UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2005

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 0-26816

IDX SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Vermont	03-0222230
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
40 IDX Drive South Burlington, VT	05403
(Address of Principal Executive Offices)	(Zip Code)

(802) 862-1022

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  x    No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock as of November 4, 2005 was 31,422,774.

The following trademarks used herein are owned by IDX: Flowcast, Groupcast, Carecast, Imagecast, IDX, LastWord, IDXtend and Web Framework. All other trademarks referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.

IDX SYSTEMS CORPORATION

FORM 10-Q

For the Period Ended September 30, 2005

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (unaudited)	3
	Condensed Consolidated Statements of Income (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	52
ITEM 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	55
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
ITEM 3.	Defaults Upon Senior Securities	56
ITEM 4.	Submission of Matters to a Vote of Security Holders	56
ITEM 5.	Other Information	57
ITEM 6.	Exhibits	57
SIGNATURES		58
EXHIBIT INDEX		59

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IDX Systems Corporation

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	September 30, 2005		December 31, 2004
ASSETS
Cash and cash equivalents	$	35,592	$	67,346
Marketable securities		188,488		94,283
Accounts receivable, net		122,739		116,659
Unbilled receivables		23,112		5,822
Deferred contract costs		25,690		24,209
Refundable income taxes		6,608		7,514
Prepaid and other current assets		22,147		8,199
Total current assets		424,376		324,032
Property and equipment, net		101,820		94,291
Deferred contract costs, less current portion		63,616		42,295
Capitalized software costs, net		6,787		5,596
Goodwill, net		13,215		7,163
Other intangible assets, net		13,521		2,514
Restricted cash		2,426		—
Other assets		2,545		10,063
Deferred tax asset		5,702		10,961
Total assets	$	634,008	$	496,915
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued expenses	$	89,118	$	84,388
Deferred revenue		59,152		62,278
Deferred tax liability		39,676		6,579
Total current liabilities		187,946		153,245
Deferred revenue, less current portion		15,944		11,365
Payments related to acquisitions		2,426		—
Total liabilities		206,316		164,610
Commitments and contingencies		—		—
Stockholders’ equity		427,692		332,305
Total liabilities and stockholders’ equity	$	634,008	$	496,915

See Notes to the Condensed Consolidated Financial Statements (unaudited)

3

IDX Systems Corporation

Condensed Consolidated Statements of Income

(in thousands, except for per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Revenues
System sales	$	34,566		$	34,201		$	106,296		$	105,616
Maintenance and service fees		114,981			101,880			333,010			263,400
Total revenues		149,547			136,081			439,306			369,016
Operating expenses
Cost of system sales		15,172			14,753			44,342			44,081
Cost of maintenance and services		76,281			63,203			223,547			168,268
Cost of sales – loss on contract termination, net		—			—			3,545			—
Selling, general and administrative		37,230			27,940			99,490			82,831
Software development costs		18,280			15,542			47,440			44,688
Restructuring costs and other charges		80			—			80			387
Total operating expenses		147,043			121,438			418,444			340,255
Operating income		2,504			14,643			20,862			28,761
Other income (expense), net
Interest income		1,018			812			3,119			1,741
Interest expense		(81	)		(63	)		(228	)		(559	)
Foreign currency exchange (losses) gains, net		(1,277	)		83			(2,887	)		101
Gain on sale of investments		1,808			248			5,225			1,257
Other-than-temporary impairment of cost method investments		—			—			(389	)		—
Other income, net		1,468			1,080			4,840			2,540
Income before income taxes		3,972			15,723			25,702			31,301
Income tax provision		(871	)		(5,949	)		(8,911	)		(11,869	)
Net income	$	3,101		$	9,774		$	16,791		$	19,432
Basic earnings per share	$	0.10		$	0.32		$	0.54		$	0.64
Basic weighted average shares outstanding		31,221			30,396			31,073			30,152
Diluted earnings per share	$	0.10		$	0.31		$	0.52		$	0.62
Diluted weighted average shares outstanding		32,450			31,684			32,300			31,563

See Notes to the Condensed Consolidated Financial Statements (unaudited)

