  |   |        |  
|Restructuring and impairment charges (4)                            |  |                                          |       |   |      |   |        |      |  |   | 12,140  |   |  |      | 651      |   |  |   | 3,769   |  
|Impairment of goodwill and other intangible assets (5)              |  |                                          |       |   |      |   |        |      |  |   |        |   |  |      | 131,019  |   |  |   |        |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Total operating expenses                                            |  |                                          | 13,950 |   |      |   | 62,655  |      |  |   | 149,556 |   |  |      | 235,574  |   |  |   | 91,638  |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Loss from operations                                                |  |                                          | (8,411 | ) |      |   | (48,617 | )    |  |   | (78,044 | ) |  |      | (148,244 | ) |  |   | (25,316 | )
|Interest income                                                     |  |                                          | 527    |   |      |   | 1,394   |      |  |   | 2,048   |   |  |      | 1,609    |   |  |   | 970     |  
|Interest expense                                                    |  |                                          | (256   | ) |      |   | (883    | )    |  |   | (1,333  | ) |  |      | (1,479   | ) |  |   | (2,005  | )
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Loss before benefit from (provision for) income taxes               |  |                                          | (8,140 | ) |      |   | (48,106 | )    |  |   | (77,329 | ) |  |      | (148,114 | ) |  |   | (26,351 | )
|Benefit from (provision for) income taxes                           |  |                                          | 213    |   |      |   | 5,848   |      |  |   | 16,175  |   |  |      | (250     | ) |  |   | (1,124  | )
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Net loss                                                            |  | $                                        | (7,927 | ) |      | $ | (42,258 | )    |  | $ | (61,154 | ) |  | $    | (148,364 | ) |  | $ | (27,475 | )
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Net loss per share:                                                 |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Basic and diluted                                                   |  | $                                        | (0.85  | ) |      | $ | (1.80   | )    |  | $ | (1.53   | ) |  | $    | (3.28    | ) |  | $ | (0.60   | )
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Shares used in computing net loss per share:                        |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Basic and diluted                                                   |  |                                          | 9,376  |   |      |   | 23,444  |      |  |   | 40,094  |   |  |      | 45,256   |   |  |   | 46,170  |  
|                                                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|                                                                    | 
|                                                                    |  | December 31,                             |       
|                                                                    |  | 1999                                     |        |   | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |         
|                                                                    |  | (in thousands)                           |       
|Consolidated balance sheet data:                                    |  |                                          |        |   |      |   |         |      |  |   |         |   |  |      |          |   |  |   |         |  
|Cash, cash equivalents, restricted cash, and short-term investments |  | $                                        | 24,806 |   |      | $ | 28,384  |      |  | $ | 84,633  |   |  | $    | 81,117   |   |  | $ | 76,347  |  
|Total assets                                                        |  |                                          | 68,418 |   |      |   | 363,751 |      |  |   | 390,721 |   |  |      | 237,996  |   |  |   | 233,308 |  
|Total short-term debt and capital lease obligations                 |  |                                          | 1,857  |   |      |   | 14,555  |      |  |   | 19,607  |   |  |      | 17,921   |   |  |   | 34,920  |  
|Total long-term debt and capital lease obligations                  |  |                                          | 2,728  |   |      |   | 4,440   |      |  |   | 9,699   |   |  |      | 15,116   |   |  |   | 7,155   |  
|Total stockholders equity                                          |  |                                          | 51,296 |   |      |   | 269,430 |      |  |   | 280,955 |   |  |      | 137,414  |   |  |   | 113,523 |  

---

|(1) | During the fourth quarter of 2003 and as part of our business planning process for 2004, we decided to wind-down our outsourcing services to physician group customers. As a result
of this decision, we estimated that the existing customer agreements from this business would generate a total of $11.3 million of losses through 2008, until the remaining terms of these agreements expire. This amount was charged to cost of revenue
during the fourth quarter of 2003. Additionally, in December 2003, we negotiated a settlement regarding out-of-scope work related to one of our large fixed fee implementation projects. As a result of this settlement, we estimated that this project
would generate a total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of revenue in the fourth quarter of 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | As of January 1, 2002, we adopted the rules set forth in Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets, effective for
fiscal years beginning after December 15, 2001, which states that goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but, instead, will be subject to annual impairment tests. Effective January 1, 2002,
goodwill, along with acquired workforce reclassified to goodwill in accordance with Statement 142, are no longer being amortized.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | In connection with our acquisitions in 1999 and 2000, we wrote off $1.4 million during each of 1999 and 2000 of the total purchase price attributable to acquired in-process
technology as technological feasibility of the products had not been established.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | In December 2001, we initiated a number of restructuring actions focused on eliminating redundancies, streamlining operations and improving overall financial results. These
initiatives included workforce reductions, office closures, discontinuation of certain business lines and related asset write-offs. In the fourth quarter of 2003, approximately $280,000 of restructuring expense was reversed related to the lease
settlements for the facility closures in Naperville, Illinois and Westmont, Illinois, which were previously accrued for in fiscal year 2001. As a result of our decision in the fourth quarter of 2004 to wind-down our outsourcing services to physician
groups and to discontinue our outsourcing services to certain non-Facets® payer customers, we estimated that our future net cash flows from the assets used in these businesses will not recover their net book value. Accordingly, a total charge of $4.0 million was taken as a restructuring and
impairment charge in the fourth quarter of 2003, which represented the net book value of these assets. The assets will be written off in the first quarter of 2004. See Note 13 of Notes to Consolidated Financial Statements for an explanation of these
restructuring initiatives.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | After the end of the fourth quarter of 2002, our market capitalization decreased to a level that required us to perform additional analyses under Statement 142 to quantify the
amount of impairment to goodwill. This analysis resulted in an impairment charge to goodwill of $97.5 million as of December 31, 2002. The decrease in market capitalization was also an indicator that our other intangible assets might also be
impaired as of December 31, 2002, and they were also tested for impairment in accordance with Financial Accounting Standards Board Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The analysis resulted
in an additional impairment charge of $33.5 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations



You should read the following discussion together with the consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K.
This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from
those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under Forward-Looking Information and the Factors Affecting Future Performance, included in Item 1,
as well as those otherwise discussed in this section and elsewhere in this Annual Report on Form 10-K. Unless otherwise specified or the context requires otherwise, the terms we, our and us refer to The TriZetto
Group, Inc. and its subsidiaries.



Overview



We offer a broad portfolio of healthcare information technology products and
services that can be provided individually or combined to create a comprehensive solution. Focused exclusively on healthcare, we offer: proprietary enterprise software, including Facets® and QicLink; outsourced services, including software hosting, business process outsourcing, and IT outsourcing; and consulting
services. We provide products and services for three healthcare markets: health plans (payers), benefits administrators and physician groups (providers). For the year ended December 31, 2003, these



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markets represented 81%, 15%, and 4% of our total revenue, respectively. As of December 31, 2003, we served approximately 433 customers.



We measure financial performance by monitoring backlog and bookings,
recurring revenue and non-recurring revenue, gross profit, and net income (loss). Total revenue for 2003 were $290.3 million compared to $265.2 million in 2002. Recurring revenue for 2003 was $161.0 million compared to $159.2 million in 2002.
Non-recurring revenue for 2003 was $129.4 million compared to $106.0 million in 2002. Bookings for 2003 were $232.0 million compared to $190.9 million in 2002. Backlog at December 31, 2003 was $496.2 million compared to $587.6 million at December
31, 2002. Gross profit was $66.3 million in 2003 compared to $87.3 in 2002. Net loss in 2003 was $27.5 million compared to a net loss of $148.4 million in 2002.



We generate recurring revenue from several sources, including the provision of outsourcing services, such as software hosting and other business
services, and the sale of maintenance and support for our proprietary software products. We generate non-recurring revenue from the licensing of our software and from consulting fees for implementation, installation, configuration, business process
engineering, data conversion, testing and training related to the use of our proprietary and third-party licensed products. Cost of revenue includes costs related to the products and services we provide to our customers and costs associated with the
operation and maintenance of our customer connectivity centers. These costs include salaries and related expenses for consulting personnel, customer connectivity centers personnel, customer support personnel, application software license fees,
amortization of capitalized software development costs, telecommunications costs and maintenance costs. Research and development (R&D) expenses are salaries and related expenses associated with the development of software
applications prior to establishing technological feasibility. Such expenses include compensation paid to engineering personnel and fees to outside contractors and consultants. Selling, general and administrative expenses consist primarily of
salaries and related expenses for sales, sales commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for certain professional services.



In our earnings announcement dated January 14, 2004, we provided investors
with 2004 guidance on revenues of between $290 and $305 million and on earnings per share of between $0.12 and $0.17.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Those estimates are based on our experience, terms of existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.



The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial statements, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting
policies to our company:



| |  | Revenue recognition;
| | - | --------------------



| |  | Up-front fees;
| | - | --------------



| |  | Allowance for doubtful accounts;
| | - | --------------------------------



| |  | Capitalization of software development costs;
| | - | ---------------------------------------------



| |  | Loss on contracts;
| | - | ------------------



| |  | Restructuring and impairment charges; and
| | - | -----------------------------------------



| |  | Impairment of goodwill and other intangible assets.
| | - | ---------------------------------------------------



This listing is not a comprehensive list of all of our accounting policies. For a detailed discussion on the application of these and other accounting
policies, see Note 2 of Notes to Consolidated Financial Statements.



Revenue Recognition.We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is probable and all other significant
obligations have been fulfilled. Our revenue is classified into two categories: recurring and non-recurring. For the year ended December 31, 2003, approximately 55% of our total revenue was recurring and 45% was non-recurring.



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We generate recurring revenue from several sources, including the provision of outsourcing services, such
as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. Recurring revenue is billed and recognized monthly over the contract term, typically three to seven years. Many of our
outsourcing agreements require us to maintain a certain level of operating performance. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over
the contract period. Payment for software maintenance received in advance is recorded on the balance sheet as deferred revenue.



We generate non-recurring revenue from the licensing of our software. We follow the provisions of the Securities and Exchange Commission Staff Accounting
Bulletin No. 101, Revenue Recognition, as amended, AICPA Statements of Position (SOP) 97-2, Software Revenue Recognition, as amended, and EITF Issue 00-21, Multiple Element Arrangements. Software
license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software
license agreements in which customer acceptance is a material condition of earning the license fees, revenue is not recognized until acceptance occurs. For arrangements containing multiple elements, such as software license fees, consulting services
and maintenance, and where vendor-specific objective evidence (VSOE) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the residual method. Under the residual method,
the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the
total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. For arrangements in which VSOE does not exist for each element, including specified upgrades, revenue is deferred
and not recognized until delivery of the element without VSOE has occurred.



We generate non-recurring revenue from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary and
third-party licensed products. We recognize revenues for these services as they are performed, if contracted on a time and materials basis, or using the percentage of completion method, if contracted on a fixed fee basis and when we can adequately
estimate the cost of the consulting project. Percentage of completion is measured based on hours incurred to date compared to total estimated hours to complete. When we cannot reasonably estimate the cost to complete, we recognize revenue using the
completed contract method until such time that the estimate to complete the consulting project can be reasonably estimated. We also generate non-recurring revenue from set-up fees, which are services, hardware, and software associated with preparing
our customer connectivity center or a customers data center in order to ready a specific customer for software hosting services. We recognize revenue for these services as they are performed using the percentage of completion basis and when we
can reasonably estimate the cost of the set-up project. We recognize the revenue for the hardware and software included in these fees over the estimated useful life of the hardware or software, respectively. We also generate non-recurring revenue
from certain one-time charges including certain contractual fees such as termination and change of control fees, and we recognize the revenue for these once the termination or change of control is guaranteed and collection is reasonably assured.



Effective July 1, 2003, we adopted Financial Accounting
Standards Board Emerging Issues Task Force No. 01-14 (EITF 01-14), Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred. ETIF 01-14 requires companies to recognize
travel and other reimbursable expenses billed to customers as revenue. As a result of the adoption of EITF 01-14, total revenue and cost of revenue for the first and second quarters of 2003 include $900,000 and $1.2 million, respectively. Before the
adoption of EITF 01-14, such reimbursable expenses are reflected as a reduction in cost of revenue. However, amounts prior to fiscal year 2003 were not significant. This change in accounting policy had no effect on our consolidated financial
position, results of operations or cash flows.



Upfront
Fees.We may pay certain up-front fees in connection with the establishment of our hosting and outsourcing services contracts. The costs are capitalized and amortized over the life of the contract as a reduction to revenue, provided that
such amounts are recoverable from future revenue under the contract. If an up-front fee is not recoverable from future revenue, or it cannot be offset by contract cancellation penalties paid by the customer, the fee will be written off as an expense
in the period it is deemed unrecoverable. Unamortized up-front fees as of December 31, 2003 were $986,000.



Allowance for Doubtful Accounts.We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of
customers to make required payments. We base this allowance on estimates after consideration of factors such as the composition of the accounts receivable aging and bad debt history and our evaluation of the financial condition of the customers. If
the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional sales allowances and bad debt expense may be required. We typically do not require collateral. Historically, our
estimates have been adequate to cover accounts receivable exposures.



Capitalization of Software Development Costs.Costs incurred internally in the development of our software products are expensed as incurred as R&D expenses until technological feasibility has been established, at which
time any future



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production costs are capitalized and amortized to the cost of revenue based on current and future revenue over the remaining estimated economic life of the
product. To the extent that amounts capitalized for R&D become impaired due to a decline in demand or the introduction of new technology, such amounts will be written-off.



Loss on Contracts.During the fourth quarter of 2003 and as part of our business planning process for 2004, we
decided to wind-down our outsourcing services to physician group customers. As a result of this decision, we estimated that the existing customer agreements from this business would generate a total of $11.3 million of losses through 2008, until the
remaining terms of these agreements expire. This amount was charged to cost of revenue during the fourth quarter of 2003. Additionally, in December 2003, we negotiated a settlement regarding out-of-scope work related to one of our large fixed fee
implementation projects. As a result of this settlement, we estimated that this project would generate a total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of revenue in the
fourth quarter of 2003. Anticipated losses on fixed price contracts are recognized in the period when they become known.



Restructuring and Impairment Charges. In December 2001, we initiated a number of restructuring actions focused on eliminating redundancies,
streamlining operations and improving overall financial results. These initiatives included workforce reductions, office closures, discontinuation of certain business lines and related asset write-offs.



In December 2001, we announced a planned workforce reduction in Los Angeles,
California; Novato, California; Baltimore, Maryland; Little Rock, Arkansas; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Albany, New York; Glastonbury, Connecticut; and Trivandrum, India. Severance and other costs related to this workforce
reduction totaled $1.7 million, of which $1.0 million was included in restructuring and impairment charges in 2001. Additional severance costs of $651,000 were charged to restructuring and impairment charges in 2002. Such workforce reductions have
been completed as of the fourth quarter 2002.



Facility
closures include the closure of the facilities in Novato, California; Birmingham, Alabama; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Naperville, Illinois; Louisville, Kentucky; and Trivandrum, India. These closures have been completed
as of the fourth quarter 2002.



The following table summarizes
the activities in the Companys restructuring reserves (in thousands):



|                                                 |  |                              |        |   |                  |   |        |       |  |   |        |  
|------------------------------------------------ |  | ---------------------------- | ------ | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|                                                 |  | Costs forTerminatedEmployees |        |   | FacilityClosures |   |        | Total | 
|Restructuring charges in 2001                    |  | $                            | 959    |   |                  | $ | 2,419  |       |  | $ | 3,378  |  
|Restructuring charges in 2002                    |  |                              | 651    |   |                  |   |       |       |  |   | 651    |  
|Restructuring charges in 2003                    |  |                              |       |   |                  |   | (280   | )     |  |   | (280   | )
|Cash payments in 2001                            |  |                              | (91    | ) |                  |   |       |       |  |   | (91    | )
|Cash payments in 2002                            |  |                              | (1,519 | ) |                  |   | (1,037 | )     |  |   | (2,556 | )
|Cash payments in 2003                            |  |                              |       |   |                  |   | (917   | )     |  |   | (917   | )
|                                                 |  |                              |        |   |                  |   |        |       |  |   |        |  
|Accrued restructuring charges, December 31, 2003 |  | $                            |       |   |                  | $ | 185    |       |  | $ | 185    |  
|                                                 |  |                              |        |   |                  |   |        |       |  |   |        |  



In the fourth quarter
of 2003, approximately $280,000 of restructuring expense was reversed related to the lease settlements for the facility closures in Naperville, Illinois and Westmont, Illinois, which were previously accrued for in the fiscal year 2001. The remaining
accrued restructuring balance of $185,000 as of December 31, 2003, represents our future commitments related to our facility closures as noted above.



In addition to the workforce reductions and facility closures described above, we have discontinued certain business lines and have written off related
assets. Specifically, we have discontinued certain website and software development activities and our hospital billing and accounts receivable business line and have written off the assets associated with these activities. We also wrote off assets
in December 2001 associated with the closure of facilities. The following table summarizes our write-off of assets in December 2001 (in thousands):



|                                          |  |                    |     |                          |   |          |  |             |       |       |   |       |  |   |      
|----------------------------------------- |  | ------------------ | --- | ------------------------ | - | -------- |  | ----------- | ----- | ----- | - | ----- |  | - | -----
|                                          |  | AccountsReceivable |     | PropertyandEquipment,net |   | Goodwill |  | OtherAssets |       | Total
|Discontinuation of certain business lines |  | $                  | 302 |                          | $ | 933      |  | $           | 5,716 |       | $ | 1,389 |  | $ | 8,340
|Office closures                           |  |                    |    |                          |   | 422      |  |             |      |       |   |      |  |   | 422  
|                                          |  |                    |     |                          |   |          |  |             |       |       |   |       |  |   |      
|Total                                     |  | $                  | 302 |                          | $ | 1,355    |  | $           | 5,716 |       | $ | 1,389 |  | $ | 8,762
|                                          |  |                    |     |                          |   |          |  |             |       |       |   |       |  |   |      



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As a result of our decision in the fourth quarter of 2004 to wind-down our outsourcing services to
physician groups and to discontinue our outsourcing services to certain non-Facets® payer customers, we estimated that our future net cash flows from the assets used in these businesses will not recover their net book value. Accordingly, a total charge of $4.0 million was taken as a
restructuring and impairment charge in the fourth quarter of 2003, which represented the net book value of these assets. The assets will be written off in the first quarter of 2004.



Impairment of Goodwill and Other Intangible Assets. Under Financial Accounting Standards Board
(FASB) Statement No. 142, Goodwill and Other Intangible Assets (Statement 142), goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests using a two-step process
prescribed in Statement 142. The first step looks for indicators of impairment. If indicators of impairment are revealed in the first step, then the second step is conducted to measure the amount of the impairment, if any. We adopted Statement 142
effective as of January 1, 2002 and performed our initial impairment test as of March 31, 2002. Our first test did not reveal any indicators of impairment as of March 31, 2002.



After the end of the fourth quarter of 2002, our market capitalization decreased to an amount below our book value prior to
any impairment charges. As a result of this decrease, we concluded that sufficient indicators existed to warrant an analysis of whether any portion of our goodwill was impaired as of the fourth quarter of 2002. We engaged an independent valuation
firm to perform a review of the value of our goodwill. Based on this independent valuation, which used a discounted cash flow valuation technique, we recognized an impairment charge of $97.5 million to our goodwill in the fourth quarter of 2002 net
of a related deferred tax liability of $5.5 million. Additionally, we performed a review of the value of our property, plant and equipment, capitalized research and development costs and other intangible assets in accordance with FASB Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement No. 144). Based on this review, we recognized an impairment charge of $33.5 million in the fourth quarter of 2002 related to certain intangible
assets, as the value of the undiscounted cash flows expected to be generated by these assets over their useful lives did not exceed their carrying value as of December 31, 2002.



We performed our annual impairment test on March 31, 2003, and this test did not reveal any further indications of
impairment.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretations No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period ending after March 15, 2004. The adoption of FIN 46 in fiscal 2003 did not have a material impact on our consolidated financial position, results of operations or cash flows.



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Revenue Information



Revenue by customer type and revenue mix for the years ended December 31, 2003, 2002, and 2001, respectively, is as follows (amounts in thousands):



|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|---------------------------- |  | ------------------------ | ------- |  | ---- | - |  | ---- | ------- |  | --- | - |  | - | ------- |  | --- | -
|                             |  | Years Ended December 31, |        
|                             |  | 2003                     |         |  | 2002 |   |  | 2001 |        
|Revenue by customer type:    |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Payer                        |  | $                        | 234,244 |  | 81   | % |  | $    | 213,273 |  | 81  | % |  | $ | 160,211 |  | 73  | %
|Benefits administration      |  |                          | 45,140  |  | 15   | % |  |      | 35,601  |  | 13  | % |  |   | 41,543  |  | 19  | %
|Provider                     |  |                          | 10,945  |  | 4    | % |  |      | 16,276  |  | 6   | % |  |   | 16,418  |  | 8   | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Total revenue                |  | $                        | 290,329 |  | 100  | % |  | $    | 265,150 |  | 100 | % |  | $ | 218,172 |  | 100 | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Revenue mix:                 |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Recurring revenue            |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Outsourced business services |  | $                        | 98,193  |  | 61   | % |  | $    | 98,299  |  | 62  | % |  | $ | 98,295  |  | 69  | %
|Software maintenance         |  |                          | 62,780  |  | 39   | % |  |      | 60,879  |  | 38  | % |  |   | 44,411  |  | 31  | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Recurring revenue total      |  |                          | 160,973 |  | 100  | % |  |      | 159,178 |  | 100 | % |  |   | 142,706 |  | 100 | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Non-recurring revenue        |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Software license fees        |  |                          | 45,688  |  | 35   | % |  |      | 32,131  |  | 30  | % |  |   | 33,740  |  | 45  | %
|Consulting services          |  |                          | 79,989  |  | 62   | % |  |      | 73,841  |  | 70  | % |  |   | 41,726  |  | 55  | %
|Other non-recurring revenue  |  |                          | 3,679   |  | 3    | % |  |      |        |  |    | % |  |   |        |  |    | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Non-recurring revenue total  |  |                          | 129,356 |  | 100  | % |  |      | 105,972 |  | 100 | % |  |   | 75,466  |  | 100 | %
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  
|Total revenue                |  | $                        | 290,329 |  |      |   |  | $    | 265,150 |  |     |   |  | $ | 218,172 |  |     |  
|                             |  |                          |         |  |      |   |  |      |         |  |     |   |  |   |         |  |     |  



Our total backlog is
defined as the revenue we expect to generate in future periods from existing customer contracts. Our 12-month backlog is defined as the revenue we expect to generate from existing customer contracts over the next 12 months. Most of the revenue in
our backlog is derived from multi-year recurring revenue contracts (including software hosting, business process outsourcing, IT outsourcing, and software maintenance). We classify revenue from software license and consulting contracts as
non-recurring. Such revenue is included in the backlog when the software license or consulting contract is more than 12 months long.



Backlog can change due to a number of factors, including unforeseen changes in implementation schedules, contract cancellations (subject to penalties paid
by the customer), or customer financial difficulties. Unless we enter into new customer agreements that generate enough revenue to replace or exceed the revenue that is recognized in any given quarter, our backlog will decline. Our backlog at any
date may not indicate demand for our products and services and may not reflect actual revenue for any period in the future.



Our 12-month and total backlog data are as follows (in thousands):



|                                         |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|---------------------------------------- |  | -------- | ------- | ------- | - | ------- |  | ------- | ------- | -------- | - | ------- |  | ------- | ------- | ------- | - | -------- |  | - | ------- |  | - | ------- |  | - | -------
|                                         |  | 12/31/03 |         | 9/30/03 |   | 6/30/03 |  | 3/31/03 |         | 12/31/02 |   | 9/30/02 |  | 6/30/02 |         | 3/31/02 |   | 12/31/01
|Twelve-month backlog:                    |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|Recurring revenue backlog                |  | $        | 158,100 |         | $ | 161,600 |  | $       | 160,000 |          | $ | 151,900 |  | $       | 149,400 |         | $ | 143,200  |  | $ | 143,900 |  | $ | 149,000 |  | $ | 148,700
|Software backlog (non-recurring revenue) |  |          | 11,900  |         |   | 12,900  |  |         | 22,700  |          |   | 25,600  |  |         | 28,400  |         |   | 41,400   |  |   | 44,900  |  |   | 26,000  |  |   | 25,900 
|                                         |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|Total                                    |  | $        | 170,000 |         | $ | 174,500 |  | $       | 182,700 |          | $ | 177,500 |  | $       | 177,800 |         | $ | 184,600  |  | $ | 188,800 |  | $ | 175,000 |  | $ | 174,600
|                                         |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|Total backlog:                           |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|Recurring revenue backlog                |  | $        | 483,600 |         | $ | 580,000 |  | $       | 586,200 |          | $ | 539,400 |  | $       | 548,000 |         | $ | 545,400  |  | $ | 565,700 |  | $ | 592,300 |  | $ | 590,000
|Software backlog (non-recurring revenue) |  |          | 12,600  |         |   | 14,100  |  |         | 27,700  |          |   | 35,400  |  |         | 39,600  |         |   | 47,800   |  |   | 70,400  |  |   | 37,300  |  |   | 33,400 
|                                         |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        
|Total                                    |  | $        | 496,200 |         | $ | 594,100 |  | $       | 613,900 |          | $ | 574,800 |  | $       | 587,600 |         | $ | 593,200  |  | $ | 636,100 |  | $ | 629,600 |  | $ | 623,400
|                                         |  |          |         |         |   |         |  |         |         |          |   |         |  |         |         |         |   |          |  |   |         |  |   |         |  |   |        



On July 9, 2003,
Coventry Health Care, Inc. (Coventry) announced its plan to acquire Altius Health Plans, Inc. (Altius), one of our outsourced services customers. On September 1, 2003, Coventry completed the acquisition. During 2003, our
services agreement with Altius produced recurring revenue of $20.0 million. We recently received Altius notice to terminate our services agreement effective May 31, 2004. Included in our twelve-month backlog and total backlog is recurring
revenue of $10.4 million related to Altius.



Total bookings
equal the total dollar value of revenue related to contracts signed in the quarter. Bookings can vary substantially from quarter to quarter, based on a number of factors, including the number and type of prospects in our pipeline, the length of time
it takes a prospect to reach a decision and sign the contract, and the effectiveness of our sales force. Total bookings for each of the quarters are as follows (in thousands):



|               |  |          |        |         |   |         |  |         |        |          |   |         |  |         |        |         |   |          |  |   |        |  |   |        |  |   |        
|-------------- |  | -------- | ------ | ------- | - | ------- |  | ------- | ------ | -------- | - | ------- |  | ------- | ------ | ------- | - | -------- |  | - | ------ |  | - | ------ |  | - | -------
|               |  | 12/31/03 |        | 9/30/03 |   | 6/30/03 |  | 3/31/03 |        | 12/31/02 |   | 9/30/02 |  | 6/30/02 |        | 3/31/02 |   | 12/31/01
|Total bookings |  | $        | 48,800 |         | $ | 37,400  |  | $       | 83,600 |          | $ | 62,200  |  | $       | 60,700 |         | $ | 22,800   |  | $ | 74,100 |  | $ | 33,300 |  | $ | 144,500
|               |  |          |        |         |   |         |  |         |        |          |   |         |  |         |        |         |   |          |  |   |        |  |   |        |  |   |        



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Results of Operations



Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002.



Revenue. Total revenue in 2003 increased $25.1 million, or 10%, to $290.3 million from $265.2 million in 2002.
The increase primarily resulted from organic growth in software license sales, software maintenance, consulting services and other non-recurring revenue, offset by a decrease in outsourced business services.



Recurring revenue includes outsourced business services (primarily software
hosting and business process outsourcing) and maintenance fees related to our software license contracts. Recurring revenue increased $1.8 million or 1%, to $161.0 million in 2003 from $159.2 million in 2002. This increase of $1.8 million consisted
of an increase of $1.9 million in our software maintenance revenue, offset by a decrease of $106,000 of outsourced services revenue. The increase of $1.9 million was due to organic growth in our software maintenance revenue from our payer customers.
The $106,000 net decrease was the result of: (i) a decrease in revenue from our non-Facets®payer customers totaling $1.1 million, (ii) a decrease in revenue from our physician group customers totaling $3.9 million, (iii) an increase in our benefits administration customers totaling $3.8 million, and (iv) $1.1 million
increase in reimbursable out-of-pocket expenses.



Non-recurring
revenue includes software license sales, consulting services and other non-recurring revenue, which includes certain contractual fees such as termination fees and change of control fees. Non-recurring revenue in 2003 increased $23.4 million, or 22%,
to $129.4 million from $106.0 million in 2002. The increase of $23.4 million consisted of: (i) an organic increase of $13.6 million in software license revenue, of which $8.6 million related to our payer customers, and $5.0 million related to our
benefits administration customers, (ii) an increase of $3.7 million in other non-recurring revenue, which includes termination fees of $1.5 million and $2.2 million of payments related to the change of control of Altius, and (iii) an increase of
$6.1 million in our consulting services revenue. This $6.1 million increase in consulting services revenue consisted of: (a) $5.2 million increase in reimbursable out-of-pocket expenses, (b) a $1.0 million one-time adjustment of sales allowance
which resulted from improved collections of aged receivables, and (c) a net decrease of $100,000 of consulting services, resulting from a $1.0 million increase in payer consulting services, a $700,000 increase in benefits administration consulting
services, and a decrease of $1.8 million in physician group consulting services.



A significant portion of TriZettos consulting resources were used to support two large fixed-fee implementation projects for two of our Facets®hosted customers during the year. We agreed to complete these two fixed-fee implementations to establish benchmark clients that could
serve as industry examples for us. At each of these accounts, the go-live dates (the date on which our hosting services become operational) were delayed beyond the original schedule.



We are continuing to target larger health plan customers. This has given us
the opportunity to sell additional services such as software hosting, business intelligence and business process outsourcing services. It also has improved the stability of our customer base. As the technology requirements of our customers become
more sophisticated, our service offerings have become more complex. This has lengthened our sales cycles and made it more difficult for us to predict the timing of our software and services sales.



Cost of Revenue. Cost of revenue in 2003 increased $46.2
million, or 26%, to $224.0 million from $177.8 million in 2002. Of the $46.2 million increase, $31.2 million related primarily to our data centers continuing to incur fixed costs associated with recurring revenue customers. During the fourth quarter
of 2003 and as part of our business planning process for 2004, we decided to wind-down our outsourcing services to physician group customers. As a result of this decision, we estimated that the existing customer agreements from this business would
generate a total of $11.3 million of losses through 2008, until the remaining terms of these agreements expire. This amount was charged to cost of goods sold during the fourth quarter of 2003. Additionally, in December 2003, we negotiated a
settlement regarding out-of-scope work related to one of our large fixed fee implementation projects. As a result of this settlement, we estimated that this project would generate a



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total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of goods sold in the fourth
quarter of 2003. As a percentage of total revenue, cost of revenue approximated 77% in 2003 and 67% in 2002. Cost of revenue in 2003 and 2002 included approximately $557,000 and $1.2 million of amortization of deferred stock compensation,
respectively.



The overall gross margin (revenue minus cost of
revenue) decreased from 33% in 2002 to 23% in 2003. Several factors affect the gross margin, including the mix of recurring and non-recurring revenue and the utilization of our data centers. The decrease in the gross margin in 2003 was primarily the
result of three issues: (i) the aforementioned loss of non-Facets®payer revenue and
physician group revenue in late 2002 combined with the continued fixed costs associated with operating the data center, (ii) decreased profit margin in our consulting business, which was the direct result of certain fixed-fee engagements, and (iii)
the loss on contract charges for our physician group business and one of our large fixed fee implementation projects.



Research and Development (R&D) Expenses. R&D expenses in 2003 increased $2.9 million, or 13%, to $24.8 million from $21.9 million in
2002. This increase was due primarily to increased spending related to the development of our proprietary software for the payer and benefits administration markets. Most of our R&D expense in 2003 was used to continue the development of Facets
Extended Enterprise, a substantial upgrade of our flagship software for health plans,
which was released at the end of the third quarter of 2003. We also made several enhancements to QicLink, a proprietary software for benefits administrators. As a percentage of total revenue, R&D expenses approximated 9% in 2003 and 8% in 2002. R&D expenses as a percentage of total R&D expenditures (which includes
capitalized R&D expenses of $12.9 million in 2003 and $11.6 million in 2002) was 66% in 2003 and 65% in 2002. R&D expenses in 2003 and 2002 included approximately $212,000 and $237,000 of amortization of deferred stock compensation,
respectively.



Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased $1.9 million, or 3%, from $54.0 million in 2002 to $52.1 million in 2003. The decrease was the result of a $2.8 million adjustment to allowance for doubtful accounts, offset by
increased costs of approximately $900,000 in providing corporate support due to the overall expansion of our business. The adjustment to allowance for doubtful accounts was the result of an initiative to improve collections of aged accounts
receivables. As a percentage of total revenue, selling, general and administrative expenses approximated 18% in 2003 and 20% in 2002. Selling, general and administrative expenses in 2003 and 2002 included approximately $1.1 million and $1.5 million
of amortization of deferred stock compensation, respectively.



Amortization of Goodwill and Intangible Assets. Amortization of goodwill and intangible assets decreased $17.1 million, or 61%, from $28.0 million in 2002 to $10.9 million in 2003. The net decrease is the result of an
impairment charge taken in December 2002. Future amortization expense relating to existing intangible assets is expected to be as follows (in thousands):



|                                  |  |   |      
|--------------------------------- |  | - | -----
|For the years ending December 31, |  |  
|2004                              |  | $ | 3,804
|2005                              |  |   | 2,221
|2006                              |  |   | 15   
|                                  |  |   |      
|                                  |  | $ | 6,040
|                                  |  |   |      



Restructuring
and Impairment Charges. In December 2001, we initiated a restructuring focused on eliminating redundancies, streamlining operations and improving overall financial results. The restructuring included workforce reductions, office closures,
discontinuation of certain business lines and related asset write-offs. The $651,000 restructuring charge in 2002 reflected severance costs related to planned workforce reductions. There were no restructuring charges in 2003 as this restructure was
completed in 2002, however, approximately $280,000 of previous restructuring charges were reversed as a result of lease settlements related to facility closures. As a result of our decision in the fourth quarter of 2004 to wind-down our outsourcing
services to physician groups and to discontinue our outsourcing services to certain non-Facets® payer customers, we estimated that our future net cash flows from the assets used in these businesses will not recover their net book value. Accordingly, a total charge of $4.0 million
was taken as a restructuring and impairment charge in the fourth quarter of 2003, which represented the net book value of these assets. The assets will be written off in the first quarter of 2004.



Interest Income. Interest income decreased $639,000, or 40%,
from $1.6 million in 2002 to $970,000 in 2003. The decrease is due to lower yields on investments in 2003 compared to 2002 as well as lower cash balances in 2003 compared to 2002.



Interest Expense. Interest expense in 2003 increased $526,000, or 36%, to $2.0 million from $1.5 million in
2002. The increase in 2003 related primarily to the increase in the total principal amount outstanding on our term note and new capital



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lease obligations, offset by a decrease related to our revolving credit facility resulting from a decrease in the prime rate compared to 2002.



Provision for Income Taxes. Provision for income taxes was $1.1
million in 2003 compared to $250,000 in 2002. The increase in tax expense from the prior year is principally due to an increase in state incomes taxes in 2002.



Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001.



Revenue. Total revenue in 2002 increased $47.0 million, or 22%, to $265.2 million from $218.2 million in 2001.
Of this increase, $4.3 million was due to the impact of a full year of operations of Infotrust Company (Infotrust) in 2002; Infotrust was acquired in the second quarter of 2001. The remaining increase of $42.7 million primarily resulted
from organic growth in our software maintenance and consulting services.



Recurring revenue in 2002 increased $16.5 million, or 12%, to $159.2 million from $142.7 million in 2001. The increase was from organic growth in our software maintenance revenue totaling $16.5 million, as well as
$3.9 million additional revenue due to the impact of a full year of operations of Infotrust in 2002. These increases were offset by an approximately $3.9 million decrease in revenue from our outsourced business services resulting from the loss of
several outsourced business services payer and provider customers. The provider customers were eliminated because they were unprofitable; the payer customers were lost because they were acquired or went out of business. Recurring revenue in 2002
includes $1.0 million from IMS Health Incorporated, a related party.



Non-recurring revenue in 2002 increased $30.5 million, or 40%, to $106.0 million from $75.5 million in 2001. Of this increase, $403,000 was due to the impact of a full year of operations of Infotrust in 2002. The remaining increase is the
result of $31.7 million in increased consulting revenue, of which $16.0 million is related to software support services for UnitedHealth under a contract executed in April 2002, and $15.7 million is related to software implementation services
primarily for our payer customers. These increases were offset by a decrease of $1.6 million in software license revenue.



Cost of Revenue. Cost of revenue in 2002 increased $31.1 million, or 21%, to $177.8 million from $146.7 million in 2001. Of this increase,
$2.8 million represented incremental costs associated with the impact of a full year of operations of Infotrust in 2002. The remaining increase of $28.3 million was primarily due to the costs incurred to support the overall expansion of our hosted
and software maintenance services and the costs required to support the increase in consulting services. As a percentage of total revenue, cost of revenue approximated 67% in both 2002 and 2001.



Cost of recurring revenue in 2002 increased $10.6 million, or 10%, to $114.5
million from $103.9 million in 2001. Of this increase, $2.3 million represented incremental costs associated with the impact of a full year of operations of Infotrust in 2002. The remaining increase of $8.3 million was primarily due to the costs
incurred to support our hosted and software maintenance services. As a percentage of recurring revenue, cost of recurring revenue approximated 72% in 2002 and 73% in 2001. Cost of recurring revenue in 2002 and 2001 includes approximately $635,000
and $682,000 of amortization of deferred stock compensation, respectively.



Cost of non-recurring revenue in 2002 increased $20.5 million, or 48%, to $63.3 million from $42.8 million in 2001. Of this increase, $508,000 was generated by the impact of a full year of operations of Infotrust in
2002. The remaining $20.0 million increase was the result of additional costs incurred to support the increase in software implementation services primarily for our payer customers, including $5.8 million in additional costs related to software
support services for UnitedHealth under a contract executed in April 2002. As a percentage of non-recurring revenue, cost of non-recurring revenue approximated 60% in 2002 and 57% in 2001. Cost of non-recurring revenue in 2002 and 2001 includes
approximately $590,000 and $553,000 of amortization of deferred stock compensation, respectively.



Research and Development (R&D) Expenses. R&D expenses in 2002 increased $5.5 million, or 34%, to $21.9 million from $16.4 million in
2001. This increase was due primarily to increased costs related to software development for the payer and benefits administration markets. As a percentage of total revenue, R&D expenses approximated 8% in both 2002 and 2001. R&D expenses as
a percentage of total R&D expenditures (which includes capitalized R&D expenses of $11.6 million in 2002 and $5.0 million in 2001) was 65% in 2002 and 77% in 2001. R&D expenses in 2002 and 2001 includes approximately $237,000 and
$222,000 of amortization of deferred stock compensation, respectively.



Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2002 increased $2.1 million, or 4%, to $54.0 million from $51.9 million in 2001. Of this increase, $297,000 represented incremental
costs associated with the impact of a full year of operations of Infotrust in 2002. The remaining increase of $1.8 million represented the expansion of our sales force and corporate support functions. As a percentage of total revenue, selling,
general and administrative expenses approximated 20% in 2002 and 24% in 2001. Selling, general and administrative



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expenses in 2002 and 2001 includes approximately $1.5 million and $1.6 million of amortization of deferred stock compensation, respectively.



Amortization of Goodwill and Intangible Assets. Amortization of
goodwill and intangible assets in 2002 decreased $41.1 million, or 59%, to $28.0 million from $69.1 million in 2001. The net decrease is the result of our adoption of Statement 142 effective as of January 1, 2002, which requires that goodwill and
intangible assets deemed to have indefinite lives no longer be amortized. Instead, such costs will be subject to annual impairment tests. The decrease is partially offset by a $2.2 million increase to amortization of intangible assets resulting from
the purchase of certain assets from ChannelPoint, Inc. in April 2002 (See Liquidity and Capital Resources).



Restructuring and Impairment Charges. In December 2001, we initiated a restructuring focused on eliminating redundancies, streamlining
operations and improving overall financial results. The restructuring included workforce reductions, office closures, discontinuation of certain business lines and related asset write-offs. The $651,000 restructuring charge in 2002 reflects
severance costs related to planned workforce reductions.



Impairment of Goodwill and Intangible Assets. After the end of the fourth quarter 2002, our market capitalization decreased to a value less than our book value. The decrease in market value was an indicator that our goodwill
was impaired and we performed additional analyses under Statement 142 to quantify the amount of impairment to goodwill. This analysis resulted in a charge to earnings of $97.5 million. The decrease in market capitalization was an indicator that our
identifiable intangibles might also be impaired and they were also tested for impairment in accordance with Statement 144. This analysis resulted in an additional impairment charge of $33.5 million.



Interest Income. Interest income in 2002 decreased $439,000, or
21%, to $1.6 million from $2.0 million in 2001. The decrease is due primarily to lower yields on investments in 2002 compared with 2001.



Interest Expense. Interest expense in 2002 increased $146,000, or 11%, to $1.5 million from $1.3 million in 2001. The increase was primarily
due to a full year of interest expense on our Secured Term Note, executed in September 2001, and increased capital lease obligations in late 2001 and all of 2002. These increases were offset by a decrease in interest expense related to our revolving
credit facility due to a decrease in the prime rate during 2002 compared to 2001.



Provision for (Benefit from) Income Taxes. Provision for income taxes was $250,000 in 2002 compared to a benefit from income taxes of $16.2 million in 2001. The increase in tax expense from prior year is
principally due to the write-off of impaired non-deductible goodwill and identified intangibles and the establishment of a valuation reserve against net deferred tax assets due to continued operating losses.