4

IDX Systems Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2005			2004
Operating Activities:
Net income	$	16,791		$	19,432
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation		14,171			12,419
Amortization		1,783			2,354
Deferred taxes		(2,269	)		2,633
Bad debt expense		972			42
Tax benefit related to exercise of non-qualified stock options		3,029			4,467
Foreign currency exchange losses (gains), net		2,887			(101	)
Gain on sale of investments		(5,225	)		(1,257	)
Impairment charge related to cost method investment		389			—
Loss on disposition of equipment		—			29
Contract termination loss, net		3,545			—
Restructuring costs and other charges		(83	)		387
Other		260			154
Changes in operating assets and liabilities:
Accounts and unbilled receivables		(20,340	)		(25,193	)
Deferred contract costs		(29,743	)		(37,107	)
Prepaid expenses and other assets		(6,240	)		(4,456	)
Accounts payable and accrued expenses		3,773			4,441
Refundable income taxes		930			4,831
Deferred revenue		1,723			46,338
Net cash (used in) provided by operating activities		(13,647	)		29,413
Investing Activities:
Increase in restricted cash		(2,426	)		—
Increase in payments related to acquisitions		2,426			—
Purchase of property and equipment		(21,871	)		(16,008	)
Purchase of marketable securities		(76,018	)		(66,173	)
Proceeds from sale of marketable securities		92,760			72,651
Business acquisitions, net of cash acquired		(17,217	)		—
Other assets		(2,763	)		(3,381	)
Net cash used in investing activities		(25,109	)		(12,911	)
Financing Activities:
Proceeds from sale of common stock and exercise of stock options		9,080			11,945
Other		(7	)		(12	)
Net cash provided by financing activities		9,073			11,933
Effect of exchange rate fluctuations on cash and cash equivalents		(2,071	)		25
Net (decrease) increase in cash and cash equivalents		(31,754	)		28,460
Cash and cash equivalents at beginning of period		67,346			25,536
Cash and cash equivalents at end of period	$	35,592		$	53,996
Business Acquisitions, Net of Cash Acquired
Fair value of tangible assets acquired	$	190		$	—
Liabilities assumed		(871	)		—
Goodwill		6,150			—
Acquired technology		11,586			—
In process research and development		162			—
Net cash paid for transaction	$	17,217		$	—

See Notes to Condensed Consolidated Financial Statements (unaudited)

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Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 – Significant Accounting Policies

Nature of Business and Basis of Presentation

IDX Systems Corporation (“IDX” or the “Company”) provides healthcare information systems and services to large integrated healthcare delivery enterprises located in the United States, the United Kingdom and Canada. Revenues are derived from the licensing of software, hardware sales, and providing maintenance and services related to system sales.

On September 28, 2005, IDX Systems Corporation (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 28, 2005, by and among the Company, General Electric Company, a New York corporation (“GE”) and Igloo Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of GE (“Merger Sub”). Under the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing after the merger as the surviving corporation and a wholly owned subsidiary of GE. Each issued and outstanding share of the Company’s common stock will be cancelled and converted automatically into the right to receive $44 in cash. Each outstanding option to purchase the Company’s common stock will be cancelled in return for a cash payment equal to $44 less the exercise price of the option. The merger, which has been approved by both the IDX and GE boards of directors, is subject to approval by IDX shareholders. On October 26, 2005, the Company filed a preliminary proxy statement with the Securities and Exchange Commission with respect to the Merger Agreement. The transactions contemplated by the Merger Agreement are also subject to other customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The Company and GE filed pre-merger notifications with the U.S. antitrust authorities pursuant to the HSR Act on October 21, 2005. The Federal Trade Commission and the Department of Justice granted early termination of the waiting period under the HSR Act on November 4, 2005. The Merger Agreement contains certain termination rights and provides that, upon the termination of the Merger Agreement under certain circumstances, the Company would be required to pay GE a termination fee of $43 million.

The interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and in accordance with accounting principles generally accepted in the United States. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been omitted or condensed. In the opinion of management, all necessary adjustments (consisting of normal recurring accruals) have been made to provide a fair presentation. The operating results for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 15, 2005.

Certain reclassifications of prior period data have been made to conform to the current reporting period classifications. Our revenues generated under hosted software arrangements where we act as an application service provider (“ASP”) have historically been classified with system sales and the related costs. These revenues and the related costs are now included with maintenance and service fees and cost of maintenance and services, respectively. For the three months ended September 30, 2005 and 2004, ASP revenues totaled $3.1 million and $2.1 million, respectively. For the nine months ended September 30, 2005 and 2004, ASP revenues totaled $8.9 million and $6.9 million, respectively. For the three months ended September 30, 2005 and 2004, the ASP cost of revenues totaled $294,000 for each period, respectively. For the nine months ended September 30, 2005 and 2004, the ASP cost of revenues totaled $813,000 and $660,000, respectively.

Principles of Consolidation

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

Significant Estimates and Assumptions

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions by management affect the Company’s revenue recognition, allowance for doubtful accounts, deferred tax assets, certain

6

accrued expenses, amortization periods, capitalized software, intangible and long-lived assets and restructuring charges.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from management’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

Revenue Recognition

IDX enters into contracts to license software and sell hardware and related ancillary products to customers through its direct sales force. The majority of the Company’s system sales attributable to software license revenue are earned from software that does not require significant customization or modification. The Company recognizes revenue for the licensing of software in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, and clarified by Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB No. 101”), and SAB No. 104, Revenue Recognition (“SAB No.104”), and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”) and, accordingly, the Company recognizes revenue from software licenses, hardware, and related ancillary products when:

• persuasive evidence of an arrangement exists, which is typically when a customer has signed a non-cancelable sales and software license agreement;

• delivery, which is typically FOB shipping point for perpetual licenses, and for term base licenses the later of FOB shipping point or the commencement of the term, is complete for the software (either physically or electronically), hardware and related ancillary products;

• the customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; and

• collectibility is probable.