28



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Selected Quarterly Results of Operations



This data has been derived from unaudited consolidated financial statements that, in the opinion of our management, include
all adjustments consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the information when read in conjunction with our audited consolidated financial statements and the attached notes included herein.
The operating results for any quarter are not necessarily indicative of the results for any future period. The following table sets forth certain unaudited consolidated statements of operations data for the eight quarters ended December 31, 2003 (in
thousands, except per share data):



|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------- | ------ | - | ------------- | - | ------ | ------------------ |  | - | ----------------- | - |  | -------------- | -------- | - | ------------- | - | ------ | ------------------ |  | - | ----------------- | - |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Quarters Ended |       
|                                                               |  | March 31, 2002 |        |   | June 30, 2002 |   |        | September 30, 2002 |  |   | December 31, 2002 |   |  | March 31, 2003 |          |   | June 30, 2003 |   |        | September 30, 2003 |  |   | December 31, 2003 |  
|                                                               |  |                |        |   |               |   |        |                    |  |   | (1)               |   |  | (2)            |          |   | (2)           |   |        |                    |  |   | (3)               |  
|Revenue:                                                       |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Recurring revenue                                              |  | $              | 39,784 |   |               | $ | 40,844 |                    |  | $ | 40,291            |   |  | $              | 38,259   |   |               | $ | 39,293 |                    |  | $ | 40,662            |   |  | $ | 40,496 |   |  | $ | 40,522  |  
|Non-recurring revenue                                          |  |                | 19,910 |   |               |   | 25,937 |                    |  |   | 28,311            |   |  |                | 31,814   |   |               |   | 30,633 |                    |  |   | 37,062            |   |  |   | 35,522 |   |  |   | 26,139  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Total revenue                                                  |  |                | 59,694 |   |               |   | 66,781 |                    |  |   | 68,602            |   |  |                | 70,073   |   |               |   | 69,926 |                    |  |   | 77,724            |   |  |   | 76,018 |   |  |   | 66,661  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Cost of revenue:                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Recurring revenue                                              |  |                | 28,205 |   |               |   | 29,047 |                    |  |   | 27,636            |   |  |                | 29,621   |   |               |   | 28,580 |                    |  |   | 29,640            |   |  |   | 28,862 |   |  |   | 28,730  |  
|Non-recurring revenue                                          |  |                | 12,194 |   |               |   | 15,814 |                    |  |   | 17,817            |   |  |                | 17,486   |   |               |   | 20,254 |                    |  |   | 24,049            |   |  |   | 24,889 |   |  |   | 24,052  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|                                                               |  |                | 40,399 |   |               |   | 44,861 |                    |  |   | 45,453            |   |  |                | 47,107   |   |               |   | 48,834 |                    |  |   | 53,689            |   |  |   | 53,751 |   |  |   | 52,782  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Recurring revenue  loss on contracts                          |  |                |       |   |               |   |       |                    |  |   |                  |   |  |                |         |   |               |   |       |                    |  |   |                  |   |  |   |       |   |  |   | 11,271  |  
|Non-recurring revenue  loss on contracts                      |  |                |       |   |               |   |       |                    |  |   |                  |   |  |                |         |   |               |   |       |                    |  |   |                  |   |  |   |       |   |  |   | 3,680   |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|                                                               |  |                |       |   |               |   |       |                    |  |   |                  |   |  |                |         |   |               |   |       |                    |  |   |                  |   |  |   |       |   |  |   | 14,951  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Total cost of revenue                                          |  |                | 40,399 |   |               |   | 44,861 |                    |  |   | 45,453            |   |  |                | 47,107   |   |               |   | 48,834 |                    |  |   | 53,689            |   |  |   | 53,751 |   |  |   | 67,733  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Gross profit (loss)                                            |  |                | 19,295 |   |               |   | 21,920 |                    |  |   | 23,149            |   |  |                | 22,966   |   |               |   | 21,092 |                    |  |   | 24,035            |   |  |   | 22,267 |   |  |   | (1,072  | )
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Operating expenses:                                            |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Research and development                                       |  |                | 5,431  |   |               |   | 5,577  |                    |  |   | 5,432             |   |  |                | 5,471    |   |               |   | 5,922  |                    |  |   | 6,286             |   |  |   | 6,334  |   |  |   | 6,281   |  
|Selling, general and administrative                            |  |                | 13,264 |   |               |   | 14,252 |                    |  |   | 13,748            |   |  |                | 12,702   |   |               |   | 14,002 |                    |  |   | 15,253            |   |  |   | 11,172 |   |  |   | 11,711  |  
|Amortization of goodwill and other intangible assets           |  |                | 6,482  |   |               |   | 6,997  |                    |  |   | 7,361             |   |  |                | 7,187    |   |               |   | 3,309  |                    |  |   | 3,324             |   |  |   | 3,324  |   |  |   | 951     |  
|Restructuring and impairment charges                           |  |                | 79     |   |               |   | 165    |                    |  |   | 235               |   |  |                | 172      |   |               |   |       |                    |  |   |                  |   |  |   |       |   |  |   | 3,769   |  
|Impairment of goodwill and other intangible assets             |  |                |       |   |               |   |       |                    |  |   |                  |   |  |                | 131,019  |   |               |   |       |                    |  |   |                  |   |  |   |       |   |  |   |        |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Total operating expenses                                       |  |                | 25,256 |   |               |   | 26,991 |                    |  |   | 26,776            |   |  |                | 156,551  |   |               |   | 23,233 |                    |  |   | 24,863            |   |  |   | 20,830 |   |  |   | 22,712  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|(Loss) income from operations                                  |  |                | (5,961 | ) |               |   | (5,071 | )                  |  |   | (3,627            | ) |  |                | (133,585 | ) |               |   | (2,141 | )                  |  |   | (828              | ) |  |   | 1,437  |   |  |   | (23,784 | )
|Interest income                                                |  |                | 325    |   |               |   | 351    |                    |  |   | 577               |   |  |                | 356      |   |               |   | 317    |                    |  |   | 301               |   |  |   | 155    |   |  |   | 197     |  
|Interest expense                                               |  |                | (368   | ) |               |   | (340   | )                  |  |   | (383              | ) |  |                | (388     | ) |               |   | (545   | )                  |  |   | (487              | ) |  |   | (483   | ) |  |   | (490    | )
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|(Loss) income before benefit from (provision for) income taxes |  |                | (6,004 | ) |               |   | (5,060 | )                  |  |   | (3,433            | ) |  |                | (133,617 | ) |               |   | (2,369 | )                  |  |   | (1,014            | ) |  |   | 1,109  |   |  |   | (24,077 | )
|Benefit from (provision for) income taxes                      |  |                | 1,390  |   |               |   | 1,390  |                    |  |   | (54               | ) |  |                | (2,976   | ) |               |   | (300   | )                  |  |   | (345              | ) |  |   | (479   | ) |  |   |        |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Net (loss) income                                              |  | $              | (4,614 | ) |               | $ | (3,670 | )                  |  | $ | (3,487            | ) |  | $              | (136,593 | ) |               | $ | (2,669 | )                  |  | $ | (1,359            | ) |  | $ | 630    |   |  | $ | (24,077 | )
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Net (loss) income per share:                                   |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Basic                                                          |  | $              | (0.10  | ) |               | $ | (0.08  | )                  |  | $ | (0.08             | ) |  | $              | (3.00    | ) |               | $ | (0.06  | )                  |  | $ | (0.03             | ) |  | $ | 0.01   |   |  | $ | (0.52   | )
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Basic                                                          |  |                | 44,919 |   |               |   | 45,094 |                    |  |   | 45,430            |   |  |                | 45,574   |   |               |   | 45,880 |                    |  |   | 46,006            |   |  |   | 46,307 |   |  |   | 46,478  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Diluted                                                        |  | $              | (0.10  | ) |               | $ | (0.08  | )                  |  | $ | (0.08             | ) |  | $              | (3.00    | ) |               | $ | (0.06  | )                  |  | $ | (0.03             | ) |  | $ | 0.01   |   |  | $ | (0.52   | )
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  
|Diluted                                                        |  |                | 44,919 |   |               |   | 45,094 |                    |  |   | 45,430            |   |  |                | 45,574   |   |               |   | 45,880 |                    |  |   | 46,006            |   |  |   | 47,955 |   |  |   | 46,478  |  
|                                                               |  |                |        |   |               |   |        |                    |  |   |                   |   |  |                |          |   |               |   |        |                    |  |   |                   |   |  |   |        |   |  |   |         |  

---

|(1) | After the end of the fourth quarter of 2002, our market capitalization decreased to a level that required us to perform additional analyses under Statement 142 to quantify the
amount of impairment to goodwill. This analysis resulted in a charge to goodwill of $97.5 million as of December 31, 2002. The decrease in market capitalization was also an indicator that our other intangible assets might also be impaired as of
December 31, 2002 and they were also tested for impairment in accordance with Statement 144. The analyses resulted in an impairment charge of $33.5 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Effective July 1, 2003, we adopted Financial Accounting Standards Board Emerging Issues Task Force No. 01-14 (EITF 01-14), Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred. ETIF 01-14 requires companies to recognize travel and other reimbursable expenses billed to customers as revenue. As a result of the adoption of EITF 01-14, total revenue
and cost of revenue for the first and second quarters of 2003 include $900,000 and $1.2 million, respectively. Before the adoption of EITF 01-14, such reimbursable expenses are reflected as a reduction in cost of revenue. However, amounts prior to
fiscal year 2003 were not significant. This change in accounting policy had no effect on our consolidated financial position, results of operations or cash flows.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | During the fourth quarter of 2003 and as part of our business planning process for 2004, we decided to wind-down our outsourcing services to physician group customers. As a result
of this decision, we estimated that the existing customer agreements from this business would generate a total of $11.3 million of losses through 2008, until the remaining terms of these agreements expire. This amount was charged to cost of revenue
during the fourth quarter of 2003. Additionally, in December 2003, we negotiated a settlement regarding out-of-scope work related to one of our large fixed fee implementation projects. As a result of this settlement, we estimated that this project
would generate a total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of revenue in the fourth quarter of 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity and Capital Resources



Since inception, we have financed our operations primarily through a
combination of cash from operations, private financings, public offerings of our common stock and cash obtained from our acquisitions. As of December 31, 2003, we had cash, cash equivalents and short-term investments totaling $76.3 million,
including $1.5 million in restricted cash.



Cash provided by
operating activities in 2003 was $16.7 million. Net cash provided during this period resulted from net losses of $27.5 million and approximately $3.8 million in other net changes in operating assets and liability accounts, offset by approximately
$48.0 million in non-cash charges such as depreciation and amortization, provision for doubtful accounts and sales returns, amortization of deferred stock compensation, amortization of intangibles, the issuance of stock in connection with prior
acquisitions, the loss on sale of property and equipment, the loss on contracts, and loss on impairment of property and equipment and other assets. Cash provided by operating activities includes a $5.0 million reclass from restricted cash to cash as
a result of the termination of a letter of credit related to the change of control at Altius, which occurred in the third quarter of 2003. At the beginning of each calendar year, we bill and collect certain annual software maintenance fees related
to our proprietary software licenses. Although cash is collected early in the year, revenue on these contracts is recognized ratably over the year. This results in higher amounts of cash received in the first six months of the year and lower amounts
of cash received in the last six months of the year. We currently have net operating loss carryforwards of $81.1 million, which will be applied against future taxable income.



Cash used in investing activities of $17.6 million in 2003 was primarily the result of our purchase of $13.5 million in
property and equipment and software licenses, $12.9 million in capitalized research and development costs, and $550,000 for the purchase of intellectual property. These purchases were offset by the net sale of $9.3 million in short-term investments.



Cash provided by financing activities of $10.1 million in 2003
was primarily the result of $5.3 million of proceeds from capital leases, $2.2 million of proceeds from borrowings under our debt facility, $1.8 million of proceeds from the issuance of common stock related to employee exercises of stock options and
employee purchases of common stock under our employee stock purchase plan, and net proceeds on our revolving credit facility of $14.5 million. These proceeds were reduced by payments made to reduce principal amounts under our equipment line of
credit, notes payable and capital lease obligations of $8.0 million, payments of $5.6 million on our secured term note, and the repurchase of our common stock of $137,000.



In September 2000, we entered into a Loan and Security Agreement and Revolving Credit Note with a lending institution
providing for a revolving credit facility in the maximum principal amount of $15.0 million. The revolving credit facility is secured by substantially all of our tangible and intangible property. In December 2002, the Loan and Security Agreement and
Revolving Credit Note were further amended to provide for the maximum principal amount of $20.0 million



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and an expiration date of December 2004. Borrowings under the revolving credit facility are limited to and shall not exceed 85% of qualified accounts, as
defined in the Loan and Security Agreement. We have the option to pay interest at prime plus 1% or a fixed rate per annum equal to LIBOR plus 3.25% payable in arrears on the first business day of each month. In addition, there is a monthly 0.0333%
usage fee to the extent by which the maximum loan amount exceeds the average amount of the principal balance of the Revolving Loans during the preceding month. The usage fee is payable in arrears on the first business day of each successive calendar
month. The revolving credit facility contains covenants to which we must adhere during the terms of the agreement. These covenants require us to maintain tangible net worth, as defined in the Loan and Security Agreement of at least $50.0 million, to
generate recurring revenue and net earnings before interest, taxes, depreciation and amortization equal to at least 70% of the amount set forth in our operating plan, and to maintain a minimum cash balance of $35.0 million. In addition, these
covenants prohibit us from paying any cash dividend, distributions and management fees as defined in the agreement and from incurring capital expenditures in excess of 120% of the amount set forth in our operating plan during any consecutive 6-month
period. As of December 31, 2003, we had outstanding borrowing on the revolving credit facility of $20.0 million. As of December 31, 2003, we were in compliance with all of the covenants under the revolving credit facility, except for the covenant
requiring us to maintain a minimum level of EBITDA for the fourth quarter of 2003 and the covenant limiting the amount of our capital expenditures for the 6-month period ended December 31, 2003. The lender has granted a full waiver of our failure to
meet these covenants, and we expect to be in compliance going forward.



In September 2001, we executed a $6.0 million Secured Term Note facility with the same lending institution that is providing the revolving credit facility. The Secured Term Note is secured by substantially all of our tangible and intangible
property. Monthly principal payments of $200,000 were due under the note on the first of each month. Additionally, the note bore interest at prime plus 1% and was payable monthly in arrears. In December 2002, the Secured Term Note was amended to
increase the total principal amount to $15.0 million. We have the option to pay interest at prime plus 1% or a fixed rate per annum equal to LIBOR plus 3.25%, payable in arrears on the first business day of each quarter. As of December 31, 2003, we
had outstanding borrowings on the Secured Term Note of $9.4 million. Quarterly payments of $1.875 million are due on the last day of each calendar quarter through September 2004. The note matures in December 2004, at which time the final payment of
$3.75 million will be due. The Secured Term Note contains the same covenants set forth in the revolving credit facility documents. As of December 31, 2003, we were in compliance with all of the covenants under the Secured Term Note, except for the
covenant requiring us to maintain a minimum level of EBITDA for the fourth quarter of 2003 and the covenant limiting the amount of our capital expenditures for the 6-month period ended December 31, 2003. The lender has granted a full waiver of our
failure to meet these covenants, and we expect to be in compliance going forward.



In November 2001, we entered into an agreement with an equipment financing company for $3.1 million, specifically to finance the acquisition of certain equipment. Principal and interest is payable monthly and the note
is due in November 2005. Interest accrues monthly at LIBOR rate plus 3.13%. As of December 31, 2003, there was a principal balance of approximately $2.4 million remaining on the note.



As of December 31, 2003, we have outstanding six unused standby letters of credit in the aggregate amount of $1.1 million
which serve as security deposits for certain capital leases. We are required to maintain a cash balance equal to the outstanding letters of credit, which is classified as restricted cash on our balance sheet. In addition, approximately $385,000 is
held in a money market account in accordance to a lease purchase transaction agreement entered into on March 22, 2001, whereby lease receivables were sold to a leasing company. As a result of this transaction, we were required to establish a credit
reserve of 25% of the lease transaction purchase price in a special deposit account. The funds are being held as collateral until all payments on these lease receivables are paid in full to the leasing company. This amount is also classified as
restricted cash on our balance sheet.



The following tables
summarizes our contractual obligations and other commercial commitments (in thousands):



|                                   |  |                         |                  |                                             |          |        |          |   |              |  |   |        |  |   |       
|---------------------------------- |  | ----------------------- | ---------------- | ------------------------------------------- | -------- | ------ | -------- | - | ------------ |  | - | ------ |  | - | ------
|                                   |  | Total                   |                  | Payments (including interest) Due by Period
|Contractual obligations            |  |                         | Less than 1 Year |                                             | 2-3Years |        | 4-5Years |   | After 5Years
|Long term debt                     |  | $                       | 11,880           |                                             | $        | 9,742  |          | $ | 2,138        |  | $ |       |  | $ |      
|Capital lease obligations          |  |                         | 10,195           |                                             |          | 5,178  |          |   | 5,017        |  |   |       |  |   |      
|Operating leases                   |  |                         | 51,235           |                                             |          | 10,545 |          |   | 16,565       |  |   | 10,905 |  |   | 13,220
|                                   |  |                         |                  |                                             |          |        |          |   |              |  |   |        |  |   |       
|Total contractual obligations      |  | $                       | 73,310           |                                             | $        | 25,465 |          | $ | 23,720       |  | $ | 10,905 |  | $ | 13,220
|                                   |  |                         |                  |                                             |          |        |          |   |              |  |   |        |  |   |       
|                                   |  |                        
|                                   |  | Total Amounts Committed |                  | Amount of Commitment Expiration Per Period 
|Other commercial commitments       |  |                         | Less Than 1 Year |                                             | 2-3Years |        | 4-5Years |   | Over 5Years 
|Lines of credit                    |  | $                       | 20,000           |                                             | $        | 20,000 |          | $ |             |  | $ |       |  | $ |      
|Standby letters of credit          |  |                         | 1,093            |                                             |          | 803    |          |   | 290          |  |   |       |  |   |      
|Credit reserve                     |  |                         | 385              |                                             |          | 385    |          |   |             |  |   |       |  |   |      
|                                   |  |                         |                  |                                             |          |        |          |   |              |  |   |        |  |   |       
|Total other commercial commitments |  | $                       | 21,478           |                                             | $        | 21,188 |          | $ | 290          |  | $ |       |  | $ |      
|                                   |  |                         |                  |                                             |          |        |          |   |              |  |   |        |  |   |       



31



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Based on our current operating plan, we believe existing cash, cash equivalents and short-term
investments balances, cash forecasted by management to be generated by operations and borrowings from existing credit facilities will be sufficient to meet our working capital and capital requirements for at least the next twelve months. However, if
events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve
our business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at
all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.



Item 7AQuantitative and Qualitative Disclosures About Market Risk



Market risk associated with adverse changes in financial and commodity market prices and rates could impact our financial position, operating results or
cash flows. We are exposed to market risk due to changes in interest rates such as prime rate and LIBOR. This exposure is directly related to our normal operating and funding activities. Historically, and as of December 31, 2003, we have not used
derivative instruments or engaged in hedging activities.



The
interest rate on our $20.0 million revolving credit facility is prime plus 1.0% or a fixed rate per annum equal to LIBOR plus 3.25% at the Borrowers option, and is payable monthly in arrears. The revolving credit facility expires in December
2004. As of December 31, 2003, we had outstanding borrowings on the revolving line of credit of $20.0 million.



In December 2002, our Secured Term Note facility was amended to increase the total amount from $6.0 million to $15.0 million. The note bears interest at
prime plus 1% or a fixed rate per annum equal to LIBOR plus 3.25% at the Borrowers option, and is payable quarterly in arrears. The note expires in December 2004. As of December 31, 2003 we had outstanding borrowings on the Secured Term Note
of $9.4 million.



In November 2001, we entered into an
agreement with an equipment financing company for $3.1 million, specifically to finance certain equipment. Principal and interest is payable monthly and the note is due in November 2005. Interest accrues monthly at LIBOR rate plus 3.13%. As of
December 31, 2003, we had outstanding borrowings of $2.4 million.



Changes in interest rates have no impact on our other debt as all of our other notes have fixed interest rates between 4% and 8%.



We manage interest rate risk by investing excess funds in cash equivalents and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows.



Item 8Financial Statements and Supplementary Data



The financial statements and supplementary data required by this Item 8 are set forth at the pages indicated at Item 15(a)(1).



Item 9Changes in and Disagreements With Accountants On Accounting and Financial Disclosure



None.



Item 9ADisclosure Controls and Procedures



Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this annual report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that as of such date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods



32



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##### Table of Contents

specified in applicable SECs rules and forms. No system of controls, no matter how well designed and operated, can provide absolute assurance that the
objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. There have been no changes in our internal
control over financial reporting that occurred during the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART III



Item 10Directors and Executive Officers of the Registrant



The information required by this Item is set forth under the caption Election of Directors in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities and Exchange Act of 1934 and is incorporated herein by reference.



Item 11Executive Compensation



The information required by this Item is set forth under the caption Compensation of Executive Officers in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities and Exchange Act of 1934 and is incorporated herein by reference.



Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The information required by this Item is set forth under the caption Security Ownership of Management and Certain Beneficial Owners in our
definitive Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is incorporated herein by reference.



Item 13Certain Relationships and Related Transactions



The information required by this Item is set forth under the caption Certain Transactions in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities and Exchange Act of 1934 and is incorporated herein by reference.



Item 14Principal Accountant Fees and Services



The information required by this Item is set forth under the caption Independent Public Accountant in our definitive Proxy Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is incorporated herein by reference.



PART IV



Item 15Exhibits, Financial Statement Schedules, and Reports On Form 8-K



|(a) | List of documents filed as part of this Form 10-K:
|--- | --------------------------------------------------



| | (1) | Financial Statements.
| | --- | ---------------------



See Index to Financial Statements and Schedule on page F-1.



| | (2) | Financial Statement Schedules.
| | --- | ------------------------------



See Index to Financial Statements and Schedule on page F-1.