Judgment is required in assessing the probability of collection and the current creditworthiness of each customer. For example, if the financial condition of the Company’s customers were to deteriorate, it could affect the timing and the amount of revenue the Company recognizes on a contract to the extent of cash collected. In addition, in certain instances judgment is required in assessing if there are uncertainties in determining the fee. If there are significant uncertainties, the revenue is not recognized until the uncertainties are resolved.

The Company uses the residual method to recognize revenue when a contract includes one or more elements to be delivered at a future date and vendor specific objective evidence (“VSOE”) of the fair value of all undelivered elements (typically maintenance and professional services) exists. Under the residual method, the Company defers revenue recognition of the fair value of the undelivered elements and allocates the remaining portion of the arrangement fee to the delivered elements and recognizes it as revenue, assuming all other conditions for revenue recognition have been satisfied. The Company recognizes substantially all of its product revenue in this manner. If the Company cannot determine the fair value of any undelivered element included in an arrangement, the Company will defer revenue recognition until all elements are delivered, services are performed or until fair value can be objectively determined.

As part of an arrangement, the Company typically sells maintenance contracts as well as professional services to customers. Maintenance services include telephone and web-based support as well as rights to unspecified upgrades and enhancements, when and if the Company makes them generally available. Professional services are deemed to be non-essential and typically are for implementation planning, loading of software, installation of hardware, training, building simple interfaces, running test data, assisting in the development and documentation of process rules, and best practices consulting.

The Company recognizes revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. The allocated fair value of revenues pertaining to contractual maintenance obligations

7

are classified as a current liability, since they are typically for the twelve-month period subsequent to the balance sheet date.

The Company recognizes revenues from professional services based on VSOE of fair value when: (1) a non-cancelable agreement for the services has been signed or a customer’s purchase order has been received and (2) the professional services have been delivered. VSOE of fair value is based upon the price charged when professional services are sold separately and is typically based on an hourly rate for professional services.

The Company’s arrangements with customers generally include acceptance provisions. However, these acceptance provisions are typically based on our standard acceptance provision, which provides the customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. This right generally expires 40 to 90 days after installation is completed. The product is deemed accepted unless the customer notifies the Company otherwise. Generally, the Company determines that these acceptance provisions are not substantive and historically have not been exercised, and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service level requirements. Certain of our system specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. Historically, the Company has not incurred substantial costs relating to this guarantee and the Company currently accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as actual experience and other information becomes available; and should they become more substantial, the Company would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on its license arrangements. The Company has not accrued any costs related to these warranties in the accompanying consolidated financial statements.

At the time the Company enters into an arrangement, the Company assesses the probability of collection of the fee and the terms granted to the customer. The Company’s typical payment terms include a deposit and subsequent payments based on specific milestone events and dates. If the Company considers the payment terms for the arrangement to be extended or if the arrangement includes a substantive acceptance provision, the Company defers revenue not meeting the criterion for recognition under SOP 97-2 and classifies this revenue as deferred revenue, including deferred product revenue. The Company’s payment terms are generally fewer than 90 days and payments from customers are typically due within 30 days of invoice date. The Company recognizes this revenue, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee.

Additionally, the Company enters into certain arrangements for the sale of software that require significant customization. In these instances, the Company accounts for the contract in accordance with Accounting Research Bulletin No. 45, Long-term Construction-Type Contracts and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”). The Company generally recognizes revenue on a percentage-of-completion basis using labor input measures, which involves the use of estimates. Labor input measures are used because they reasonably measure the stage of completion of the contract. Revisions to cost estimates, which could be material, are recorded to income in the period in which the facts that give rise to the revision become known.

The Company recognizes losses, if any, on fixed price contracts when the amount of the loss is determined. The complexity of the estimation process and the assumptions inherent in the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in the Company’s consolidated financial statements. The Company records revenues earned in excess of billings on uncompleted contracts as an asset with unbilled receivables and records billings in excess of revenue earned on uncompleted contracts as deferred revenues until revenue recognition criteria are met. Deferred contract costs represent costs incurred for the acquisition of goods or services associated with contracts, including contracts accounted for under the percentage-of-completion method of accounting, and certain pre-contract costs for which revenue has not yet been earned.

The Company also enters into arrangements that involve the delivery or performance of multiple products and services that include the development and customization of software, implementation services, and licensed software and support services. For these contracts, the Company applies the consensus of EITF 00-21 to determine whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes. Accordingly, if the elements qualify as separate units of accounting, and fair value exists for the elements of the contract that are unrelated to the customization services, these elements are accounted for separately, and the related revenue is recognized as the products are delivered or the services are rendered. The

8

Company has concluded that the following qualify for separate units of accounting under EITF 00-21: software licenses, including certain integrated third party software products; implementation and training services, some of which are provided by third parties; and software support and maintenance services, some of which are provided by third parties.

The Company also enters into arrangements under which the Company provides a hosted software application. The Company recognizes revenue for these arrangements based on the provisions of EITF Issue No. 00-3, Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-3”), and the provisions of SAB No. 101, as amended by SAB No. 104, when there is persuasive evidence of an arrangement, collection of the resulting receivable is probable, the fee is fixed or determinable and acceptance has occurred. The Company’s revenues related to these arrangements consist of system implementation service fees and software subscription fees. The Company has determined that the system implementation services represent set-up services that do not qualify as separate units of accounting from the software subscriptions as the customer would not purchase these services without the purchase of the software subscription. As a result, the Company recognizes system implementation fees ratably over a period of time from when the core system implementation services are completed and accepted by the customer over the remaining customer relationship life, which the Company has determined is the contractual life of the customer’s subscription agreement. The Company recognizes software subscription fees, which typically commence upon completion of the related system implementation, ratably over the applicable subscription period. Amounts billed prior to satisfying the Company’s revenue recognition policy are reflected as deferred revenue.

As of September 30, 2005 and December 31, 2004, the Company had deferred revenue totaling $11.6 million and $5.5 million, respectively related to system implementation and subscription fees under hosting arrangements. Prior to the year ended December 31, 2004, the revenues and deferred revenues associated with system implementation services were not material.

The application of SOP 97-2 and EITF 00-21 requires significant judgment, including whether a software arrangement includes multiple elements, and if so, whether fair value exists for those elements. Typically the Company’s contracts contain multiple elements, and while the majority of the Company’s contracts contain standard terms and conditions, there are instances where our contracts contain non-standard terms and conditions. As a result, contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes in accordance with SOP 97-2 or EITF 00-21, and if so, the relative fair value that should be allocated to each of the elements and when to recognize revenue for each element. Interpretations would not affect the amount of revenue recognized but could impact the timing of recognition.

The Company records reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and services in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred (“EITF 01-14”). EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in the income statement. For the three months ended September 30, 2005 and 2004 reimbursable out-of-pocket expenses were $1.5 million and $2.1 million, respectively. For the nine months ended September 30, 2005 and 2004 reimbursable out-of-pocket expenses were $4.8 million and $5.8 million, respectively.

In accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees, the Company classifies the reimbursement by customers of shipping and handling costs as revenue and the associated cost as cost of revenue.

Cost of Sales

On June 1, 2005, the Company entered into a letter of agreement with the National Health Service Connecting for Health (“NHS”), Fujitsu Services, Limited (“Fujitsu”), and British Telecommunications PLC (“BT”) to terminate the agreement in principle between the Company and Fujitsu dated December 15, 2003 (the “Fujitsu Arrangement”) to provide a clinical information system for the Southern Cluster of the UK NHS Connecting for Health Program. The termination of the Fujitsu Arrangement resulted in a charge during the second quarter of 2005 totaling $3.5 million in connection with the write-off of costs incurred-to-date classified as Deferred Contract Costs of $8.7 million, offset by $5.2 million collected from Fujitsu in consideration of the Company agreeing to the termination of the Fujitsu Arrangement. The charge includes a liability for estimated costs for obligations under certain subcontract agreements. In connection with the termination of this contract, the Company commenced and completed certain restructuring activities related to a reduction in workforce during the three months ended September 30, 2005. Approximately $327,000 of the $490,000 of restructuring costs is subject to reimbursement by Fujitsu under the

9

terms of the letter agreement. The Company anticipates that this reimbursement will be collected during the fourth quarter of 2005.

The Company recognizes revenue and costs relating to its development work in the UK on a percentage-of-completion basis, which involves the use of estimates. Revisions to revenue and cost estimates are recorded to income in the period in which the facts that give rise to the revision become known. During the three and nine month periods ended September 30, 2005, the Company finalized the costs for development work in the UK with certain of its subcontractors, which resulted in a reduction of approximately $1.3 million and $4.1 million in the cost of maintenance and service fees, respectively. Based on current facts and circumstances, the Company believes that its estimates to complete these contractual arrangements are complete and accurate, however, adjustments to these estimates in the future could result in a material impact to earnings. The change in estimates resulted in an increase in net income, net of tax, for the three and nine month periods ended September 30, 2005 of $0.8 million and $2.6 million, respectively, or $0.02 and $0.08 fully diluted earnings per share, respectively.