33



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##### Table of Contents

| | (3) | Exhibits.
| | --- | ---------



The following exhibits are filed (or incorporated by reference herein) as part of this Form 10-K:



|              |  |                                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                
|              | 
|2.1*          |  | Agreement and Plan of Reorganization, dated as of May 16, 2000, by and among TriZetto, Elbejay Acquisition Corp., IMS Health Incorporated and Erisco Managed Care Technologies, Inc.
(Incorporated by reference to Exhibit 2.1 of TriZettos Form 8-K as filed with the SEC on May 19, 2000, File No. 000-27501)                                                      
|              | 
|2.2*          |  | Agreement and Plan of Merger, dated as of November 2, 2000, by and among TriZetto, Cidadaw Acquisition Corp., Resource Information Management Systems, Inc. (RIMS), the
shareholders of RIMS, Terry L. Kirch and Thomas H. Heimsoth (Incorporated by reference to Exhibit 2.1 of TriZettos Form 8-K as filed with the SEC on December 18, 2000, File No. 000-27501)
|              | 
|2.3*          |  | First Amendment to Agreement and Plan of Merger, dated as of December 1, 2000, by and among TriZetto, Cidadaw Acquisition Corp., RIMS, the shareholders of RIMS, Terry L. Kirch and Thomas H.
Heimsoth (Incorporated by reference to Exhibit 2.2 of TriZettos Form 8-K as filed with the SEC on December 18, 2000, File No. 000-27501)                               
|              | 
|3.1*          |  | Form of Amended and Restated Certificate of Incorporation of TriZetto, as filed with the Delaware Secretary of State effective as of October 14, 1999 (Incorporated by reference to Exhibit 3.2
of TriZettos Registration Statement on Form S-1/A, as filed with the SEC on September 14, 1999, File No. 333-84533)                                                  
|              | 
|3.2*          |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of TriZetto, dated October 3, 2000 (Incorporated by reference to Exhibit 3.1 of TriZettos Form 10-Q as
filed with the SEC on November 14, 2000, File No. 000-27501)                                                                                                                    
|              | 
|3.3*          |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating Preferred Stock of TriZetto, dated October 17, 2000 (Incorporated by reference to Exhibit 3.2
of TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                                               
|              | 
|3.4*          |  | Amended and Restated Bylaws of TriZetto effective as of October 7, 1999 (Incorporated by reference to Exhibit 3.4 of TriZettos Registration Statement on Form S-1/A, as filed with the
SEC on August 18, 1999, File No. 333-84533)                                                                                                                                   
|              | 
|4.1*          |  | Specimen common stock certificate (Incorporated by reference to Exhibit 4.1 of TriZettos Registration Statement on Form S-1/A as filed with the SEC on September 14, 1999, File No.
333-84533)                                                                                                                                                                       
|              | 
|4.2*          |  | Rights Agreement, dated October 2, 2000, by and between TriZetto and U.S. Stock Transfer Corporation (Incorporated by reference to Exhibit 2.1 of TriZettos Form 8-A12G as filed with the
SEC on October 19, 2000, File No. 000-27501)                                                                                                                               
|              | 
|10.1*         |  | First Amended and Restated 1998 Stock Option Plan (Incorporated by reference to Exhibit 4.1 of TriZettos Form S-8 as filed with the SEC on August 7, 2000, File No.
333-43220)                                                                                                                                                                                       
|              | 
|10.2*         |  | Form of 1998 Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.2 of TriZettos Registration Statement on Form S-1 as filed with the SEC on August 5, 1999, File
No. 333-84533)                                                                                                                                                                
|              | 
|10.3*         |  | Form of 1998 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.3 of TriZettos Registration Statement on Form S-1 as filed with the SEC on August 5, 1999,
File No. 333-84533)                                                                                                                                                            
|              | 
|10.4*         |  | 1999 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.4 of TriZettos Registration Statement on Form S-1/A as filed with the SEC on August 18, 1999, File No.
333-84533)                                                                                                                                                                         
|              | 
|10.5*         |  | RIMS Stock Option Plan (Incorporated by reference to Exhibit 4.1 of TriZettos Form S-8 as filed with the SEC on December 21, 2000, File No. 000-27501)                                                                                                                                                                                                               
|              | 
|10.6*         |  | Employment Agreement, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.5 of TriZettos Registration Statement on Form S-1 as
filed with the SEC on August 5, 1999, File No. 333-84533)                                                                                                                  
|              | 
|10.7*         |  | Promissory Note, dated April 30, 1998, by and between TriZetto and Jeffrey H. Margolis (Incorporated by reference to Exhibit 10.6 of TriZettos Registration Statement on Form S-1 as
filed with the SEC on August 5, 1999, File No. 333-84533)                                                                                                                       
|              | 
|10.8*         |  | Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.7 of TriZettos Registration Statement on Form S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)                                                                                                                                                                            



34



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|              |  |                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                
|              | 
|10.9*         |  | Form of Restricted Stock Agreement between TriZetto and certain consultants and employees (Incorporated by reference to Exhibit 10.3 of TriZettos Form 10-Q as filed with the SEC on
August 14, 2000, File No. 000-27501)                                                                                                                            
|              | 
|10.10*        |  | Form of Change of Control Agreement entered into by and between TriZetto and certain executive officers of TriZetto effective as of February 18, 2000 (Incorporated by reference to Exhibit
10.1 of TriZettos Form 10-Q as filed with the SEC on May 15, 2000, File No. 000-27501)                                                                   
|              | 
|10.11*        |  | First Amended and Restated Investor Rights Agreement, dated April 9, 1999 by and among Raymond Croghan, Jeffrey Margolis, TriZetto, and Series A and Series B Preferred Stockholders
(Incorporated by reference to Exhibit 10.8 of TriZettos Registration Statement on Form S-1/A, as filed with the SEC on August 18, 1999, File No. 333-84533)     
|              | 
|10.12*        |  | Office Lease Agreement, dated April 26, 1999, between St. Paul Properties, Inc. and TriZetto (including addendum) (Incorporated by reference to Exhibit 10.10 of TriZettos Registration
Statement on Form S-1 as filed with the SEC on August 5, 1999, File No. 333-84533)                                                                           
|              | 
|10.13*        |  | Sublease Agreement, dated December 18, 1998, between TPI Petroleum, Inc. and TriZetto (including underlying Office Lease Agreement by and between St. Paul Properties, Inc. and Total, Inc.)
(Incorporated by reference to Exhibit 10.11 of TriZettos Registration Statement on Form S-1 as filed with the SEC on August 5, 1999, File No. 333-84533)
|              | 
|10.14*        |  | First Modification and Ratification of Lease, dated November 1, 1999, by and between TriZetto and St. Paul Properties, Inc. (Incorporated by reference to Exhibit 10.22 of TriZettos Form
10-K as filed with the SEC on March 30, 2000, File No. 000-27501)                                                                                          
|              | 
|10.15*        |  | Second Modification and Ratification of Lease, dated December 1999, by and between TriZetto and St. Paul Properties, Inc. (Incorporated by reference to Exhibit 10.23 of TriZettos Form
10-K as filed with the SEC on March 30, 2000, File No. 000-27501)                                                                                            
|              | 
|10.16*        |  | Third Modification and Ratification of Lease, dated January 15, 2000, by and between TriZetto and St. Paul Properties, Inc. (Incorporated by reference to Exhibit 10.16 of TriZettos Form
10-K as filed with the SEC on April 2, 2001, File No. 000-27501)                                                                                           
|              | 
|10.17*        |  | Fourth Modification and Ratification of Lease, dated October 15, 2000, by and between TriZetto and St. Paul Properties, Inc. (Incorporated by reference to Exhibit 10.17 TriZettos Form
10-K as filed with the SEC on April 2, 2001, File No. 000-27501)                                                                                             
|              | 
|10.18*        |  | Form of Voting Agreement (Incorporated by reference to Exhibit 2.1 of TriZettos Form 8-K as filed with the SEC on May 19, 2000, File No. 000-27501)                                                                                                                                                                                                  
|              | 
|10.19*        |  | Secured Term Note, dated September 11, 2000, payable by TriZetto and each of TriZettos subsidiaries to Heller Healthcare Finance, Inc. (Incorporated by reference to Exhibit 10.1 of
TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                                            
|              | 
|10.20*        |  | Loan and Security Agreement, dated September 11, 2000, by and among TriZetto, each of TriZettos subsidiaries, and Heller Healthcare Finance, Inc. (Incorporated by reference to Exhibit
10.2 of TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                                 
|              | 
|10.21*        |  | Revolving Credit Note, dated September 11, 2000, payable by TriZetto and each of TriZettos subsidiaries to Heller Healthcare Finance, Inc. (Incorporated by reference to Exhibit 10.3 of
TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                                        
|              | 
|10.22*        |  | Amendment No. 1 to Loan and Security Agreement, dated October 17, 2000, by and among TriZetto, each of TriZettos subsidiaries, and Heller Healthcare Finance, Inc. (Incorporated by
reference to Exhibit 10.4 of TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                
|              | 
|10.23*        |  | Amended and Restated Revolving Credit Note, dated October 17, 2000, payable by TriZetto and each of TriZettos subsidiaries to Heller Healthcare Finance, Inc. (Incorporated by reference
to Exhibit 10.5 of TriZettos Form 10-Q as filed with the SEC on November 14, 2000, File No. 000-27501)                                                     
|              | 
|10.24*        |  | Amendment No. 2 to Loan and Security Agreement, dated December 28, 2000, by and among TriZetto, each of TriZettos subsidiaries, and Heller Healthcare Finance, Inc. (Incorporated by
reference to Exhibit 10.24 of TriZettos Form 10-K as filed with the SEC on April 2, 2001, File No. 000-27501)                                                  
|              | 
|10.25*        |  | Second Amended and Restated Revolving Credit Note, dated December 28, 2000, payable by TriZetto and each of TriZettos subsidiaries to Heller Healthcare Finance, Inc. (Incorporated by
reference to Exhibit 10.25 of TriZettos Form 10-K as filed with the SEC on April 2, 2001, File No. 000-27501)                                                



35



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                    
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibit                                                                                                                                                                                                                                                                                             
|              | 
|10.26*        |  | Bank One Credit Facility (including Promissory Note, Business Loan Agreement and Commercial Pledge and Security Agreement), dated October 27, 1999 (Incorporated by reference to Exhibit 10.21
of TriZettos Form 10-K as filed with the SEC on March 30, 2000 File No. 000-27501)                                 
|              | 
|10.27*        |  | Amendment to Bank One Credit Facility, dated June 22, 2000 (including Promissory Note Modification Agreement, Business Loan Agreement and Commercial Pledge and Security Agreement)
(Incorporated by reference to Exhibit 10.27 of TriZettos Form 10-K as filed with the SEC on April 2, 2001, File No. 000-27501)
|              | 
|10.28*        |  | Amendment to Bank One Credit Facility, dated November 4, 2000 (including Change in Terms Agreement) (Incorporated by reference to Exhibit 10.28 of TriZettos Form 10-K as filed with the
SEC on April 2, 2001, File No. 000-27501)                                                                                
|              | 
|10.29*        |  | Stockholder Agreement, dated as of October 2, 2000, by and between TriZetto and IMS Health Incorporated (Incorporated by reference to Exhibit 10.29 of TriZettos Form 10-K as filed with
the SEC on April 2, 2001, File No. 000-27501)                                                                            
|              | 
|10.30*        |  | Registration Rights Agreement, dated as of October 2, 2000, by and between TriZetto and IMS Health Incorporated (Incorporated by reference to Exhibit 10.30 of TriZettos Form 10-K as
filed with the SEC on April 2, 2001, File No. 000-27501)                                                                    
|              | 
|10.31*        |  | Amendment to Bank One Credit Facility, dated March 29, 2001 (including Business Loan Agreement) (Incorporated by reference to Exhibit 10.1 of TriZettos Form 10-Q as filed with the SEC
on May 15, 2001, File No. 000-27501)                                                                                      
|              | 
|10.32*        |  | Second Amended and Restated Stock Option Plan (Incorporated by reference to Exhibit 4.1 of TriZettos Form S-8 as filed with the SEC on June 26, 2001, File No. 333-63902) (Incorporated
by reference to Exhibit 10.1 of TriZettos Form 10-Q as filed with the SEC on August 14, 2001, File No. 000-27501)        
|              | 
|10.33*        |  | Secured Term Note (Incorporated by reference to Exhibit 10.1 of TriZettos Form 10-Q as filed with the SEC on November 14, 2001, File No. 000-27501)                                                                                                                                                               
|              | 
|10.34*        |  | Third Amended and Restated Revolving Credit Note (Incorporated by reference to Exhibit 10.2 of TriZettos Form 10-Q as filed with the SEC on November 14, 2001, File No.
000-27501)                                                                                                                                
|              | 
|10.35*        |  | Amendment No. 3 to Loan and Security Agreement (Incorporated by reference to Exhibit 10.3 of TriZettos Form 10-Q as filed with the SEC on November 14, 2001, File No.
000-27501)                                                                                                                                  
|              | 
|10.36*        |  | Amended and Restated Secured Term Note (Incorporated by reference to Exhibit 10.36 of TriZettos Form 10-K as filed with the SEC on March 31, 2003, File No. 000-27501)                                                                                                                                            
|              | 
|10.37*        |  | Fourth Amended and Restated Revolving Credit Note (Incorporated by reference to Exhibit 10.37 of TriZettos Form 10-K as filed with the SEC on March 31, 2003, File No.
000-27501)                                                                                                                                 
|              | 
|10.38*        |  | Amendment No. 4 to Loan and Security Agreement (Incorporated by reference to Exhibit 10.38 of TriZettos Form 10-K as filed with the SEC on March 31, 2003, File No.
000-27501)                                                                                                                                    
|              | 
|10.39*        |  | Form of Restricted Stock Agreement Between TriZetto and Certain Employees (Incorporated by reference to Exhibit 10.39 of TriZettos Form 10-K as filed with the SEC on March 31, 2003,
File No. 000-27501)                                                                                                         
|              | 
|10.40*        |  | Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.40 of TriZettos Form 10-Q as filed with the SEC on May 15, 2003, File No. 000-27501)                                                                                                                                                   
|              | 
|10.41*        |  | Amendment to Employment Agreement between TriZetto and Jeffrey H. Margolis dated July 1, 2002 (Incorporated by reference to Exhibit 10.1 of TriZettos Form 10-Q as filed with the SEC on
August 14, 2003, File No. 000-27501)                                                                                     
|              | 
|10.42*        |  | Second Amendment to Employment Agreement between TriZetto and Jeffrey H. Margolis dated April 16, 2003 (Incorporated by reference to Exhibit 10.2 of TriZettos Form 10-Q as filed with
the SEC on August 14, 2003, File No. 000-27501)                                                                            
|              | 
|14.1*         |  | Code of Ethics (Incorporated by reference to Exhibit 14.1 of TriZettos Form 10-Q as filed with the SEC on August 14, 2003, File No. 000-27501)                                                                                                                                                                    
|              | 
|16.1*         |  | Letter regarding Change in Certifying Accountants (Incorporated by reference to Exhibit 16.1 of TriZettos Form 10-Q as filed with the SEC on August 14, 2001, File No.
000-27501)                                                                                                                                 
|              | 
|21.1          |  | Current Subsidiaries of TriZetto                                                                                                                                                                                                                                                                                   
|              | 
|23.1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                       
|              | 
|31.1          |  | Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              
|              | 
|31.2          |  | Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              
|              | 
|32.1          |  | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                               

---

|* | Previously filed.
|- | -----------------



|(b) | Reports On Form 8-K.
|--- | --------------------



None.



36



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SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 25, 2004.



THE TRIZETTO GROUP, INC.By:

/s/    JEFFREY H. MARGOLISJeffrey H. Margolis, President, Chief Executive Officer and Chairman of the Board




POWER OF
ATTORNEY



Each of the undersigned hereby constitutes and
appoints Jeffrey H. Margolis and Michael J. Sunderland, or either of them, his/her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, to sign any or all amendments to the Form 10-K of The TriZetto Group,
Inc. for the year ended December 31, 2003 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his/her substitute or substitutes, may do or cause to be done by virtue hereof in any and all capacities.



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



|                                                      |  |                                                                                                           |  |                  
|----------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | -----------------
|Signature                                             |  | Title                                                                                                     |  | Date             
|                                                      |  |                                                                                                          
|/s/    JEFFREY H.
MARGOLISJeffrey H.
Margolis         |  | President, Chief Executive Officer and Chairman of the Board (Principal executive officer)                |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    MICHAEL J.
SUNDERLANDMichael J.
Sunderland     |  | Senior Vice President of Finance and Chief Financial Officer (Principal financial and accounting officer) |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    LOIS A.
EVANSLois A.
Evans                     |  | Director                                                                                                  |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    THOMAS B.
JOHNSONThomas B.
Johnson             |  | Director                                                                                                  |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    WILLARD A. JOHNSON,
JR.Willard A. Johnson,
Jr. |  | Director                                                                                                  |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    PAUL F.
LEFORTPaul F.
LeFort                   |  | Director                                                                                                  |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    DONALD J.
LOTHROPDonald J.
Lothrop             |  | Director                                                                                                  |  | February 25, 2004
|                                                      |  |                                                                                                          
|/s/    DAVID M.
THOMASDavid M.
Thomas                 |  | Director                                                                                                  |  | February 25, 2004



37



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The TriZetto Group, Inc. and Subsidiaries

Index to Consolidated Financial Information



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Auditors                                                                       |  | F-2 
|Consolidated Balance SheetsDecember 31, 2003 and 2002                                               |  | F-3 
|Consolidated Statements of OperationsFor the years ended December 31, 2003, 2002 and 2001           |  | F-4 
|Consolidated Statements of Comprehensive LossFor the years ended December 31, 2003, 2002 and 2001   |  | F-5 
|Consolidated Statements of Stockholders EquityFor the years ended December 31, 2003, 2002 and 2001 |  | F-6 
|Consolidated Statements of Cash FlowsFor the years ended December 31, 2003, 2002 and 2001           |  | F-7 
|Notes to Consolidated Financial Statements                                                           |  | F-8 
|Financial Statement ScheduleValuation and Qualifying Accounts                                       |  | F-26



F-1



---

##### Table of Contents

Report of Independent Auditors



To the Board of
Directors and Stockholders

of The TriZetto Group, Inc.



We have audited the accompanying consolidated balance sheets of The TriZetto Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, comprehensive loss, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the
Index at Item 15. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



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



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The TriZetto Group, Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



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



/s/ Ernst & Young LLP



Orange County,
California

February 3, 2004



F-2



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                        |  | December 31, |         
|                                                                                                                                                                                                        |  | 2003         |          |   | 2002 |  
|Assets                                                                                                                                                                                                  |  |              |          |   |      |   |          |  
|Current assets:                                                                                                                                                                                         |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                               |  | $            | 56,026   |   |      | $ | 46,833   |  
|Short-term investments                                                                                                                                                                                  |  |              | 18,843   |   |      |   | 28,191   |  
|Restricted cash                                                                                                                                                                                         |  |              | 1,478    |   |      |   | 6,093    |  
|Accounts receivable, less allowances of $4,932 and $8,448, respectively                                                                                                                                 |  |              | 37,349   |   |      |   | 32,847   |  
|Prepaid expenses and other current assets                                                                                                                                                               |  |              | 7,015    |   |      |   | 8,550    |  
|Income tax receivable                                                                                                                                                                                   |  |              | 577      |   |      |   | 961      |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                                                                                    |  |              | 121,288  |   |      |   | 123,475  |  
|Property and equipment, net                                                                                                                                                                             |  |              | 41,124   |   |      |   | 42,307   |  
|Capitalized software development costs, net                                                                                                                                                             |  |              | 25,479   |   |      |   | 16,021   |  
|Goodwill                                                                                                                                                                                                |  |              | 37,579   |   |      |   | 37,579   |  
|Other intangible assets, net                                                                                                                                                                            |  |              | 6,040    |   |      |   | 16,398   |  
|Other assets                                                                                                                                                                                            |  |              | 1,798    |   |      |   | 2,216    |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total assets                                                                                                                                                                                            |  | $            | 233,308  |   |      | $ | 237,996  |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Notes payable                                                                                                                                                                                           |  | $            | 9,742    |   |      | $ | 7,937    |  
|Equipment lease and revolving lines of credit                                                                                                                                                           |  |              | 20,000   |   |      |   | 5,655    |  
|Capital lease obligations                                                                                                                                                                               |  |              | 5,178    |   |      |   | 4,329    |  
|Accounts payable                                                                                                                                                                                        |  |              | 11,483   |   |      |   | 10,757   |  
|Accrued liabilities                                                                                                                                                                                     |  |              | 33,379   |   |      |   | 30,774   |  
|Deferred revenue                                                                                                                                                                                        |  |              | 23,422   |   |      |   | 21,692   |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                               |  |              | 103,204  |   |      |   | 81,144   |  
|Long-term notes payable                                                                                                                                                                                 |  |              | 2,138    |   |      |   | 9,990    |  
|Other long-term liabilities                                                                                                                                                                             |  |              | 8,594    |   |      |   | 1,269    |  
|Capital lease obligations                                                                                                                                                                               |  |              | 5,017    |   |      |   | 5,126    |  
|Deferred revenue                                                                                                                                                                                        |  |              | 832      |   |      |   | 3,053    |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total liabilities                                                                                                                                                                                       |  |              | 119,785  |   |      |   | 100,582  |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Commitments and contingencies (Note 8)                                                                                                                                                                  |  |              |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                                                   |  |              |          |   |      |   |          |  
|Preferred stock: $0.001 par value; shares authorized: 4,000 (5,000 authorized net of 1,000 designated as Series A Junior Participating
Preferred); shares issued and outstanding: zero in 2003 and 2002 |  |              |         |   |      |   |         |  
|Series A Junior Participating Preferred Stock: $0.001 par value; shares authorized: 1,000; shares issued and outstanding: zero in 2003 and
2002                                                         |  |              |         |   |      |   |         |  
|Common stock: $0.001 par value; shares authorized: 95,000; shares issued and outstanding: 46,870 in 2003 and 46,034 in 2002                                                                             |  |              | 47       |   |      |   | 46       |  
|Additional paid-in capital                                                                                                                                                                              |  |              | 402,702  |   |      |   | 400,573  |  
|Deferred stock compensation                                                                                                                                                                             |  |              | (863     | ) |      |   | (2,317   | )
|Accumulated deficit                                                                                                                                                                                     |  |              | (288,363 | ) |      |   | (260,888 | )
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                                              |  |              | 113,523  |   |      |   | 137,414  |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                              |  | $            | 233,308  |   |      | $ | 237,996  |  
|                                                                                                                                                                                                        |  |              |          |   |      |   |          |  



See accompanying
notes.



F-3



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|----------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                      |  | For the Years Ended December 31, |        
|                                                      |  | 2003                             |         |   | 2002 |   |          | 2001 | 
|Revenue:                                              |  |                                  |         |   |      |   |          |      |  |   |         |  
|Recurring revenue                                     |  | $                                | 160,973 |   |      | $ | 159,178  |      |  | $ | 142,706 |  
|Non-recurring revenue                                 |  |                                  | 129,356 |   |      |   | 105,972  |      |  |   | 75,466  |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Total revenue                                         |  |                                  | 290,329 |   |      |   | 265,150  |      |  |   | 218,172 |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Cost of revenue:                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Recurring revenue (1)                                 |  |                                  | 115,812 |   |      |   | 114,509  |      |  |   | 103,854 |  
|Non-recurring revenue (2)                             |  |                                  | 93,244  |   |      |   | 63,311   |      |  |   | 42,806  |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|                                                      |  |                                  | 209,056 |   |      |   | 177,820  |      |  |   | 146,660 |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Recurring revenue  loss on contracts                 |  |                                  | 11,271  |   |      |   |         |      |  |   |        |  
|Non-recurring revenue  loss on contracts             |  |                                  | 3,680   |   |      |   |         |      |  |   |        |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|                                                      |  |                                  | 14,951  |   |      |   |         |      |  |   |        |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Total cost of revenue                                 |  |                                  | 224,007 |   |      |   | 177,820  |      |  |   | 146,660 |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Gross profit                                          |  |                                  | 66,322  |   |      |   | 87,330   |      |  |   | 71,512  |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Operating expenses:                                   |  |                                  |         |   |      |   |          |      |  |   |         |  
|Research and development (3)                          |  |                                  | 24,823  |   |      |   | 21,911   |      |  |   | 16,402  |  
|Selling, general and administrative (4)               |  |                                  | 52,138  |   |      |   | 53,966   |      |  |   | 51,938  |  
|Amortization of goodwill and other intangible assets  |  |                                  | 10,908  |   |      |   | 28,027   |      |  |   | 69,076  |  
|Restructuring and impairment charges                  |  |                                  | 3,769   |   |      |   | 651      |      |  |   | 12,140  |  
|Impairment of goodwill and other intangible assets    |  |                                  |        |   |      |   | 131,019  |      |  |   |        |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Total operating expenses                              |  |                                  | 91,638  |   |      |   | 235,574  |      |  |   | 149,556 |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Loss from operations                                  |  |                                  | (25,316 | ) |      |   | (148,244 | )    |  |   | (78,044 | )
|Interest income                                       |  |                                  | 970     |   |      |   | 1,609    |      |  |   | 2,048   |  
|Interest expense                                      |  |                                  | (2,005  | ) |      |   | (1,479   | )    |  |   | (1,333  | )
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Loss before (provision for) benefit from income taxes |  |                                  | (26,351 | ) |      |   | (148,114 | )    |  |   | (77,329 | )
|(Provision for) benefit from income taxes             |  |                                  | (1,124  | ) |      |   | (250     | )    |  |   | 16,175  |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net loss                                              |  | $                                | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net loss per share:                                   |  |                                  |         |   |      |   |          |      |  |   |         |  
|Basic and diluted                                     |  | $                                | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (1.53   | )
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  
|Shares used in computing net loss per share:          |  |                                  |         |   |      |   |          |      |  |   |         |  
|Basic and diluted                                     |  |                                  | 46,170  |   |      |   | 45,256   |      |  |   | 40,094  |  
|                                                      |  |                                  |         |   |      |   |          |      |  |   |         |  

---

|(1) | Cost of recurring revenue for the years ended December 31, 2003, 2002, and 2001, includes $476,000, $635,000 and $682,000 of amortization of deferred stock compensation,
respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Cost of non-recurring revenue for the years ended December 31, 2003, 2002, and 2001, includes $81,000, $590,000, and $553,000 of amortization of deferred stock compensation,
respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Research and development for the years ended December 31, 2003, 2002, and 2001, includes $212,000, $237,000, and $222,000 of amortization of deferred stock compensation,
respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Selling, general and administrative for the years ended December 31, 2003, 2002, and 2001, includes $1.1 million, $1.5 million, and $1.6 million of amortization of deferred stock
compensation, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying
notes.