Software Development Costs

The Company accounts for the development cost of software intended for sale in accordance with SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (“SFAS 86”). Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. Software development costs incurred after the establishment of technological feasibility and until the product is available for general release are capitalized, provided recoverability is reasonably assured. Technological feasibility is established upon the completion of a working model. Software development costs, when material, are stated at the lower of amortized cost or net realizable value. Net realizable value for each software product is assessed based on anticipated profitability applicable to revenues of the related product in future periods. Amortization of capitalized software costs begins when the related product is available for general release to customers and is provided for using the straight-line method over twelve to eighteen months or the product’s estimated economic life, if shorter. IDX has also capitalized software acquired in connection with certain acquisitions (See Notes 2 and 6). Approximately $295,000 and $889,000 of software development costs were capitalized during the three months ended September 30, 2005 and 2004, respectively. Amortization of software development costs was approximately $133,000 and $770,000 during the three months ended September 30, 2005 and 2004, respectively. Approximately $2.4 million and $3.4 million of software development costs were capitalized during the nine months ended September 30, 2005 and 2004, respectively. Amortization of software development costs was approximately $1.2 million and $2.1 million during the nine months ended September 30, 2005 and 2004, respectively.

Deferred Contract Costs

Deferred contract costs represent costs incurred for the acquisition of goods and services associated with contracts, including contracts accounted for under the percentage-of-completion method of accounting, and certain pre-contract costs for which revenue has not yet been earned. Deferred contract costs consist primarily of third-party networking and licensing costs, IDX labor costs and third party labor costs. Certain of the Company’s contracts provide for fixed, date-driven payments that, during the software customization phase of the arrangement, are payable to the Company after the associated services are performed. For these contracts, the Company deems this schedule of payments to constitute extended payment terms, and accordingly limits the revenue to be recognized to the amount of payments that are due. The associated revenue will be recognized in the future period that payment becomes due.

The Company defers direct and incremental system implementation related hosted software arrangements in accordance with SFAS No. 91, Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans. The costs deferred consist of employee compensation and benefits for those employees directly involved with performing system implementation, as well as other direct and incremental costs. The costs are amortized to costs of revenues ratably over a period of time from when the system implementation is completed and accepted by the customer over the remaining customer relationship life, which the Company has determined is the contractual life of the customer’s subscription agreement. All costs incurred in excess of the related revenues are expensed as incurred. The Company accrues costs in excess of contractual amounts when the loss is probable and estimable. As of September 30, 2005, there are no amounts accrued for anticipated losses under contractual arrangements.

As of September 30, 2005 and December 31, 2004, the Company had deferred costs related to system implementation services for hosted software arrangements totaling $1.9 million and $1.0 million, respectively. Prior to the year ended December 31, 2004, due to the fact that the revenues associated with system implementation services were not material, no costs were capitalized.

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Accounting for Stock Based Compensation

The Company accounts for its stock-based compensation plan under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and related interpretations. Accordingly, the Company records expense for employee stock compensation plans equal to the excess of the market price of the underlying IDX shares at the date of grant over the exercise price of the stock-related award, if any (known as the intrinsic value). In general, all employee stock options are issued with the exercise price equal to the market price of the underlying shares at the grant date and, therefore, no compensation expense is recorded. In addition, no compensation expense is recorded for purchases under the 1995 Employee Stock Purchase Plan (the “ESPP”), as the plan is non-compensatory under the provisions of APB No. 25. The intrinsic value of restricted stock units and certain other stock-based compensation issued to employees as of the date of grant is amortized to compensation expense over the vesting period.

SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), establishes the fair value based method of accounting for stock-based compensation plans. The Company has adopted the disclosure-only alternative for stock options granted to employees and directors and for employee stock purchases under the ESPP under SFAS 123. The table below summarizes the pro forma operating results of the Company had compensation cost been determined in accordance with the fair value based method prescribed by SFAS 123.

	Three months ended September 30,						Nine months ended September 30,
	(in thousands, except for per share data)
	2005			2004			2005			2004
Net income as reported	$	3,101		$	9,774		$	16,791		$	19,432
Add:
Stock-based compensation expense included in reported net income, net of tax		—			—			—			96
Deduct:
Total stock-based compensation under fair value based methods, net of tax		(1,520	)		(1,277	)		(4,391	)		(4,553	)
Pro forma net income - SFAS 123	$	1,581		$	8,497		$	12,400		$	14,975
Basic net income per share:
As reported	$	0.10		$	0.32		$	0.54		$	0.64
Pro forma - SFAS 123	$	0.05		$	0.28		$	0.40		$	0.50
Diluted net income per share:
As reported	$	0.10		$	0.31		$	0.52		$	0.62
Pro forma - SFAS 123	$	0.05		$	0.27		$	0.38		$	0.47

The Company has entered into Executive Retention Agreements with certain key executives providing that if certain conditions exist subsequent to a change in control of the Company, the executives will receive both acceleration of vesting and extension of the exercise period on their stock-based awards. In accordance with APB No. 25, the Company has measured the intrinsic value of these individuals’ stock awards as of the modification dates, which totaled approximately $35.4 million as of September 30, 2005. If the acceleration of vesting and the extension of the exercise period occurs pursuant to the Executive Retention Agreements, the intrinsic value of any outstanding awards as of the date of separation or change of control will be recorded as compensation expense in the Company’s Consolidated Statements of Income. If the award vests and is exercised prior to the separation or change in control, the intrinsic value as of the date of modification is not recognized.

In addition, the Company has amended certain of its option plans to provide that in the event of a change in control in which the Company merges with another corporation under the terms of which holders of the Company’s common stock will receive a cash payment for each share surrendered in the merger (referred to as the “merger consideration”), the Board of Directors may make or provide for a cash payment to each option holder equal to (i) the merger consideration times the number of shares of common stock subject to the holder’s options granted under the plan, whether or not then exercisable (to the extent the exercise price does not exceed the merger consideration) minus (ii) the aggregate exercise price of all such options, in the exchange for termination of such options. If the

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cash out of outstanding options occurs pursuant to the option plans, the intrinsic value of any outstanding, unvested awards as of the date of change of control will be recorded as compensation expense in the Company’s Consolidated Statements of Income. The intrinsic value as of the modification date totaled $11.9 million.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentration of credit risks are principally cash and cash equivalents, marketable securities, investments, accounts receivable, unbilled receivables and deferred contract costs. The Company invests its cash and cash equivalents with financial institutions with highly rated credit and monitors the amount of credit exposure to any one financial institution. The Company places its marketable securities in a variety of financial instruments and, by policy, limits the amount of credit exposure through diversification and by restricting its investments to highly rated debt and equity securities. Substantially all of the Company’s end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom and Canada. The Company is also a subcontractor for BT as part of the NHS project in the United Kingdom. The Company has not experienced any write-offs with respect to this relationship to date. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Although the Company is directly affected by the overall financial condition of the healthcare industry, management does not believe significant credit risk exists at September 30, 2005. The Company generally has not experienced any material losses related to receivables or deferred costs under contractual arrangements from individual customers or groups of customers in any specific industry or geographic area. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company’s losses related to collection of trade accounts receivables have consistently been within management’s expectations. Due to these factors, no additional credit risk beyond amounts provided for collection losses, which the Company re-evaluates on a monthly basis based on specific review of receivable aging and the period that any receivables are beyond the standard payment terms, is believed by management to be probable in the Company’s accounts receivable.

For the three months ended September 30, 2005 and 2004, there was one customer that accounted for approximately 22.0% and 14.3% of consolidated revenues, respectively. During the nine months ended September 30, 2005, one customer accounted for approximately 21.2% of consolidated revenues. No single customer accounted for more than 10% of our consolidated revenues for the nine months ended September 30, 2004. One customer accounted for 31.0% and 13.9% of accounts receivable and unbilled receivables at September 30, 2005 and December 31, 2004, respectively. No other single customer accounted for more than 10% of total accounts receivable and unbilled receivables as of September 30, 2005 and December 31, 2004. Three customers accounted for 64.8%, 13.6% and 10.2% and 52.4%, 28.7% and 10.3% of deferred contract costs at September 30, 2005 and December 31, 2004, respectively.

Foreign Currency Translation

The financial statements of the Company’s foreign subsidiaries are translated in accordance with SFAS No. 52, Foreign Currency Translation. The reporting currency for the Company is the U.S. dollar (dollar). Assets and liabilities of foreign subsidiaries that operate in a local currency environment are translated to U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts are generally translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to inter-company accounts that have been determined to be temporary in nature and cash, accounts receivable and accounts payable denominated in non-functional currencies.

New Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004) (“Statement 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123. Statement 123(R) supersedes APB No. 25, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R) is effective for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1, 2006.

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Statement 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company currently plans to adopt Statement 123(R) using the modified prospective method.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method of APB No. 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on the Company’s result of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact would have approximated that of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, future stock grants and when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $3.0 million and $4.5 million for the nine months ended September 30, 2005 and 2004, respectively.

In May 2005, the FASB issued FASB Statement No. 154 (“SFAS No. 154”), Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In June 2005, the SEC adopted Securities Offering Reform, which will become effective December 1, 2005. Among other things, the final rule requires all issuers (excluding asset-backed issuers and small business issuers) to disclose “risk factors” in Form 10-K and Form 20-F for fiscal years ending on or after December 1, 2005. Material changes in an issuer’s risk factors are required to be disclosed in Form 10-Q and Form 10-QSB only after the issuer is first required to disclose risk factors in its Form 10-K. The Company already discloses “risk factors” in its annual report filed in Form 10-K and any material changes in interim report filed in Form 10-Q.