F-4



---

##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



|                                  |  |                                  |         |   |      |   |          |      |  |   |         |  
|--------------------------------- |  | -------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                  |  | For the Years Ended December 31, |        
|                                  |  | 2003                             |         |   | 2002 |   |          | 2001 | 
|Net loss                          |  | $                                | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|Other comprehensive loss:         |  |                                  |         |   |      |   |          |      |  |   |         |  
|Foreign currency translation loss |  |                                  |        |   |      |   |         |      |  |   | (8      | )
|                                  |  |                                  |         |   |      |   |          |      |  |   |         |  
|Comprehensive loss                |  | $                                | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,162 | )
|                                  |  |                                  |         |   |      |   |          |      |  |   |         |  



See accompanying
notes.



F-5



---

##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended December 31, 2003, 2002 and 2001

(in thousands)



|                                                                                      |  |              |   |                          |        |    |                                 |   |         |                           |  |   |                                     |   |  |                    |        |   |                          |   |    |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------- |  | ------------ | - | ------------------------ | ------ | -- | ------------------------------- | - | ------- | ------------------------- |  | - | ----------------------------------- | - |  | ------------------ | ------ | - | ------------------------ | - | -- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                      |  | Common Stock |   | AdditionalPaid-inCapital |        |    | NotesReceivableFromStockholders |   |         | DeferredStockCompensation |  |   | AccumulatedOtherComprehensiveIncome |   |  | AccumulatedDeficit |        |   | TotalStockholdersEquity |  
|                                                                                      |  | Shares       |   |                          | Amount |    |                                 |   |         |                           | 
|Balance, December 31, 2000                                                            |  | 36,597       |   |                          | $      | 35 |                                 | $ | 330,061 |                           |  | $ | (41                                 | ) |  | $                  | (9,263 | ) |                          | $ | 8  |   |  | $ | (51,370  | ) |  | $ | 269,430  |  
|Issuance of common stock for Healthcare Media Enterprises, Inc.                       |  | 56           |   |                          |        |   |                                 |   | (57     | )                         |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | (57      | )
|Issuance of common stock for Resource Information Management Systems, Inc.            |  | 647          |   |                          |        | 1  |                                 |   | (1      | )                         |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   |         |  
|Issuance of common stock to purchase Infotrust Company                                |  | 923          |   |                          |        | 1  |                                 |   | 12,889  |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 12,890   |  
|Issuance of common stock related to secondary offering, net of offering costs of $800 |  | 6,348        |   |                          |        | 7  |                                 |   | 54,828  |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 54,835   |  
|Deferred stock compensation related to stock grants                                   |  | 48           |   |                          |        |   |                                 |   | (1,966  | )                         |  |   |                                    |   |  |                    | 1,966  |   |                          |   |   |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                           |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    | 3,032  |   |                          |   |   |   |  |   |         |   |  |   | 3,032    |  
|Exercise of common stock options                                                      |  | 510          |   |                          |        | 1  |                                 |   | 653     |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 654      |  
|Employee purchase of common stock                                                     |  | 170          |   |                          |        |   |                                 |   | 1,333   |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 1,333    |  
|Foreign currency translation loss                                                     |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    |       |   |                          |   | (8 | ) |  |   |         |   |  |   | (8       | )
|Net loss                                                                              |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   | (61,154  | ) |  |   | (61,154  | )
|                                                                                      |  |              |   |                          |        |    |                                 |   |         |                           |  |   |                                     |   |  |                    |        |   |                          |   |    |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2001                                                            |  | 45,299       |   |                          |        | 45 |                                 |   | 397,740 |                           |  |   | (41                                 | ) |  |                    | (4,265 | ) |                          |   |   |   |  |   | (112,524 | ) |  |   | 280,955  |  
|Issuance of common stock for Infotrust Company                                        |  | 66           |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   |         |  
|Deferred stock compensation related to stock grants                                   |  | 90           |   |                          |        |   |                                 |   | 1,005   |                           |  |   |                                    |   |  |                    | (1,005 | ) |                          |   |   |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                           |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    | 2,953  |   |                          |   |   |   |  |   |         |   |  |   | 2,953    |  
|Exercise of common stock options                                                      |  | 323          |   |                          |        | 1  |                                 |   | 264     |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 265      |  
|Employee purchase of common stock                                                     |  | 256          |   |                          |        |   |                                 |   | 1,564   |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 1,564    |  
|Write-off of uncollectible notes receivable                                           |  |             |   |                          |        |   |                                 |   |        |                           |  |   | 41                                  |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 41       |  
|Net loss                                                                              |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   | (148,364 | ) |  |   | (148,364 | )
|                                                                                      |  |              |   |                          |        |    |                                 |   |         |                           |  |   |                                     |   |  |                    |        |   |                          |   |    |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2002                                                            |  | 46,034       |   |                          |        | 46 |                                 |   | 400,573 |                           |  |   |                                    |   |  |                    | (2,317 | ) |                          |   |   |   |  |   | (260,888 | ) |  |   | 137,414  |  
|Issuance of common stock in connection with prior acquisitions                        |  | 85           |   |                          |        |   |                                 |   | 37      |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 37       |  
|Deferred stock compensation related to stock grants                                   |  | 100          |   |                          |        |   |                                 |   | 385     |                           |  |   |                                    |   |  |                    | (385   | ) |                          |   |   |   |  |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                           |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    | 1,839  |   |                          |   |   |   |  |   |         |   |  |   | 1,839    |  
|Exercise of common stock options                                                      |  | 406          |   |                          |        | 1  |                                 |   | 482     |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 483      |  
|Employee purchase of common stock                                                     |  | 270          |   |                          |        |   |                                 |   | 1,362   |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | 1,362    |  
|Repurchase of common stock                                                            |  | (25          | ) |                          |        |   |                                 |   | (137    | )                         |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   |         |   |  |   | (137     | )
|Net loss                                                                              |  |             |   |                          |        |   |                                 |   |        |                           |  |   |                                    |   |  |                    |       |   |                          |   |   |   |  |   | (27,475  | ) |  |   | (27,475  | )
|                                                                                      |  |              |   |                          |        |    |                                 |   |         |                           |  |   |                                     |   |  |                    |        |   |                          |   |    |   |  |   |          |   |  |   |          |  
|                                                                                      |  | 46,870       |   |                          | $      | 47 |                                 | $ | 402,702 |                           |  | $ |                                    |   |  | $                  | (863   | ) |                          | $ |   |   |  | $ | (288,363 | ) |  | $ | 113,523  |  
|                                                                                      |  |              |   |                          |        |    |                                 |   |         |                           |  |   |                                     |   |  |                    |        |   |                          |   |    |   |  |   |          |   |  |   |          |  



See accompanying
notes.



F-6



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                |  | For the Years Ended December 31, |        
|                                                                                |  | 2003                             |         |   | 2002 |   |          | 2001 | 
|Cash flows from operating activities:                                           |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net loss                                                                        |  | $                                | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                  |         |   |      |   |          |      |  |   |         |  
|Provision for doubtful accounts and sales allowance                             |  |                                  | (1,938  | ) |      |   | 3,638    |      |  |   | 5,918   |  
|Issuance of stock in connection with a prior acquisitions                       |  |                                  | 37      |   |      |   |         |      |  |   |        |  
|Amortization of deferred stock compensation                                     |  |                                  | 1,839   |   |      |   | 2,953    |      |  |   | 3,032   |  
|Amortization of deferred stock warrants                                         |  |                                  |        |   |      |   |         |      |  |   | 241     |  
|Forgiveness of notes receivable                                                 |  |                                  |        |   |      |   | 68       |      |  |   | 30      |  
|Deferred tax benefit                                                            |  |                                  |        |   |      |   | (647     | )    |  |   | (16,371 | )
|Loss on disposal of property and equipment                                      |  |                                  | 19      |   |      |   | 16       |      |  |   | 1,312   |  
|Depreciation and amortization                                                   |  |                                  | 18,407  |   |      |   | 12,794   |      |  |   | 8,771   |  
|Amortization of goodwill and other intangible assets                            |  |                                  | 10,908  |   |      |   | 28,027   |      |  |   | 69,076  |  
|Loss on contracts                                                               |  |                                  | 14,951  |   |      |   |         |      |  |   |        |  
|Loss on impairment of property and equipment and other assets                   |  |                                  | 3,769   |   |      |   |         |      |  |   | 1,389   |  
|Impairment of goodwill and other intangible assets                              |  |                                  |        |   |      |   | 131,019  |      |  |   | 5,716   |  
|Changes in assets and liabilities (net of acquisitions):                        |  |                                  |         |   |      |   |          |      |  |   |         |  
|Restricted cash                                                                 |  |                                  | 4,615   |   |      |   | (3,860   | )    |  |   | (733    | )
|Accounts receivable                                                             |  |                                  | (2,564  | ) |      |   | (4,565   | )    |  |   | (17,531 | )
|Prepaid expenses and other current assets                                       |  |                                  | 1,528   |   |      |   | (2,946   | )    |  |   | (217    | )
|Income tax receivable                                                           |  |                                  | 384     |   |      |   | (886     | )    |  |   |        |  
|Notes receivable                                                                |  |                                  | 61      |   |      |   | 207      |      |  |   | 1,929   |  
|Accounts payable                                                                |  |                                  | 726     |   |      |   | 2,648    |      |  |   | (1,501  | )
|Accrued liabilities                                                             |  |                                  | (8,437  | ) |      |   | 7,875    |      |  |   | 5,586   |  
|Deferred revenue                                                                |  |                                  | (491    | ) |      |   | (8,352   | )    |  |   | 14,253  |  
|Other assets                                                                    |  |                                  | 366     |   |      |   | 7,244    |      |  |   | (8,520  | )
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities                                       |  |                                  | 16,705  |   |      |   | 26,869   |      |  |   | 11,226  |  
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Cash flows from investing activities:                                           |  |                                  |         |   |      |   |          |      |  |   |         |  
|Sale (purchase) of short-term investments, net                                  |  |                                  | 9,348   |   |      |   | (13,132  | )    |  |   | (12,040 | )
|Purchases of property and equipment and software licenses                       |  |                                  | (13,522 | ) |      |   | (17,081  | )    |  |   | (12,736 | )
|Capitalization of software development costs                                    |  |                                  | (12,916 | ) |      |   | (11,622  | )    |  |   | (5,027  | )
|Purchase of intangible assets                                                   |  |                                  | (550    | ) |      |   | (8,568   | )    |  |   | (241    | )
|Acquisitions, net of cash acquired                                              |  |                                  |        |   |      |   |         |      |  |   | 846     |  
|Payment of acquisition-related costs                                            |  |                                  |        |   |      |   | (1,026   | )    |  |   | (2,542  | )
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net cash used in investing activities                                           |  |                                  | (17,640 | ) |      |   | (51,429  | )    |  |   | (31,740 | )
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Cash flows from financing activities:                                           |  |                                  |         |   |      |   |          |      |  |   |         |  
|Proceeds from issuance of common stock, net                                     |  |                                  |        |   |      |   |         |      |  |   | 54,835  |  
|Proceeds from (repayment of) revolving line of credit, net                      |  |                                  | 14,500  |   |      |   | (7,644   | )    |  |   | 1,706   |  
|Proceeds from debt financing                                                    |  |                                  | 2,215   |   |      |   |         |      |  |   | 3,120   |  
|Payments on notes payable                                                       |  |                                  | (2,637  | ) |      |   | (3,022   | )    |  |   | (1,020  | )
|Proceeds from term note                                                         |  |                                  |        |   |      |   | 15,000   |      |  |   | 6,000   |  
|Payments on term note                                                           |  |                                  | (5,625  | ) |      |   | (5,400   | )    |  |   | (600    | )
|Payments on equipment line of credit                                            |  |                                  | (155    | ) |      |   | (717     | )    |  |   | (651    | )
|Proceeds from capital leases                                                    |  |                                  | 5,327   |   |      |   | 7,752    |      |  |   | 854     |  
|Payments on capital leases                                                      |  |                                  | (5,205  | ) |      |   | (3,745   | )    |  |   | (2,233  | )
|Repurchase of common stock                                                      |  |                                  | (137    | ) |      |   |         |      |  |   |        |  
|Employee exercises of stock options and purchase of common stock                |  |                                  | 1,845   |   |      |   | 1,828    |      |  |   | 1,987   |  
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net cash provided by financing activities                                       |  |                                  | 10,128  |   |      |   | 4,052    |      |  |   | 63,998  |  
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                                  | 9,193   |   |      |   | (20,508  | )    |  |   | 43,484  |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                                  |        |   |      |   |         |      |  |   | (8      | )
|Cash and cash equivalents at beginning of year                                  |  |                                  | 46,833  |   |      |   | 67,341   |      |  |   | 23,865  |  
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents at end of year                                        |  | $                                | 56,026  |   |      | $ | 46,833   |      |  | $ | 67,341  |  
|                                                                                |  |                                  |         |   |      |   |          |      |  |   |         |  



See accompanying
notes.



F-7



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Formation and Business of the Company
|-- | -------------------------------------



The TriZetto Group, Inc. (the Company), was incorporated in the state of Delaware on May 27, 1997. The Company is a provider of remotely
hosted software applications, both third-party packaged and proprietary software, and related services used primarily in the healthcare industry. The Company also develops and supports software products for the healthcare industry. Additionally, the
Company offers an Internet browser application that serves as a portal for the exchange of healthcare information and services over the Internet. The Company provides access to its hosted solutions either through the Internet or through traditional
networks. The Company markets and sells its software and services to customers primarily in the United States.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Basis of consolidation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been
eliminated in consolidation.



Liquidity and capital
resources



The Company has incurred net losses of $27.5
million, $148.4 million, and $61.2 million for the years ended December 31, 2003, 2002, and 2001, respectively, and has an accumulated deficit of $288.4 million at December 31, 2003. The Company has generated cash from operating activities of $16.7
million, $26.9 million and $11.2 million for the years ended December 31, 2003, 2002, and 2001, respectively. The Company has total cash and cash equivalents, short-term investments, and restricted cash of $76.3 million and net working capital of
$18.1 million at December 31, 2003. Based on the Companys current operating plan, management believes existing cash, cash equivalents and short-term investments balances, cash forecasted by management to be generated by operations and
borrowings from existing credit facilities will be sufficient to meet the Companys working capital and capital requirements for at least the next twelve months. However, if events or circumstances occur such that the Company does not meet its
operating plan as expected, the Company may be required to seek additional capital and/or to reduce certain discretionary spending, which could have a material adverse effect on the Companys ability to achieve its intended business objectives.
The Company may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity
financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.



Use of estimates



The preparation of consolidated 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.



Concentration of credit risk



Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited in demand and money market accounts in three financial
institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Companys accounts receivable are derived from
revenue earned from customers primarily located in the United States. The Company performs ongoing credit evaluations of its customers financial condition and, generally, requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts receivable based upon the expected collectibility of individual accounts.



Revenues or accounts receivable balances from any one customer does not exceed 10% of total revenue and total accounts receivable balances for the years
ended December 31, 2003, 2002 or 2001, respectively.



Fair
value of financial instruments



Carrying amounts of
certain of the Companys financial instruments including cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value due to their short maturities. Based on



F-8



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligations approximates fair value.



Cash and cash equivalents



The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash equivalents include money market funds, commercial paper and various deposit accounts.



Short-term investments



Short-term investments include money market funds, commercial paper, and various deposit accounts. The Company has the ability to convert these
investments to cash upon notice.



Restricted cash



Restricted cash consists of $1.5 million in money market
funds primarily against letters of credits issued for certain capital leases.



Property and equipment



Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives: computer equipment, equipment and software are depreciated over three to twenty years, and furniture and fixtures are
depreciated over seven years. Leasehold improvements are amortized over their estimated useful lives or the lease term, if shorter. Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the
resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.



Goodwill



Under Financial Accounting Standards Board (FASB) Statement Nos. 141 and 142, Business Combinations and Goodwill and Other
Intangible Assets, respectively, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but, instead, are tested annually or on an interim basis if events or circumstances indicate that the fair value of the
asset has decreased below its carrying value. Effective as of January 1, 2002, the Company adopted these standards.



Net loss and net loss per share for the years ended December 31, 2003, 2002 and 2001, adjusted to exclude goodwill amortization, was as follows (in
thousands, expect per share data):



|                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                                      |  | Years Ended December 31, |        
|                                                                                                      |  | 2003                     |         |   | 2002 |   |          | 2001 | 
|Reported net loss                                                                                     |  | $                        | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|Add back amortization of goodwill and acquired workforce previously classified as an intangible asset |  |                          |        |   |      |   |         |      |  |   | 43,227  |  
|                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|Adjusted net loss                                                                                     |  | $                        | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (17,927 | )
|                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|Basic and diluted net loss per share:                                                                 |  |                          |         |   |      |   |          |      |  |   |         |  
|As reported                                                                                           |  | $                        | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (1.53   | )
|                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|As adjusted                                                                                           |  | $                        | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (0.45   | )
|                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  



Long-lived assets,
including other intangible assets



Other intangible assets
arising from the Companys acquisitions consist of customer lists, core technology, consulting contracts, tradenames and intellectual property, which are being amortized on a straight-line basis over their estimated useful lives of two to five
years. Software technology rights are being amortized on a straight-line basis over the lesser of the contract term or five years. Long-lived assets and other intangible assets are reviewed for impairment when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of LongLived Assets. Recoverability is measured by comparison of the assets
carrying amount to future net undiscounted cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the asset. The discount rate applied to these cash flows is based on a discount rate commensurate with the risks involved.



F-9



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Revenue recognition



The Company recognizes revenue when persuasive evidence of an arrangement exists, the product or service has been delivered,
fees are fixed and determinable, collection is probable and all other significant obligations have been fulfilled. The Companys revenue is classified into two categories: recurring and non-recurring. For the year ended December 31, 2003,
approximately 55% of the Companys total revenue was recurring and 45% was non-recurring.



The Company generates recurring revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for its
proprietary software products. Recurring revenue is billed and recognized monthly over the contract term, typically three to seven years. Many of the Companys outsourcing agreements require it to maintain a certain level of operating
performance. Recurring software maintenance revenue is typically based on one-year renewable contracts. Software maintenance and support revenues are recognized ratably over the contract period. Payment for software maintenance received in advance
is recorded on the balance sheet as deferred revenue.



The
Company generates non-recurring revenue from the licensing of its software. The Company follows the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition, as amended, AICPA Statements
of Position (SOP) 97-2, Software Revenue Recognition, as amended, and EITF Issue 00-21, Multiple Element Arrangements. Software license revenue is recognized upon the execution of a license agreement, upon
delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a material condition of
earning the license fees, revenue is not recognized until acceptance occurs. For arrangements containing multiple elements, such as software license fees, consulting services and maintenance, and where vendor-specific objective evidence
(VSOE) of fair value exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the residual method. Under the residual method, the arrangement fee is recognized as follows: (1)
the total fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered elements. For arrangements in which VSOE does not exist for each element, including specified upgrades, revenue is deferred and not recognized until delivery of the element
without VSOE has occurred.



The Company generates non-recurring
revenue from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of its proprietary and third-party licensed products. The Company recognizes
revenues for these services as they are performed, if contracted on a time and material basis, or using the percentage of completion method, if contracted on a fixed fee basis and when the Company can adequately estimate the cost of the consulting
project. Percentage of completion is measured based on hours incurred to date compared to total estimated hours to complete. When the Company cannot reasonably estimate the cost to complete, revenue is recognized using the completed contract method
until such time that the estimate to complete the consulting project can be reasonably estimated. The Company also generates non-recurring revenue from set-up fees, which are services, hardware, and software associated with preparing a
customers connectivity center or a customers data center in order to ready a specific customer for software hosting services. The Company recognizes revenue for these services as they are performed using the percentage of completion
basis and when the Company can reasonably estimate the cost of the set-up project. The Company recognizes the revenue for the hardware and software included in these fees over the estimated useful life of the hardware or software, respectively. The
Company also generates other non-recurring revenue, which includes certain contractual fees such as termination and change of control fees, and recognizes the revenue for these once the termination or change of control takes place and collection is
reasonably assured.



Research and development expense and
capitalized software development costs



Research and
development (R&D) expenses are salaries and related expenses associated with the development of software applications prior to establishing technological feasibility. Such expenses include compensation paid to engineering personnel
and fees to outside contractors and consultants. Costs incurred internally in the development of our software products are expensed as incurred as R&D expenses until technological feasibility has been established, at which time any future
production costs are capitalized as software development costs in accordance with FASB Statement No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Capitalization ceases and amortization of
capitalized software development costs begins when the software product is available for general release to customers.



F-10



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Capitalized software development costs are amortized to cost of revenue on a straight-line basis over
the estimated useful life of the related products, which is generally deemed to be five years. Software development costs capitalized for the years ended December 31, 2003, 2002 and 2001 was $12.9 million, $11.6 million, and $5.0 million,
respectively. Amortization expense for the years ended December 31, 2003, 2002, and 2001 was $3.5 million, $977,000, and $130,000, respectively, and is included in cost of revenue.