Note 2 – Business Combinations and Divestitures

2005

On July 1, 2005 the Company acquired substantially all the assets of RealTimeImage, Ltd. (“RTI”), a privately held developer of web-based medical specialty imaging solutions with offices in Tel Aviv, Israel and San Bruno, California for approximately $17.2 million, including acquisition costs. The RTI acquired technology is integrated into the Company’s Imagecast for Cardiology solution. This technology is also currently being sold as a separate element. The acquisition was financed with cash on hand. Of the purchase price, approximately $2.43 million is held in escrow for a period of 18 months to secure certain indemnification obligations of RTI under the Agreement, although up to $0.8 million of such amount may be released 6 months following the closing under certain conditions. This transaction was accounted for using the purchase method of accounting.

The allocation of the purchase price to the fair values of the identified tangible and intangible assets acquired and liabilities assumed was based upon an independent valuation and management estimates and resulted in goodwill of $6.2 million, $11.6 million in intangible assets, $0.2 million in tangible assets and $0.9 million in assumed

13

liabilities. The Company reflected the $0.2 million of the purchase price allocated to in-process research and development as a charge to earnings in the quarter ended September 30, 2005 as research and development expense.

The intangible assets represent acquired technology, which will be amortized over its expected useful life of five years, commencing on the date of acquisition. Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company determined that the acquisition of RTI resulted in the recognition of goodwill primarily because of synergies unique to the Company and the strength of its acquired workforce. The goodwill and the acquired technology are deductible for tax purposes.

Included in liabilities assumed is a provision for lease abandonment costs of approximately $0.2 million and costs associated with an employee severance arrangement of approximately $0.7 million. The Company has formulated a plan to abandon the leased facilities in San Bruno, California related to the RTI acquisition and to release an employee from an employment agreement made in conjunction with the RTI purchase.

2004

On November 22, 2004, the Company acquired all the outstanding common stock of PointDx, Inc. (“PointDx”), a developer of structured medical reporting technology located in Winston-Salem, North Carolina for approximately $7.3 million, including acquisition costs. PointDx was subsequently merged into a subsidiary of the Company. The PointDx structured reporting technology will be directly integrated into the IDX Imagecast RIS and Imagecast PACS, designed to achieve a standardized, efficient relationship between workflow and the imaging activities for radiology. The acquisition was financed with cash on hand with $3.3 million, including acquisition costs, paid at closing. The remaining $4.0 million will be paid out in four equal installments of $1.0 million over the course of an earn-out process through 2005, subject to reductions as defined under the terms of the agreement. The Company made the quarterly payments of $3.0 million during the nine months ended September 30, 2005. Included in accrued expenses is $1.0 million at September 30, 2005 and $4.0 million at December 31, 2004 relating to the earn-out payments. The agreement also contains a provision for the payment of a contingent consideration in the amount of an additional $1.0 million, subject to reductions as defined under the terms of the acquisition agreement, in the event that the Company sells a certain number of products incorporating PointDx technology prior to November 1, 2006. Goodwill will be increased by the amount of the additional consideration, if any, when it becomes due and payable. This transaction was accounted for using the purchase method of accounting and, accordingly, results of operation for PointDx are included in the Company’s consolidated financial statements since the date of acquisition.

The allocation of the purchase price to the fair values of the identified tangible and intangible assets acquired and liabilities assumed, which was based upon an independent valuation and management estimates, resulted in goodwill of $4.6 million, intangible assets of $2.5 million, tangible assets of $0.8 million and assumed liabilities of $0.6 million.

The Company determined that the acquisition of PointDx resulted in the recognition of goodwill primarily because of synergies unique to the Company and the strength of its acquired workforce. The intangible assets represent acquired technology, which will be amortized over its expected useful life of seven years. The goodwill and the acquired technology are not deductible for tax purposes.

Note 3 – Restructuring Costs and Other Charges

A summary of the Company’s restructuring and other charges is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004		2005			2004
	(in thousands)
Lease cancellations	$	(83	)	$	—	$	(83	)	$	387
Workforce reduction		163			—		163			—
	$	80		$	—	$	80		$	387

Restructuring costs

In connection with the termination of the Company’s arrangement with Fujitsu (See Note 1—Cost of Sales), the Company re-evaluated its operating costs and staffing requirements related to its operations in the United Kingdom. In July and August 2005, the Company finalized and approved a headcount reduction plan under which the

14

Company terminated 20 client-serving personnel in the Company’s Carecast operating unit in the UK. The reduction plan resulted in a charge to earnings of approximately $163,000 this quarter in connection with costs associated principally with employee severance payments of $490,000, net of an estimated $327,000 in reimbursements from Fujitsu for qualifying redundancy costs. All payments related to the plan were paid to personnel during the third quarter of 2005. Estimated reimbursements due from Fujitsu are included in other current assets at September 30, 2005 and are expected to be received during the fourth quarter.