Capitalized software development costs, net consist of the following (in thousands):



|                                       |  |                          |        |   |      |   |        |  
|-------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                       |  | Years Ended December 31, |       
|                                       |  | 2003                     |        |   | 2002 |  
|Capitalized software development costs |  | $                        | 30,052 |   |      | $ | 17,137 |  
|Less: accumulated amortization         |  |                          | (4,573 | ) |      |   | (1,116 | )
|                                       |  |                          |        |   |      |   |        |  
|                                       |  | $                        | 25,479 |   |      | $ | 16,021 |  
|                                       |  |                          |        |   |      |   |        |  



Advertising costs



Advertising costs are expensed as incurred. Advertising
expense for the years ended December 31, 2003, 2002, and 2001 was $1.7 million, $2.7 million, and $3.4 million, respectively.



Stock-based compensation



The Company has two stock-based employee compensation plans, which are described more fully in Note 9. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Stock-based employee compensation costs of $267,000, $686,000
and $1.0 million in 2003, 2002, and 2001, respectively, are reflected in net loss, net of related tax effects, as a result of the amortization of deferred stock compensation. The amortization represents the difference between the exercise price and
estimated fair value of the Companys common stock on 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 FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands, except per share data):



|                                                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                                                                      |  | Years Ended December 31, |        
|                                                                                                                                      |  | 2003                     |         |   | 2002 |   |          | 2001 | 
|Net loss as reported                                                                                                                  |  | $                        | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|Add: stock-based employee compensation expense included in reported net loss, net of related tax effects                              |  |                          | 267     |   |      |   | 686      |      |  |   | 1,038   |  
|Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                          | (5,254  | ) |      |   | (6,205   | )    |  |   | (5,655  | )
|                                                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|Pro forma net loss                                                                                                                    |  | $                        | (32,462 | ) |      | $ | (153,883 | )    |  | $ | (65,771 | )
|                                                                                                                                      |  |                          |         |   |      |   |          |      |  |   |         |  
|Net loss per share                                                                                                                    |  |                          |         |   |      |   |          |      |  |   |         |  
|Basic and diluted, as reported                                                                                                        |  | $                        | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (1.53   | )
|Basic and diluted, pro forma                                                                                                          |  | $                        | (0.70   | ) |      | $ | (3.40    | )    |  | $ | (1.64   | )



Such pro forma
disclosures may not be representative of future pro forma compensation cost because options vest over several years and additional grants are anticipated to be made each year.



The fair value of option grants were estimated using a Black-Scholes pricing model. The following weighted average
assumptions were used in the estimations:



|                            |  |                          |         |   |      |   |         |      |  |   |         |  
|--------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                            |  | Years Ended December 31, |        
|                            |  | 2003                     |         |   | 2002 |   |         | 2001 | 
|Expected volatility         |  |                          | 50      | % |      |   | 50      | %    |  |   | 50      | %
|Risk-free interest rate     |  |                          | 3.00    | % |      |   | 3.00    | %    |  |   | 5.00    | %
|Expected life               |  |                          | 4 years |   |      |   | 4 years |      |  |   | 4 years |  
|Expected dividends          |  |                          |        |   |      |   |        |      |  |   |        |  
|Weighted average fair value |  | $                        | 1.70    |   |      | $ | 5.31    |      |  | $ | 5.39    |  



F-11



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Common stock repurchase program



During the second quarter of 2003, the Company repurchased 24,500 shares of common stock under the Companys authorized
repurchase program at a cost of $137,000. The repurchase program was approved in the first quarter of 2003 and expires on December 31, 2004. In addition, the Board of Directors has established certain parameters within which purchases of shares may
be made, and a limit of $10.0 million on the aggregate dollar amount of the shares that may be purchased pursuant to the program. As of December 31, 2003, $9.9 million was available for future repurchase of shares of common stock.



Income taxes



The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect
taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.



Computation of loss per share



Basic earnings per share (EPS) is computed by dividing net loss by the weighted average number of common shares outstanding for the period.
Common shares issued in connection with business combinations, that are held in escrow, are excluded from the computation of basic EPS until the shares are released from escrow. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, shares held in escrow and other convertible securities. The following is a reconciliation of the numerator (net loss) and the denominator (number of shares) used in the basic and diluted EPS
calculations (in thousands, except per share data):



|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                           |  | Years Ended December 31, |        
|                                           |  | 2003                     |         |   | 2002 |   |          | 2001 | 
|Basic:                                     |  |                          |         |   |      |   |          |      |  |   |         |  
|Net loss                                   |  | $                        | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|Weighted average common shares outstanding |  |                          | 46,170  |   |      |   | 45,256   |      |  |   | 40,094  |  
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|Net loss per share                         |  | $                        | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (1.53   | )
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|Diluted:                                   |  |                          |         |   |      |   |          |      |  |   |         |  
|Net loss                                   |  | $                        | (27,475 | ) |      | $ | (148,364 | )    |  | $ | (61,154 | )
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|Weighted average common shares outstanding |  |                          | 46,170  |   |      |   | 45,256   |      |  |   | 40,094  |  
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  
|Net loss per share                         |  | $                        | (0.60   | ) |      | $ | (3.28    | )    |  | $ | (1.53   | )
|                                           |  |                          |         |   |      |   |          |      |  |   |         |  



Because their effects
are anti-dilutive, diluted EPS excludes the following potential common shares (in thousands):



|                                     |  |                          |  |       |  |      
|------------------------------------ |  | ------------------------ |  | ----- |  | -----
|                                     |  | Years Ended December 31,
|                                     |  | 2003                     |  | 2002  |  | 2001 
|Shares held in escrow                |  |                         |  | 20    |  | 158  
|Options to purchase common stock     |  | 6,814                    |  | 6,379 |  | 6,128
|Unvested portion of restricted stock |  | 172                      |  | 200   |  | 241  
|Warrants                             |  |                         |  | 300   |  | 300  
|                                     |  |                          |  |       |  |      
|                                     |  | 6,986                    |  | 6,899 |  | 6,827
|                                     |  |                          |  |       |  |      



Comprehensive loss



The Company has adopted the provisions of FASB Statement
No. 130, Comprehensive Income (Statement 130). Statement 130 establishes standards for reporting and display of comprehensive loss and its components for general-purpose financial statements. Comprehensive loss is defined as
net loss plus all revenues, expenses, gains and losses from non-owner sources that are excluded from net loss in accordance with accounting principles generally accepted in the United States.



Reclassifications



Certain reclassifications, none of which affected net loss, have been made
to prior year amounts to conform to current year presentation.



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The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recent accounting pronouncements



In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretations No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other
parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period ending after March 15, 2004. The adoption of FIN 46 in fiscal 2003 did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.



|3. | Property and Equipment
|-- | ----------------------



Property and equipment, net, consist of the following (in thousands):



|                               |  |              |         |   |      |   |         |  
|------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                               |  | December 31, |        
|                               |  | 2003         |         |   | 2002 |  
|Computer equipment             |  | $            | 32,274  |   |      | $ | 28,102  |  
|Furniture and fixtures         |  |              | 6,615   |   |      |   | 5,661   |  
|Equipment                      |  |              | 4,744   |   |      |   | 4,915   |  
|Software                       |  |              | 26,964  |   |      |   | 21,496  |  
|Leasehold improvements         |  |              | 3,873   |   |      |   | 3,492   |  
|                               |  |              |         |   |      |   |         |  
|                               |  |              | 74,470  |   |      |   | 63,666  |  
|Less: Accumulated depreciation |  |              | (33,346 | ) |      |   | (21,359 | )
|                               |  |              |         |   |      |   |         |  
|                               |  | $            | 41,124  |   |      | $ | 42,307  |  
|                               |  |              |         |   |      |   |         |  



Depreciation expense
for the years ended December 31, 2003, 2002 and 2001 was $14.9 million, $11.1 million and $8.0 million, respectively. Included in property and equipment at December 31, 2003 and 2002 is equipment acquired under capital leases totaling approximately
$22.0 million and $17.3 million, and related accumulated depreciation of $10.4 million and $6.1 million, respectively. In connection with the Companys restructuring, the Company recognized an impairment of its property and equipment of $1.4
million for the year ended December 31, 2001. The Company performed an evaluation of its long-lived assets in accordance with FASB Statement No. 144 and determined that some of its property and equipment was impaired as of December 31, 2003 due to
the winding down of certain business lines. As a result, the Company recognized a restructuring and impairment charge of $4.0 million related to these assets in the fourth quarter of 2003. The assets will be written off in the first quarter of 2004.



|4. | Goodwill and Other Intangible Assets
|-- | ------------------------------------



Goodwill and other intangible assets, net, consist of the following (in thousands):



|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  
|------------------------------------------------------------------- |  | ------------ | ------ | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                    |  | December 31, |       
|                                                                    |  | 2003         |        |   | 2002 |   |          | 2001 | 
|Intangible assets not subject to amortization as of January 1, 2002 |  |              |        |   |      |   |          |      |  |   |         |  
|Goodwill                                                            |  | $            | 37,579 |   |      | $ | 188,162  |      |  | $ | 190,240 |  
|Less: Accumulated amortization                                      |  |              |       |   |      |   | (47,542  | )    |  |   | (48,620 | )
|Less: Impairment of goodwill                                        |  |              |       |   |      |   | (103,041 | )    |  |   |        |  
|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  
|                                                                    |  | $            | 37,579 |   |      | $ | 37,579   |      |  | $ | 141,620 |  
|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  
|Other intangible assets subject to amortization                     |  |              |        |   |      |   |          |      |  |   |         |  
|Customer lists                                                      |  | $            | 2,300  |   |      | $ | 38,946   |      |  | $ | 38,764  |  
|Core technology and intellectual property                           |  |              | 2,650  |   |      |   | 56,855   |      |  |   | 52,994  |  
|Consulting contracts                                                |  |              |       |   |      |   | 125      |      |  |   | 125     |  
|Software licenses                                                   |  |              |       |   |      |   | 2,983    |      |  |   | 3,188   |  
|Tradenames                                                          |  |              | 4,878  |   |      |   | 9,343    |      |  |   | 9,343   |  
|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  
|                                                                    |  |              | 9,828  |   |      |   | 108,252  |      |  |   | 104,414 |  
|Less: Accumulated amortization                                      |  |              | (3,788 | ) |      |   | (58,314  | )    |  |   | (34,332 | )
|Less: Impairment of other intangible assets                         |  |              |       |   |      |   | (33,540  | )    |  |   |        |  
|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  
|                                                                    |  | $            | 6,040  |   |      | $ | 16,398   |      |  | $ | 70,082  |  
|                                                                    |  |              |        |   |      |   |          |      |  |   |         |  



For the year ended
December 31, 2001, the Company recorded $4.1 million in goodwill in connection with its acquisition of Infotrust Company in April 2001 (Note 12). In connection with the Companys restructuring, the Company



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recognized an impairment of its goodwill relating to its acquisitions of Creative Business Solutions, Inc., Finserv Health Care Systems, Inc. and Healthcare
Media Enterprises, Inc. of $5.7 million for the year ended December 31, 2001.



The Company tested goodwill using the two-step process prescribed in Statement 142. The first required step is a screen for potential impairment, while the second step measures the amount of the impairment, if any.
The Company performed the first of the required impairment tests of goodwill as of March 31, 2002 and did not have an identification of potential impairment of its goodwill. After the fourth quarter of 2002 and before the issuance of the
Companys financial statements for the year ended December 31, 2002, the Companys market capitalization decreased to a value that was less than its book value prior to any impairment charges. That decrease led the Company to conclude that
there were sufficient indicators prior to December 31, 2002 to warrant an analysis of whether any portion of the Companys recorded goodwill was impaired in the fourth quarter of 2002. The Company performed a review of the value of goodwill as
of December 31, 2002 with the assistance of an independent valuation firm. Based on the valuation, which utilized a discounted cash flow valuation technique, the Company recorded a $97.5 million impairment charge net of related deferred tax
liabilities of $5.5 million. The Company performed its annual impairment test on March 31, 2003, and this test did not reveal any further indications of impairment.



Additionally, the Company performed a review of the value of its other intangible assets in accordance with FASB Statement
No. 144. Based on the Companys review, a $33.5 million impairment charge was recognized on the Companys intangible assets at December 31, 2002 as the value of undiscounted cash flows expected to be generated by these assets over their
useful lives did not exceed their carrying value as of December 31, 2002.



Amortization expense recorded for the years ended December 31, 2003, 2002 and 2001 related to the intangible assets that are subject to amortization was $10.9 million, $28.0 million and $26.5 million, respectively.
The estimated aggregate amortization expense related to these intangible assets for the next three fiscal years is as follows (in thousands):



|                                    |  |   |      
|----------------------------------- |  | - | -----
|For the Periods Ending December 31, |  |  
|2004                                |  | $ | 3,804
|2005                                |  |   | 2,221
|2006                                |  |   | 15   
|                                    |  |   |      
|Total                               |  | $ | 6,040
|                                    |  |   |      



|5. | Accrued Liabilities
|-- | -------------------



Accrued liabilities consist of the following (in thousands):



|                                         |  |              |        |      |   |       
|---------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                         |  | December 31,
|                                         |  | 2003         |        | 2002
|Accrued payroll and benefits             |  | $            | 12,176 |      | $ | 17,924
|Accrued professional and litigation fees |  |              | 2,352  |      |   | 2,034 
|Accrued acquisition expenses             |  |              | 138    |      |   | 446   
|Loss on contracts                        |  |              | 7,519  |      |   |      
|Restructuring and impairment charges     |  |              | 3,988  |      |   | 1,488 
|Other                                    |  |              | 7,206  |      |   | 8,882 
|                                         |  |              |        |      |   |       
|                                         |  | $            | 33,379 |      | $ | 30,774
|                                         |  |              |        |      |   |       



|6. | Notes Payable and Lines of Credit
|-- | ---------------------------------



In September 2000, the Company entered into a Loan and Security Agreement and Revolving Credit Note with a lending institution providing for a revolving
credit facility in the maximum principal amount of $15.0 million. The revolving credit facility is secured by substantially all of the Companys tangible and intangible property. In December 2002, the Loan and Security Agreement and Revolving
Credit Note were further amended to provide for the maximum principal amount of $20.0 million and an expiration date of December 2004. Borrowings under the revolving credit facility are limited to and shall not exceed 85% of qualified accounts, as
defined in the Loan and Security Agreement. The Company has the option to pay interest at prime plus 1% or a fixed rate per annum equal to LIBOR plus 3.25% payable in arrears on the first business day of each month. In addition, there is a monthly
0.0333% usage fee to the extent by which the maximum loan amount exceeds the average amount of the principal balance of the Revolving Loans during the preceding month. The usage fee is payable in arrears on the first business day of each successive
calendar month. The revolving credit facility contains



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



covenants to which the Company must adhere to during the terms of the agreement. These covenants require the Company to maintain tangible net worth, as
defined in the Loan and Security Agreement of at least $50.0 million, to generate recurring revenue and net earnings before interest, taxes, depreciation and amortization equal to at least 70% of the amount set forth in the Companys operating
plan, and to maintain a minimum cash balance of $35.0 million. In addition, these covenants prohibit the Company from paying any cash dividend, distributions and management fees as defined in the agreement and from incurring capital expenditures in
excess of 120% of the amount set forth in the Companys operating plan during any consecutive 6-month period. As of December 31, 2003, the Company had outstanding borrowings on the revolving credit facility of $20.0 million. As of December 31,
2003, the Company was in compliance with all of the covenants under the revolving credit facility, except for the covenant requiring the Company to maintain a minimum level of EBITDA for the fourth quarter of 2003 and the covenant limiting the
amount of its capital expenditures for the 6-month period ended December 31, 2003. The lender has granted a full waiver of the Companys failure to meet these covenants.



In September 2001, the Company executed a $6.0 million Secured Term Note facility with the same lending institution that is
providing the revolving credit facility. The Secured Term Note is secured by substantially all of the Companys tangible and intangible property. Monthly principal payments of $200,000 were due under the note on the first of each month.
Additionally, the note bore interest at prime plus 1% and was payable monthly in arrears. In December 2002, the Secured Term Note was amended to increase the total principal amount to $15.0 million. The Company has the option to pay interest at
prime plus 1% or a fixed rate per annum equal to LIBOR plus 3.25%, payable in arrears on the first business day of each quarter. As of December 31, 2003, the Company had outstanding borrowings on the Secured Term Note of $9.4 million. Quarterly
payments of $1.875 million are due on the last day of each calendar quarter through September 2004. The note matures in December 2004, at which time the final payment of $3.75 million will be due. The Secured Term Note contains the same covenants
set forth in the revolving credit facility documents. As of December 31, 2003, the Company was in compliance with all of the covenants under the Secured Term Note, except for the covenant requiring the Company to maintain a minimum level of EBITDA
for the fourth quarter of 2003 and the covenant limiting the amount of its capital expenditures for the 6-month period ended December 31, 2003. The lender has granted a full waiver of the Companys failure to meet these covenants.



In November 2001, the Company entered into an agreement with a financing
company for $3.1 million, specifically to finance certain equipment. Principal and interest is payable monthly and the note is due in November 2005. Interest accrues monthly at LIBOR plus 3.13%. As of December 31, 2003, there was a principal balance
of approximately $2.4 million remaining on the note.



Notes
payable and lines of credit consist of the following at December 31 (in thousands):



|                                                                                                                                                                                                                                                                                    |  |               |        |   |                 |   |        |      |  |   |         |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | --------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                                                                                                                                                                                                    |  | Notes Payable |        |   | Lines of Credit |  
|                                                                                                                                                                                                                                                                                    |  | 2003          |        |   | 2002            |   |        | 2003 |  |   | 2002    |  
|Revolving credit facility of $20.0 million, interest at prime plus 1% (5.00% at December 31, 2003) or a fixed rate per annum equal to LIBOR
plus 3.25% (4.40% at December 31, 2003) at borrowers option, payable monthly in arrears                                                |  | $             |       |   |                 | $ |       |      |  | $ | 20,000  |   |  | $ | 5,500  |  
|Note payable of $3.1 million issued for certain equipment, due in monthly installments through November 2005, interest at LIBOR rate plus
3.13% (4.30% at December 31, 2003)                                                                                                        |  |               | 2,446  |   |                 |   | 2,787  |      |  |   |        |   |  |   |       |  
|Secured Term Note of $15.0 million, due in quarterly installments through December 2004, interest at prime plus 1% (5.00% at December 31,
2003) or a fixed rate per annum equal to LIBOR plus 3.25% (4.40% at December 31, 2003) at Borrowers option, payable quarterly in arrears |  |               | 9,375  |   |                 |   | 15,000 |      |  |   |        |   |  |   |       |  
|Other                                                                                                                                                                                                                                                                               |  |               | 59     |   |                 |   | 140    |      |  |   |        |   |  |   | 155    |  
|                                                                                                                                                                                                                                                                                    |  |               |        |   |                 |   |        |      |  |   |         |   |  |   |        |  
|Total notes payable and lines of credit                                                                                                                                                                                                                                             |  |               | 11,880 |   |                 |   | 17,927 |      |  |   | 20,000  |   |  |   | 5,655  |  
|Less: Current portion                                                                                                                                                                                                                                                               |  |               | (9,742 | ) |                 |   | (7,937 | )    |  |   | (20,000 | ) |  |   | (5,655 | )
|                                                                                                                                                                                                                                                                                    |  |               |        |   |                 |   |        |      |  |   |         |   |  |   |        |  
|                                                                                                                                                                                                                                                                                    |  | $             | 2,138  |   |                 | $ | 9,990  |      |  | $ |        |   |  | $ |       |  
|                                                                                                                                                                                                                                                                                    |  |               |        |   |                 |   |        |      |  |   |         |   |  |   |        |  



Future principal
payments of notes payable at December 31, 2003 are as follows (in thousands):



|                                    |  |              |       |                |   |       
|----------------------------------- |  | ------------ | ----- | -------------- | - | ------
|For the Periods Ending December 31, |  | NotesPayable |       | Lines ofCredit
|2004                                |  | $            | 9,742 |                | $ | 20,000
|2005                                |  |              | 2,138 |                |   |      



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2003, the Company has outstanding six unused standby letters of credit in the
aggregate amount of $1.1 million which serve as security deposits for certain capital leases. The Company is required to maintain a cash balance equal to the outstanding letters of credit, which is classified as restricted cash on the balance sheet.
In addition, approximately $385,000 is held in a money market account in accordance with a lease purchase transaction agreement entered into on March 22, 2001, whereby lease receivables were sold to a leasing company. As a result of this
transaction, the Company was required to establish a credit reserve of 25% of the lease transaction purchase price in a special deposit account. The funds are being held as collateral until all payments on these lease receivables are paid in full to
the leasing company. This amount is also classified as restricted cash on the balance sheet.



|7. | Related Party Transactions
|-- | --------------------------



In April 1998, the Company issued a note receivable to an officer of the Company. The note accrued interest at 6.5% per annum. The principal and accrued
interest was forgiven annually over a four-year period beginning April 30, 1999, provided the officer was an employee of the Company. In 2002, the remaining balance of $25,000 plus accrued interest was written-off.



In June 1999, the Company entered into an agreement with Garte &
Associates, Inc., pursuant to which the Company would pay Garte & Associates, Inc. an investment banking fee for certain acquisitions. Harvey Garte, who was previously the Companys Vice President of Corporate Development until June 2003,
is the sole stockholder of Garte & Associates, Inc. From 1999 through 2002, the Company paid a total of $1.3 million in connection with the Companys acquisitions, of which $262,000 was paid in 2001 in connection with the Companys
acquisition of Infotrust Company, and $164,000 paid in 2002 in connection with the Companys acquisition of ChannelPoint, Inc. assets.



In November 1999, in connection with the acquisition of Novalis Corporation, the Company received notes receivable in the aggregate amount of $475,000
from the eight former stockholders of Novalis. The notes represented the former stockholders agreement to repay all legal, financial and accounting fees and expenses incurred in connection with the acquisition. The notes accrued interest at
8.0% per annum and were payable in full one year from the date of acquisition. As of December 31, 2003, the remaining balance on the notes was $111,000, consisting of principal and interest, for which an allowance was recorded for the full amount of
the receivable.



In October 2000, in connection with the
acquisition of Erisco Managed Care Technologies, Inc., the Company entered into a software license agreement with IMS Health Incorporated (IMS Health) to which IMS Health would pay three annual installments of $1.0 million each for a
total of $3.0 million beginning October 2000. As of December 31, 2003, the total of $3.0 million has been received and recognized as revenue. Approximately $1.0 million, $1.0 million, $833,000, and $167,000 are included in recurring revenue in 2003,
2002, 2001, and 2000, respectively. As of December 31, 2003, IMS Health beneficially owned 12,142,857 shares of the Companys common stock representing approximately 26% of the total shares of the Companys common stock outstanding of
46,869,600.



In December 2000, in connection with the
acquisition of Resource Information Management Systems, Inc. (RIMS), the Company acquired a facility lease agreement with Mill Street Properties with a future commitment of $3.1 million, for the rental of the 500 Technology Drive,
Naperville, IL facility. Thomas Heimsoth and Terry Kirch, co-founders of RIMS, are also co-owners of Mill Street Properties. Effective December 10, 2003, the property was sold to unrelated third parties.



|8. | Commitments and Contingencies
|-- | -----------------------------



The Company leases office space and equipment under noncancelable operating and capital leases, respectively, with various expiration dates through 2009.
Capital lease obligations are collateralized by the equipment subject to the leases. The Company is responsible for maintenance costs and property taxes on certain of the operating leases. Rent expense for the years ended December 31, 2003, 2002 and
2001 was $8.0 million, $8.1 million and $8.2 million, respectively. These amounts are net of sublease income of $178,000, $136,000 and $172,000, respectively.



Future minimum lease payments under noncancelable operating and capital leases at December 31, 2003 are as follows (in thousands):



|                                    |  |                |        |   |                  |   |       
|----------------------------------- |  | -------------- | ------ | - | ---------------- | - | ------
|For the Periods Ending December 31, |  | Capital Leases |        |   | Operating Leases
|2004                                |  | $              | 6,008  |   |                  | $ | 10,545
|2005                                |  |                | 4,127  |   |                  |   | 9,229 
|2006                                |  |                | 1,250  |   |                  |   | 7,336 
|2007                                |  |                |       |   |                  |   | 5,598 
|2008                                |  |                |       |   |                  |   | 5,307 
|Thereafter                          |  |                |       |   |                  |   | 13,220
|                                    |  |                |        |   |                  |   |       
|Total minimum lease payments        |  |                | 11,385 |   |                  | $ | 51,235
|                                    |  |                |        |   |                  |   |       
|Less: interest                      |  |                | (1,190 | ) |                  |   |       
|Less: current portion               |  |                | (5,178 | ) |                  |   |       
|                                    |  |                |        |   |                  |   |       
|                                    |  | $              | 5,017  |   |                  |   |       
|                                    |  |                |        |   |                  |   |       



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



From time to time, the Company is involved in legal proceedings, claims, and litigation arising in
the ordinary course of business. Management does not believe the outcome of these matters will have a material effect on the Companys consolidated financial condition, consolidated results of operations or cash flows.



|9. | Stockholders Equity
|-- | --------------------



Common stock



In June 2001, the Company completed a secondary offering of 5,520,000 shares of common stock, at a price of $9.25 per share, that raised approximately
$47.6 million, net of underwriting discounts, commissions and other offering costs. In connection with the offering, an additional 480,000 shares of common stock of the Company were sold by selling stockholders at $9.25 per share, for which the
Company received no proceeds.



In July 2001, in connection with
the exercise of the underwriters over-allotment option relating to the secondary offering, the Company issued 828,000 shares of common stock, at a price of $9.25 per share, that raised approximately $7.2 million, net of underwriting discounts,
commissions and other offering costs. In connection with the exercise of the underwriters over-allotment option, an additional 72,000 shares of common stock of the Company were sold by selling stockholders at $9.25 per share, for which the
Company received no proceeds.



Common stockholders are entitled
to dividends as and when declared by the Board of Directors subject to the prior rights of preferred stockholders. The holders of each share of common stock are entitled to one vote.



Stock option plans



In May 1998, the Company adopted the 1998 Stock Option Plan (the Plan) under which the Board of Directors or the Compensation Committee may
issue incentive and non-qualified stock options to employees, directors and consultants. The Compensation Committee has the authority to determine to whom options will be granted, the number of shares and the term and exercise price. Options are to
be granted at an exercise price not less than fair market value for incentive stock options or 85% of fair market value for non-qualified stock options. For individuals holding more than 10% of the voting rights of all classes of stock, the exercise
price of incentive stock options will not be less than 110% of fair market value. The options generally vest and become exercisable annually at a rate of 25% of the option grant over a four-year period. The term of the options will be no longer than
five years for incentive stock options for which the grantee owns greater than 10% of the voting power of all classes of stock and no longer than ten years for all other options.



On November 30, 2000, in connection with the Resource Information Management Systems, Inc. (RIMS) acquisition,
the Company adopted the RIMS Stock Option Plan based primarily upon RIMS existing non-statutory stock option plan. Unless previously terminated by the stockholders, the Plan shall terminate at the close of business on January 1, 2009, and no
options shall be granted under it thereafter. Such termination shall not affect any option previously granted. Upon a business combination by the Company with any corporation or other entity, the Company may provide written notice to optionees that
options shall terminate on a date not less than 14 days after the date of such notice unless theretofore exercised. In connection with such notice, the Company may, in its discretion, accelerate or waive any deferred exercise period.



At December 31, 2003, the Company had reserved approximately 9,917,711 shares
of common stock for issuance upon exercise of stock options and shares issuable under its stock option plans.



F-17



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Activity under the two plans was as follows (in thousands, except per share data):



|                            |  |                          |                 |  |                     |                |                                 |               |  |   |      
|--------------------------- |  | ------------------------ | --------------- |  | ------------------- | -------------- | ------------------------------- | ------------- |  | - | -----
|                            |  | SharesAvailablefor Grant |                 |  | Outstanding Options |                | Weighted Average Exercise Price
|                            |  |                          | Number ofShares |  |                     | Exercise Price |                                
|Balances, December 31, 2000 |  | 1,845                    |                 |  | 5,170               |                |                                 | $0.25$63.25  |  | $ | 11.24
|Additional options reserved |  | 1,800                    |                 |  |                    |                |                                 |               |  |   |      
|Granted                     |  | (2,345                   | )               |  | 2,345               |                |                                 | 9.25  13.08  |  |   | 11.47
|Exercised                   |  |                         |                 |  | (510                | )              |                                 | 0.25    6.50 |  |   | 1.28 
|Cancelled                   |  | 877                      |                 |  | (877                | )              |                                 | 0.25  57.50  |  |   | 15.45
|                            |  |                          |                 |  |                     |                |                                 |               |  |   |      
|Balances, December 31, 2001 |  | 2,177                    |                 |  | 6,128               |                |                                 | 0.25  63.25  |  |   | 11.56
|                            |  |                          |                 | 
|Additional options reserved |  | 800                      |                 |  |                    |                |                                 |               |  |   |      
|Granted                     |  | (1,156                   | )               |  | 1,156               |                |                                 | 4.95  15.00  |  |   | 11.96
|Exercised                   |  |                         |                 |  | (323                | )              |                                 | 0.25  12.81  |  |   | 0.82 
|Cancelled                   |  | 582                      |                 |  | (582                | )              |                                 | 0.25  57.50  |  |   | 14.71
|                            |  |                          |                 |  |                     |                |                                 |               |  |   |      
|Balances, December 31, 2002 |  | 2,403                    |                 |  | 6,379               |                |                                 | 0.25  63.25  |  |   | 11.89
|Additional options reserved |  | 1,200                    |                 |  |                    |                |                                 |               |  |   |      
|Granted                     |  | (1,784                   | )               |  | 1,784               |                |                                 | 3.34    7.77 |  |   | 3.73 
|Exercised                   |  |                         |                 |  | (406                | )              |                                 | 0.25    6.50 |  |   | 1.19 
|Cancelled                   |  | 942                      |                 |  | (942                | )              |                                 | 1.00  57.50  |  |   | 12.87
|                            |  |                          |                 |  |                     |                |                                 |               |  |   |      
|Balances, December 31, 2003 |  | 2,761                    |                 |  | 6,815               |                |                                 | $0.25$63.25  |  | $ | 10.26
|                            |  |                          |                 |  |                     |                |                                 |               |  |   |      



The options
outstanding and currently exercisable by exercise price at December 31, 2003 are as follows (in thousands, except per share data):



| |  |  |  |  |  |                                          |  |                                         |  |  |  |  |  | 
| |  |  |  |  |  | ---------------------------------------- |  | --------------------------------------- |  |  |  |  |  | 
| |  |  |  |  |  | Options Outstanding at December 31, 2003 |  | Options Exercisableat December 31, 2003

|                        |  |                 |  |                                                  |  |                               |       |                 |       |                               |   |      
|----------------------- |  | --------------- |  | ------------------------------------------------ |  | ----------------------------- | ----- | --------------- | ----- | ----------------------------- | - | -----
|Range of Exercise Price |  | Number ofShares |  | Weighted AverageRemainingContractual Life(Years) |  | WeightedAverageExercise Price |       | Number ofShares |       | WeightedAverageExercise Price
|$0.25-$2.60             |  | 448             |  | 4.90                                             |  | $                             | 0.64  |                 | 448   |                               | $ | 0.64 
|$3.34-$4.11             |  | 1,507           |  | 9.14                                             |  |                               | 3.57  |                 | 360   |                               |   | 3.49 
|$4.40-$6.50             |  | 367             |  | 6.60                                             |  |                               | 6.04  |                 | 282   |                               |   | 6.40 
|$7.02-$7.77             |  | 299             |  | 7.09                                             |  |                               | 7.13  |                 | 212   |                               |   | 7.05 
|$9.25-$12.50            |  | 2,279           |  | 7.64                                             |  |                               | 11.53 |                 | 826   |                               |   | 11.44
|$12.69-$15.25           |  | 1,643           |  | 6.78                                             |  |                               | 14.69 |                 | 1,193 |                               |   | 14.75
|$17.81-$20.25           |  | 135             |  | 6.18                                             |  |                               | 19.62 |                 | 126   |                               |   | 19.74
|$35.44-$38.98           |  | 56              |  | 6.07                                             |  |                               | 36.73 |                 | 42    |                               |   | 36.73
|$57.50-$63.25           |  | 81              |  | 6.13                                             |  |                               | 58.91 |                 | 39    |                               |   | 57.50
|                        |  |                 |  |                                                  |  |                               |       |                 |       |                               |   |      
|                        |  | 6,815           |  | 7.45                                             |  |                               | 10.26 |                 | 3,528 |                               |   | 10.81
|                        |  |                 |  |                                                  |  |                               |       |                 |       |                               |   |      



At December 31, 2003,
2002 and 2001, options exercisable under the plans were 3,527,773, 2,688,938 and 1,610,493, respectively.



Employee Stock Purchase Plan



In July 1999, the Board of Directors adopted the Employee Stock Purchase Plan (Stock Purchase Plan), which is intended to qualify under
Section 423 of the Internal Revenue Code. A total of 600,000 shares of common stock were reserved for issuance under the original Stock Purchase Plan. The Stock Purchase Plan was amended on May 14, 2003, increasing the number of common stock
reserved for issuance to 1,100,000 shares, of which 342,593 remain available for issuance at December 31, 2003. Employees are eligible to participate once they have been employed for at least 90 days before the offering period and are employed for
at least 20 hours per week. Employees who own more than 5% of the Companys outstanding stock may not participate. The Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed the
lesser of 15% of an employees compensation or $25,000.



The Stock Purchase Plan was implemented by six-month offerings with purchases occurring at six-month intervals commencing January 1, 2000. The purchase price of the common stock under the Stock Purchase Plan will be equal to 85%



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of the fair market value per share of common stock on either the start date of the offering period or on the purchase date, whichever is less. The Stock
Purchase Plan will terminate in 2009, unless terminated sooner by the Board of Directors. Shares issued under the Stock Purchase Plan in 2003, 2002, and 2001 were 269,516, 256,333, and 170,034, at a weighted average purchase price of $5.05, $6.10,
and $7.84 per share, respectively.



Deferred stock
compensation



The Company has recorded a total of $7.8
million of deferred stock compensation related to stock options granted to employees, where the exercise price was lower than the fair market value of the Companys common stock on the date of the grant. Additionally, the Company has recorded a
total of $7.2 million of deferred stock compensation for the issuance of restricted stock to certain employees related to acquisitions and to certain employees to encourage continued service with the Company  see Restricted Stock.
The Company amortizes the deferred stock compensation charge over the vesting period of the underlying stock option or restricted stock awarded. Amortization of deferred stock compensation expense was $1.8 million, $3.0 million and $3.0 million in
2003, 2002, and 2001, respectively.



Warrants



In September 2000, the Company issued warrants to
purchase 300,000 shares of the Companys common stock, at an exercise price of $13.50 per share and, in return, received warrants to purchase 100,000 shares of common stock of Maxicare Health Plans, Inc. (Maxicare) at an exercise
price of $1.50 per share, in connection with consummation of an Application Services Provider (hosted) agreement. The warrants were immediately exercisable upon issuance and were originally expected to expire in 2005. The values of the warrants
issued and received were determined using a Black Scholes option pricing model with the following assumptions:



|                        |  |                |         |   |                  |   |         |  
|----------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                        |  | WarrantsIssued |         |   | WarrantsReceived |  
|Term                    |  |                | 5 years |   |                  |   | 5 years |  
|Expected dividends      |  |                |        |   |                  |   |        |  
|Exercise price          |  | $              | 13.50   |   |                  | $ | 1.50    |  
|Grant date stock price  |  | $              | 12.06   |   |                  | $ | 1.31    |  
|Expected volatility     |  |                | 50      | % |                  |   | 53      | %
|Risk-free interest rate |  |                | 5.91    | % |                  |   | 5.91    | %



The $1,716,000 net
value of the Maxicare warrants exchanged was being amortized on a straight-line basis over the agreement term as a reduction of recurring revenue. A total of $323,000 was charged against recurring revenue as of December 31, 2001. As of December 31,
2001, it was determined that the Maxicare warrants no longer had value and, therefore, the net balance of $1.4 million at December 31, 2001 was expensed as restructuring and impairment charges.





As a result of the Maxicare litigation settlement in June 2003, the warrants issued to purchase 300,000 shares of the Companys common stock were immediately cancelled.



Shareholder rights plan



In September 2000, the Companys Board of Directors adopted a shareholder rights plan. The plan provides for a dividend distribution of one preferred
stock purchase right (a Right) for each outstanding share of common stock, distributed to stockholders of record on or after October 19, 2000. The Rights will be exercisable only if a person or group acquires 15% or more of the
Companys common stock (an Acquiring Person) or announces a tender offer for 15% or more of the common stock. Each Right will entitle stockholders to buy one one-hundredth of a share of newly created Series A Junior Participating
Preferred Stock, par value $0.001 per share, of the Company at an initial exercise price of $75 per Right, subject to adjustment from time to time. However, if any person becomes an Acquiring Person, each Right will then entitle its holder (other
than the Acquiring Person) to purchase at the exercise price, common stock of the Company having a market value at that time of twice the Rights exercise price. If the Company is later acquired in a merger or similar transaction, all holders
of Rights (other than the Acquiring Person) may, for $75.00, purchase shares of the acquiring corporation with a market value of $150.00. Rights held by the Acquiring Person will become void. The Rights Plan excludes from its operation IMS Health
Incorporated (Note 12), and as a result, their holdings will not cause the Rights to become exercisable or nonredeemable or trigger the other features of the Rights. The Rights will expire on October 2, 2010, unless earlier redeemed by the Board at
$0.001 per Right.



F-19



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The holders of Series A Junior Participating Preferred Stock in preference to the holders of common
stock, shall be entitled to receive, when, as and if declared by the Board of Directors, quarterly dividends payable in cash in an amount per share equal to 100 times the aggregate per share amount of all cash dividends or non-cash dividends other
than a dividend payable in share of common stock.



Each share
of Series A Junior Participating Preferred Stock shall entitle its holder to 100 votes.



Restricted stock



In
May 2000, the Company issued 13,700 shares of restricted stock pursuant to restricted stock agreements with non-employees. In addition, the Company recorded a $164,000 charge to deferred stock compensation. Pursuant to the agreements, the Company
shall cancel any unvested shares of common stock upon termination of services. Shares subject to the agreements vest over a four-year period, in equal annual installments, commencing on the first anniversary of the agreement date. The fair value of
the restricted stock is determined based on a Black-Scholes pricing model at each reporting period. As of December 31, 2003, 6,375 shares had vested and the Company had cancelled 5,850 shares of unvested common stock upon termination of services.
The unvested shares of common stock vest immediately prior to a change in control of the Company unless the Board of Directors determines otherwise.



In October 2000, in connection with the acquisition of Erisco Managed Care Technologies, Inc. (Erisco), the Company issued 231,404 shares of
restricted stock to certain employees of Erisco. In addition, the Company recorded a $3.5 million charge to deferred stock compensation. Of the 231,404 shares, 115,702 of the shares subject to the agreement vest over a three-year period, in equal
annual installments, commencing on the first anniversary of the agreement date, as long as the individual remains employed by the Company. The remaining 115,702 shares vest over a three-year period commencing on December 31, 2001 if certain revenue
and operating income goals are achieved for the prior year. As of December 31, 2003, all 231,404 shares had vested.



In December 2000, in connection with the acquisition of Resource Information Management Systems, Inc. (RIMS), the Company issued 82,553 shares
of restricted stock to certain employees of RIMS. In addition, the Company recorded a $1.4 million charge to deferred stock compensation. The shares subject to the agreement vest over a three-year period, in equal annual installments, commencing on
the first anniversary of the agreement date, as long as the individual remains employed by the Company. As of December 31, 2003, 75,634 shares had vested and the Company had cancelled 6,919 shares of unvested common stock upon termination of
services.



In February 2001, in connection with performance
bonuses, the Company issued 53,117 restricted shares of common stock to three employees. In addition, the Company recorded a $647,000 charge to deferred stock compensation. The shares subject to the agreement vest over a two-year period, in equal
installments, commencing on December 31, 2001, as long as the individual remains employed by the Company. The unvested shares of common stock vest immediately prior to a change in control of the Company unless the Board of Directors determines
otherwise. As of December 31, 2002, all 53,117 shares had vested.



In January 2002, the Company issued 76,220 shares of restricted stock to an employee to encourage continued service with the Company. In addition, the Company recorded a $972,000 charge to deferred stock compensation. The shares subject to
the agreement vest over a four-year period, in equal installments, commencing on January 1, 2003, as long as the individual remains employed by the Company. In the event the employee is terminated by the Company without cause prior to the second
anniversary date of the agreement, one-half of the shares shall become fully vested upon the termination date. As of December 31, 2003, 19,055 shares had vested. The unvested shares of common stock vest immediately prior to a change in control of
the Company unless the Board of Directors determines otherwise.



In April 2002, the Company issued 6,000 shares of restricted stock to an employee to encourage continued service with the Company. In addition, the Company recorded a $68,000 charge to deferred stock compensation. The shares subject to the
agreement vest over a three-year period, in equal installments, commencing on April 18, 2003, as long as the individual remains employed by the Company. As of December 31, 2003, 2,000 shares had vested. The unvested shares of common stock vest
immediately prior to a change in control of the Company unless the Board of Directors determines otherwise.





In September 2002, the Company issued 12,000 shares of restricted stock to an employee to encourage continued service with
the Company. In addition, the Company recorded a $56,000 charge to deferred stock compensation. The shares subject to the agreement vest over a four-year period, in equal installments, commencing on September 26, 2003, as long as the individual
remains employed by the Company. As of December 31, 2003, 3,000 shares had vested. The unvested shares of common stock vest immediately prior to a change in control of the Company unless the Board of Directors determines otherwise.



F-20



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In February 2003, the Company issued 100,000 shares of restricted stock to an employee to encourage
continued service with the Company. In addition, the Company recorded a $388,000 charge to deferred stock compensation. The shares subject to the agreement vest over a four-year period, in equal installments, commencing on February 27, 2004, as long
as the individual remains employed by the Company. The unvested shares of common stock vest immediately prior to a change in control of the Company unless the Board of Directors determines otherwise.



|10. | Income Taxes
|--- | ------------



The components of the provision (benefit) from income taxes are as follows (in thousands):



|                                          |  |                          |       |      |   |        |      |  |   |         |  
|----------------------------------------- |  | ------------------------ | ----- | ---- | - | ------ | ---- |  | - | ------- | -
|                                          |  | Years Ended December 31, |      
|                                          |  | 2003                     |       | 2002 |   |        | 2001 | 
|Current:                                  |  |                          |       |      |   |        |      |  |   |         |  
|Federal                                   |  | $                        |      |      | $ | (555   | )    |  | $ | 107     |  
|State                                     |  |                          | 1,124 |      |   | 1,452  |      |  |   | 89      |  
|                                          |  |                          |       |      |   |        |      |  |   |         |  
|                                          |  |                          | 1,124 |      |   | 897    |      |  |   | 196     |  
|                                          |  |                          |       |      |   |        |      |  |   |         |  
|Deferred:                                 |  |                          |       |      |   |        |      |  |   |         |  
|Federal                                   |  |                          |      |      |   | 395    |      |  |   | (14,152 | )
|State                                     |  |                          |      |      |   | (1,042 | )    |  |   | (2,219  | )
|                                          |  |                          |       |      |   |        |      |  |   |         |  
|                                          |  |                          |      |      |   | (647   | )    |  |   | (16,371 | )
|                                          |  |                          |       |      |   |        |      |  |   |         |  
|Provision for (benefit from) income taxes |  | $                        | 1,124 |      | $ | 250    |      |  | $ | (16,175 | )
|                                          |  |                          |       |      |   |        |      |  |   |         |  



Deferred income taxes
reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax
liabilities and assets as of December 31, 2003 and 2002, are as follows (in thousands):



|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|-------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ------- | ------- |  | - | --------- | - |  | - | ------- | -
|                                                   |  | December 31, 2003 |        |   | December 31, 2002 |  
|                                                   |  | Current           |        |   | Long Term         |   |         | Current |  |   | Long Term |  
|Deferred tax assets:                               |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Reserves and accruals                              |  | $                 | 9,399  |   |                   | $ | 2,831   |         |  | $ | 6,529     |   |  | $ |        |  
|Deferred compensation                              |  |                   |       |   |                   |   | 322     |         |  |   |          |   |  |   | 323     |  
|Other                                              |  |                   | 129    |   |                   |   | 187     |         |  |   | 268       |   |  |   | 553     |  
|Net operating losses and capital losses            |  |                   |       |   |                   |   | 30,111  |         |  |   |          |   |  |   | 22,111  |  
|Tax credits                                        |  |                   |       |   |                   |   | 1,009   |         |  |   |          |   |  |   | 1,009   |  
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Deferred tax assets                                |  |                   | 9,528  |   |                   |   | 34,460  |         |  |   | 6,797     |   |  |   | 23,996  |  
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Deferred tax liabilities:                          |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Deferred revenue                                   |  |                   | (2,688 | ) |                   |   |        |         |  |   | (627      | ) |  |   |        |  
|Leases                                             |  |                   |       |   |                   |   |        |         |  |   |          |   |  |   | (6      | )
|Depreciation                                       |  |                   |       |   |                   |   | (3,365  | )       |  |   |          |   |  |   | (2,610  | )
|Capitalized software                               |  |                   |       |   |                   |   | (10,981 | )       |  |   |          |   |  |   | (7,122  | )
|Acquired intangible assets                         |  |                   |       |   |                   |   | (417    | )       |  |   |          |   |  |   | (3,282  | )
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Deferred tax liabilities                           |  |                   | (2,688 | ) |                   |   | (14,763 | )       |  |   | (627      | ) |  |   | (13,020 | )
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Net deferred tax assets before valuation allowance |  |                   | 6,840  |   |                   |   | 19,697  |         |  |   | 6,170     |   |  |   | 10,976  |  
|Valuation allowance                                |  |                   | (6,840 | ) |                   |   | (19,697 | )       |  |   | (6,170    | ) |  |   | (10,976 | )
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  
|Net deferred taxes                                 |  | $                 |       |   |                   | $ |        |         |  | $ |          |   |  | $ |        |  
|                                                   |  |                   |        |   |                   |   |         |         |  |   |           |   |  |   |         |  



The valuation
allowance on the deferred tax assets was $26.5 million and $17.1 million as of December 31, 2003 and 2002, respectively. The valuation allowance increased during 2003 due to the Companys continued operating losses. If and when the Company
decreases the valuation allowance on its deferred tax asset, approximately $25.4 million will be allocated to a tax benefit with the remaining $1.1 million as an adjustment to equity for the benefit of employee stock option exercises.



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys effective tax rate differs from the statutory rate as shown in the following
schedule (in thousands):



|                                            |  |                          |        |   |      |   |         |      |  |   |         |  
|------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                            |  | Years Ended December 31, |       
|                                            |  | 2003                     |        |   | 2002 |   |         | 2001 | 
|Tax benefit at federal statutory rate       |  | $                        | (8,959 | ) |      | $ | (50,358 | )    |  | $ | (26,290 | )
|State income taxes, net of federal benefit  |  |                          | 742    |   |      |   | 271     |      |  |   | (1,529  | )
|Change in valuation allowance               |  |                          | 9,305  |   |      |   | 15,712  |      |  |   |        |  
|Goodwill amortization                       |  |                          |       |   |      |   |        |      |  |   | 10,190  |  
|Goodwill impairment                         |  |                          |       |   |      |   | 33,142  |      |  |   | 1,824   |  
|Amortization of deferred stock compensation |  |                          | (127   | ) |      |   | 464     |      |  |   | 1,637   |  
|Tax credits                                 |  |                          |       |   |      |   | 910     |      |  |   | (1,740  | )
|Other                                       |  |                          |       |   |      |   | (394    | )    |  |   |        |  
|Nondeductible items and other               |  |                          | 163    |   |      |   | 503     |      |  |   | (267    | )
|                                            |  |                          |        |   |      |   |         |      |  |   |         |  
|                                            |  | $                        | 1,124  |   |      | $ | 250     |      |  | $ | (16,175 | )
|                                            |  |                          |        |   |      |   |         |      |  |   |         |  



Federal tax loss
carryforwards at December 31, 2003 are approximately $81.1 million. The federal tax loss carryforwards will start to expire beginning in 2010. State tax loss carryforwards at December 31, 2003 are approximately $58.5 million. The state tax loss
carryforwards will start to expire beginning in 2004.



In 2002,
the Company was notified by the Internal Revenue Service (IRS) that the IRS plans to examine the Companys September 30, 2000 federal tax return. During 2003, the IRS completed its examination which resulted in no changes for the
period under review.



|11. | Employee Benefit Plan
|--- | ---------------------



In January 1998, the Company adopted a defined contribution plan (the 401(k) Plan) which qualifies under Section 401(k) of the Internal
Revenue Code of 1986. Employees are eligible to participate the first day of the month following 30 days of employment. Eligible employees may make voluntary contributions to the 401(k) Plan of up to 25% of their annual compensation, not to exceed
the statutory limit.



Effective January 1, 2001, the Company
provides a matching contribution to the 401(k) Plan in the amount of $0.50 for each $1.00 contributed to the Plan, up to 6% of pay. Employees must be employed on the last day of the Plan Year (December 31) to receive the match. The match has a
three-year vesting period after which the employee will be 100% vested. The Company contributed $2.0 million and $2.1 million to the 401(k) Plan in 2002 and 2003, respectively. The Company did not make contributions to the 401(k) plan in 2001.



|12. | Acquisition
|--- | -----------



Infotrust Company



In April 2001, the Company acquired all of the issued and outstanding shares of Infotrust Company (Infotrust) from Trustco Holdings, Inc.
Infotrust served healthcare payers, providing hosted applications services and outsourcing of essential administrative processes. The purchase price of approximately $15.4 million consisted of 923,077 shares of common stock with a value of $13.96
per share, assumed liabilities of $1.9 million, which included $1.6 million of deferred tax liability resulting from the difference between the book and tax basis of the intangible assets arising as a result of the acquisition, and acquisition costs
of $647,000. Of the 923,077 shares of common stock which have been issued in connection with this acquisition, 138,462 shares of the common stock were held in escrow to indeminify the Company for any breach of warranty, any inaccuracy of any
representation made by the seller or any breach of any covenant in the purchase agreement, and were subsequently released.



The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair market values on the acquisition date. The excess of the purchase price over the estimated fair market value of the assets purchased and liabilities assumed was $8.4
million and was allocated to goodwill and intangible assets consisting of assembled workforce, core technology, customer lists, consulting contracts and trademarks.



A deferred tax adjustment relating to the deductible portion of the acquisition accrual was recorded in 2002 resulting in a
decrease in goodwill of $143,900. In addition, the remaining balance of the acquisition accrual was reversed resulting in a decrease to goodwill of $195,300. The purchase price was reduced by a total of $339,200 to approximately $15.1 million. As



F-22



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



a result, the excess of the purchase price over the estimated fair values of the assets purchased and liabilities assumed was reduced to $4.1 million.



The purchase price allocation for the acquisition described
above was based on the estimated fair value of the assets, on the date of purchase as follows (in thousands):



|                                                       |  |   |       
|------------------------------------------------------ |  | - | ------
|Total current assets                                   |  | $ | 3,285 
|Property, plant, equipment and other noncurrent assets |  |   | 3,725 
|Goodwill                                               |  |   | 4,074 
|Other intangible assets                                |  |   | 4,002 
|Acquired in-process technology                         |  |   |      
|                                                       |  |   |       
|Total purchase price                                   |  | $ | 15,086
|                                                       |  |   |       



|13. | Restructuring and Impairment Charges
|--- | ------------------------------------



In December 2001, the Company initiated a number of restructuring actions focused on eliminating redundancies, streamlining operations and improving
overall financial results. These initiatives include workforce reductions, office closures, discontinuation of certain business lines and related asset write-offs.



In December 2001, the Company announced a planned workforce reduction in Los Angeles, California; Novato, California;
Baltimore, Maryland; Little Rock, Arkansas; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Albany, New York; Glastonbury, Connecticut; and Trivandrum, India. This workforce reduction was expected to affect 168 employees. Severance and other
costs related to this workforce reduction totaled $1.7 million, of which $1.0 million was included in restructuring and impairment charges in 2001. A total of $651,000 in severance and other costs were charged to restructuring and impairment charges
in 2002. Such workforce reductions have been completed as of the fourth quarter of 2002.



Facility closures include the closure of the facilities in Novato, California; Birmingham, Alabama; Provo, Utah; Salt Lake City, Utah; Westmont, Illinois; Naperville, Illinois; Louisville, Kentucky; and Trivandrum,
India. These closures have been completed as of the fourth quarter 2002.



The following table summarizes the activities in the Companys restructuring reserves as of December 31, 2003 (in thousands):



|                                                 |  |                                |        |   |                   |   |        |       |  |   |        |  
|------------------------------------------------ |  | ------------------------------ | ------ | - | ----------------- | - | ------ | ----- |  | - | ------ | -
|                                                 |  | Costs for Terminated Employees |        |   | Facility Closures |   |        | Total | 
|Restructuring charges in 2001                    |  | $                              | 959    |   |                   | $ | 2,419  |       |  | $ | 3,378  |  
|Restructuring charges in 2002                    |  |                                | 651    |   |                   |   |       |       |  |   | 651    |  
|Restructuring charges in 2003                    |  |                                |       |   |                   |   | (280   | )     |  |   | (280   | )
|Cash payments in 2001                            |  |                                | (91    | ) |                   |   |       |       |  |   | (91    | )
|Cash payments in 2002                            |  |                                | (1,519 | ) |                   |   | (1,037 | )     |  |   | (2,556 | )
|Cash payments in 2003                            |  |                                |       |   |                   |   | (917   | )     |  |   | (917   | )
|                                                 |  |                                |        |   |                   |   |        |       |  |   |        |  
|Accrued restructuring charges, December 31, 2003 |  | $                              |       |   |                   | $ | 185    |       |  | $ | 185    |  
|                                                 |  |                                |        |   |                   |   |        |       |  |   |        |  



In the fourth quarter
of 2003, approximately $280,000 of restructuring expense was reversed related to the lease settlements for the facility closures in Naperville, Illinois and Westmont, Illinois, which were previously accrued for in the fiscal year 2001. The remaining
accrued restructuring balance of $185,000 as of December 31, 2003, represents the Companys future commitments related to its facility closures as noted above.



In addition to the workforce reductions and facility closures described above, the Company has discontinued certain business
lines and has written-off assets associated with these business lines. Specifically, the Company has discontinued certain website and software development activities and its hospital billing and accounts receivable business line and has written off
the assets associated with these activities. The Company also wrote off assets in December 2001 associated with the closure of facilities. The following table summarizes the Companys write-off of assets in December 2001 (in thousands):



|                                          |  |                     |     |                             |   |          |  |              |       |       |   |       |  |   |      
|----------------------------------------- |  | ------------------- | --- | --------------------------- | - | -------- |  | ------------ | ----- | ----- | - | ----- |  | - | -----
|                                          |  | Accounts Receivable |     | Property and Equipment, net |   | Goodwill |  | Other Assets |       | Total
|Discontinuation of certain business lines |  | $                   | 302 |                             | $ | 933      |  | $            | 5,716 |       | $ | 1,389 |  | $ | 8,340
|Office closures                           |  |                     |    |                             |   | 422      |  |              |      |       |   |      |  |   | 422  
|                                          |  |                     |     |                             |   |          |  |              |       |       |   |       |  |   |      
|Total                                     |  | $                   | 302 |                             | $ | 1,355    |  | $            | 5,716 |       | $ | 1,389 |  | $ | 8,762
|                                          |  |                     |     |                             |   |          |  |              |       |       |   |       |  |   |      



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As a result of the Companys decision in the fourth quarter of 2003 to wind-down its outsourcing
services to physician groups and to discontinue its outsourcing services to certain non-Facets®payer customers, the Company estimated that its future net cash flows from the assets used in these businesses will not recover their net book value. Accordingly, a total charge of $4.0 million was taken as a restructuring and
impairment charge in the fourth quarter of 2003, which represented the net book value of these assets. The assets will be written off in the first quarter of 2004.



|14. | Loss on Contracts
|--- | -----------------



During the fourth quarter of 2003 and as part of the Companys business planning process for 2004, the Company decided to wind-down its outsourcing
services to physician group customers. As a result of this decision, the Company estimated that the existing customer agreements from this business would generate a total of $11.3 million of losses through 2008, until the remaining terms of these
agreements expire. This amount was charged to cost of revenue during the fourth quarter of 2003. Additionally, in December 2003, the Company negotiated a settlement regarding out-of-scope work related to one of its large fixed fee implementation
projects. As a result of this settlement, the Company estimated that this project would generate a total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of revenue in the fourth
quarter of 2003.



The following table summarizes the effect on
future cash flows as a result of these future losses (in thousands):



|           |  |      |       |      |   |       |  |      |       |      |   |       |  |   |     |  |   |       
|---------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | --- |  | - | ------
|           |  | 2004 |       | 2005 |   | 2006  |  | 2007 |       | 2008 |   | Total
|Provider   |  | $    | 3,839 |      | $ | 3,365 |  | $    | 2,604 |      | $ | 1,198 |  | $ | 265 |  | $ | 11,271
|Consulting |  |      | 3,680 |      |   |      |  |      |      |      |   |      |  |   |    |  |   | 3,680 
|           |  |      |       |      |   |       |  |      |       |      |   |       |  |   |     |  |   |       
|Total      |  | $    | 7,519 |      | $ | 3,365 |  | $    | 2,604 |      | $ | 1,198 |  | $ | 265 |  | $ | 14,951
|           |  |      |       |      |   |       |  |      |       |      |   |       |  |   |     |  |   |       



|15. | Supplemental Cash Flow Disclosures (in thousands)
|--- | -------------------------------------------------



|                                                   |  |                                  |       |      |   |       |  |   |        |  
|-------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ----- |  | - | ------ | -
|                                                   |  | For the Years Ended December 31, |      
|                                                   |  | 2003                             |       | 2002 |   | 2001  | 
|Supplemental disclosures for cash flow information |  |                                  |       |      |   |       |  |   |        |  
|Cash paid for interest                             |  | $                                | 2,034 |      | $ | 1,479 |  | $ | 1,351  |  
|Cash paid for income taxes                         |  |                                  | 704   |      |   | 1,782 |  |   | 292    |  
|Noncash investing and financing activities         |  |                                  |       |      |   |       |  |   |        |  
|Assets acquired through capital lease              |  |                                  | 96    |      |   | 1,508 |  |   | 2,734  |  
|Assets acquired through debt financing             |  |                                  |      |      |   |      |  |   | 778    |  
|Deferred stock compensation                        |  |                                  | 385   |      |   | 1,005 |  |   | (1,966 | )
|Common stock issued for acquisitions               |  |                                  | 37    |      |   |      |  |   | 12,833 |  



|16. | Segment Information
|--- | -------------------



The Company has adopted FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 requires enterprises to report information about operating segments in annual financial statements and selected information about reportable segments in interim financial reports issued to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas and major customers. The Company has only one reportable segment.



The Company classifies its revenue in the following categories: recurring or multi-year contractually based revenue, and revenue generated via
non-recurring agreements. The Companys chief operating decision makers evaluate performance and allocate resources based on gross margin for these reporting units.



The Companys reporting units are organized primarily by the nature of services provided. These reporting units are
managed separately because of the difference in marketing strategies, customer base and client approach. Financial information about reporting units are reported in the consolidated statements of operations.



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Companys assets are all located in the United States and the Companys sales were
primarily to customers located in the United States.



Recurring
and non-recurring revenue by type of similar products and services are as follows (in thousands):



|                             |  |                                  |         |      |   |         |  |   |        
|---------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | -------
|                             |  | For the Years Ended December 31,
|                             |  | 2003                             |         | 2002 |   | 2001   
|Outsourced business services |  | $                                | 98,193  |      | $ | 98,299  |  | $ | 98,295 
|Software maintenance         |  |                                  | 62,780  |      |   | 60,879  |  |   | 44,411 
|                             |  |                                  |         |      |   |         |  |   |        
|Recurring revenue            |  |                                  | 160,973 |      |   | 159,178 |  |   | 142,706
|                             |  |                                  |         |      |   |         |  |   |        
|Software license fees        |  |                                  | 45,688  |      |   | 32,131  |  |   | 33,740 
|Consulting services          |  |                                  | 79,989  |      |   | 73,841  |  |   | 41,726 
|Other non-recurring revenue  |  |                                  | 3,679   |      |   |        |  |   |       
|                             |  |                                  |         |      |   |         |  |   |        
|Non-recurring revenue        |  |                                  | 129,356 |      |   | 105,972 |  |   | 75,466 
|                             |  |                                  |         |      |   |         |  |   |        
|Total revenue                |  | $                                | 290,329 |      | $ | 265,150 |  | $ | 218,172
|                             |  |                                  |         |      |   |         |  |   |        



|17. | Quarterly Financial Data (unaudited and in thousands)
|--- | -----------------------------------------------------



|                   |  |             |        |                   |   |        |                  |  |   |                                        |   |  |   |       |  
|------------------ |  | ----------- | ------ | ----------------- | - | ------ | ---------------- |  | - | -------------------------------------- | - |  | - | ----- | -
|                   |  | Net Revenue |        | GrossProfit(Loss) |   |        | Net (Loss)Income |  |   | Basic andDiluted (Loss)Income PerShare |  
|Fiscal year 2003   |  |             |        |                   |   |        |                  |  |   |                                        |   |  |   |       |  
|First quarter (1)  |  | $           | 69,926 |                   | $ | 21,092 |                  |  | $ | (2,669                                 | ) |  | $ | (0.06 | )
|Second quarter (1) |  |             | 77,724 |                   |   | 24,035 |                  |  |   | (1,359                                 | ) |  |   | (0.03 | )
|Third quarter      |  |             | 76,018 |                   |   | 22,267 |                  |  |   | 630                                    |   |  |   | 0.01  |  
|Fourth quarter (2) |  |             | 66,661 |                   |   | (1,072 | )                |  |   | (24,077                                | ) |  |   | (0.52 | )
|Fiscal year 2002   |  |             |        |                   |   |        |                  |  |   |                                        |   |  |   |       |  
|First quarter      |  |             | 59,694 |                   |   | 19,295 |                  |  |   | (4,614                                 | ) |  |   | (0.10 | )
|Second quarter     |  |             | 66,781 |                   |   | 21,920 |                  |  |   | (3,670                                 | ) |  |   | (0.08 | )
|Third quarter      |  |             | 68,602 |                   |   | 23,149 |                  |  |   | (3,487                                 | ) |  |   | (0.08 | )
|Fourth quarter (3) |  |             | 70,073 |                   |   | 22,966 |                  |  |   | (136,593                               | ) |  |   | (3.00 | )



|(1) | Effective July 1, 2003, the Company adopted Financial Accounting Standards Board Emerging Issues Task Force No. 01-14 (EITF 01-14), Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred. ETIF 01-14 requires companies to recognize travel and other reimbursable expenses billed to customers as revenue. As a result of the adoption of EITF
01-14, total revenue and cost of revenue for the first and second quarters of 2003 include $900,000 and $1.2 million, respectively. Before the adoption of EITF 01-14, such reimbursable expenses are reflected as a reduction in cost of revenue.
However, amounts prior to fiscal year 2003 were not significant. This change in accounting policy had no effect on the Companys consolidated financial position, results of operations or cash flows.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | During the fourth quarter of 2003 and as part of the Companys business planning process for 2004, the Company decided to wind-down its outsourcing services to physician group
customers. As a result of this decision, the Company estimated that the existing customer agreements from this business would generate a total of $11.3 million of losses through 2008, until the remaining terms of these agreements expire. This amount
was charged to cost of revenue during the fourth quarter of 2003. Additionally, in December 2003, the Company negotiated a settlement regarding out-of-scope work related to one of its large fixed fee implementation projects. As a result of this
settlement, the Company estimated that this project would generate a total of $3.7 million of losses until its completion, which is expected to occur in mid-2004. This amount was charged to cost of revenue in the fourth quarter of 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | After the end of the fourth quarter of 2002, the Companys market capitalization decreased to a level that required the Company to perform additional analyses under Statement
142 to quantify the amount of impairment to goodwill. This analysis resulted in a charge to goodwill of $97.5 million as of December 31, 2002. The decrease in market capitalization was also an indicator that the Companys other intangible
assets might also be impaired as of December 31, 2002 and they were also tested for impairment in accordance with Statement 144. The analyses resulted in an impairment charge of $33.5 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

The TriZetto Group, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



SCHEDULE II



VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                 |  |                              |        |                                     |   |        |            |  |   |                       |   |  |   |       
|-------------------------------- |  | ---------------------------- | ------ | ----------------------------------- | - | ------ | ---------- |  | - | --------------------- | - |  | - | ------
|                                 |  | Balance atBeginningof Period |        | AdditionsChargedto CostsandExpenses |   |        | Deductions |  |   | BalanceatEndingPeriod
|                                 |  |                              |        |                                     |   |        | (1)        |  |   |                      
|Allowance for doubtful accounts  |  |                              |        |                                     |   |        |            |  |   |                       |   |  |   |       
|Year ended December 31, 2001     |  | $                            | 1,220  |                                     | $ | 5,090  |            |  | $ | 867                   |   |  | $ | 5,443 
|Year ended December 31, 2002     |  | $                            | 5,443  |                                     | $ | 1,675  |            |  | $ | 1,722                 |   |  | $ | 5,396 
|Year ended December 31, 2003     |  | $                            | 5,396  |                                     | $ | (1,874 | )(2)       |  | $ | 1,154                 |   |  | $ | 2,368 
|Sales allowances                 |  |                              |        |                                     |   |        |            |  |   |                       |   |  |   |       
|Year ended December 31, 2001     |  | $                            |       |                                     | $ | 828    |            |  | $ | 35                    |   |  | $ | 793   
|Year ended December 31, 2002     |  | $                            | 793    |                                     | $ | 1,963  |            |  | $ | (296                  | ) |  | $ | 3,052 
|Year ended December 31, 2003     |  | $                            | 3,052  |                                     | $ | (64    | )(2)       |  | $ | 424                   |   |  | $ | 2,564 
|Deferred tax valuation allowance |  |                              |        |                                     |   |        |            |  |   |                       |   |  |   |       
|Year ended December 31, 2001     |  | $                            |       |                                     | $ |       |            |  | $ |                      |   |  | $ |      
|Year ended December 31, 2002     |  | $                            |       |                                     | $ | 17,146 |            |  | $ |                      |   |  | $ | 17,146
|Year ended December 31, 2003     |  | $                            | 17,146 |                                     | $ | 9,391  |            |  | $ |                      |   |  | $ | 26,537

---

|(1) | Deductions include the net effect of write-offs and recoveries of uncollectible amounts with respect to accounts receivable.
|--- | ----------------------------------------------------------------------------------------------------------------------------



|(2) | In 2003, a $2.8 million adjustment to the allowance for doubtful accounts and a $1.0 million adjustment to the sales allowance were the result of the collections of aged receivables
which had been previously accrued for.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-26