On June 1, 2004, the Company entered into an agreement to terminate its contractual commitments under the remaining lease related, in part, to the Company’s 2001 plan to restructure and realign its large physician group practice businesses. The Company paid $1.5 million to terminate the lease, which was approximately $387,000 higher than the amount accrued at the date of termination.

In conjunction with the RealTimeImage acquisition (See Note 2), the Company recorded a liability for costs associated with an employee severance arrangement of approximately $660,000. The cost was included in the respective purchase price allocations as part of goodwill. During the three months ended September 30, 2005, cash payments charged against the liability totaled $25,000. Of the $635,000 remaining accrual balance at September 30, 2005, approximately $53,000 will be paid during the remainder of 2005 and $582,000 thereafter.

Lease charges

In 1999, the Company entered into a lease commitment for new office space in Seattle under a lease that commenced in 2002. The Company continued to utilize its existing space and an active search for a sublessor was initiated and has been ongoing. In 2002, the Company consolidated its Seattle operations into the new office space and abandoned its then existing office space. Due to the depressed Seattle real estate market and the inability to obtain a sublessor, the Company recorded a lease abandonment charge of $9.2 million in its Information Systems and Services business segment in 2002. The lease abandonment charge is related to lease payments of approximately $7.9 million through the end of the lease term in 2005 and non-cash write-offs of certain leasehold improvements of approximately $1.3 million. In August, 2005, the Company entered into an agreement to terminate a portion of its remaining contractual commitments under the lease resulting in a reduction in the liability of approximately $83,000. In the event that the Company is able to negotiate terminations in a future reporting period, the savings would be recorded as a reduction in expenses under the lease abandonment caption in the consolidated financial statements in the period in which the termination agreement is signed.

In December 2004, the Company entered into a sublease agreement for a portion of its facilities under lease in San Diego, which was formerly used principally for EDiX operations and was being utilized during 2004 for sales and support services from continuing operations. The sublease agreement is for three years commencing January 1, 2005 with sublease rental income totaling $783,000 over the term of the sublease. The Company’s lease term expires October 31, 2010. The Company vacated the subleased portion of the facilities in December 2004 and recorded a charge of $479,000 related to lease payments of $1.8 million and other costs of approximately $75,000 primarily related to commissions incurred in connection with the sublease, offset with sublease rental income of $1.4 million. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company has assumed sublease rental income for the entire lease term in calculating the applicable charge. The Company has assumed sublease rental income beyond the current contractual sublease term at the same rate as the contracted rate due to the fact that the Company believes that this represents the most probable sublease rate. In the event that the Company is unable to secure a sub-lessee for the remaining three years of the lease term, the loss of sub-lease income would be recorded in the period in which the Company determines that sublease rentals could not be reasonably obtained. In the event that the Company is unable to secure a sub-lessee during the time between the date the present sublease expires, and the date at which the Company determines sublease rental could not be reasonably obtained, the loss of sub-lease income would be recorded in the period in which the property is not subleased.

In conjunction with the PointDx and RealTimeImage acquisitions, the Company recorded a liability for lease abandonment costs of $173,000 and $211,000, respectively related to lease payments on leased facilities in Winston-Salem, North Carolina, San Bruno, California and Tel Aviv, Israel. The costs were included in the respective purchase price allocations as part of goodwill.

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The following table sets forth the significant components and activity in the liability for restructuring costs and other charges (in thousands):

	Balance December 31, 2003		Charges		Non-Cash Charge		Cash Payments			Balance December 31, 2004		Non-Cash Charge/ Adjustments		Cash Payments			Balance September 30, 2005
Lease costs	$	5,099	$	652	$	—	$	(2,534	)	$	3,217	$	128	$	(2,141	)	$	1,204
Severance and benefit costs		—		—		—		—			—		823		(188	)		635
Total	$	5,099	$	652	$	—	$	(2,534	)	$	3,217	$	951	$	(2,329	)	$	1,839

Of the $1.8 million accrual balance at September 30, 2005, approximately $773,000 will be paid during the remainder of 2005 and $1.1 million thereafter. Interest expense relating to lease abandonment charges for the three months ended September 30, 2005 and 2004 was $21,000 and $48,000, respectively. Interest expense relating to lease abandonment charges for the nine months ended September 30, 2005 and 2004 was $84,000 and $197,000, respectively.

Note 4 – Investments

On January 8, 2001, the Company sold certain of the net assets and operations of its majority owned subsidiary, ChannelHealth Incorporated (“ChannelHealth”), to Allscripts Healthcare Solutions, Inc. (“Allscripts”), a public company providing point-of-care e-prescribing and productivity solutions for physicians. In exchange for the Company’s 87% ownership of ChannelHealth, the Company received approximately 7.5 million shares (with restrictions as to resale as discussed below) of Allscripts common stock, which represented approximately a 20% ownership interest in Allscripts. In addition to the sale, the Company entered into a ten-year strategic alliance (the “Alliance Agreement”) whereby Allscripts is the exclusive provider of point-of-care clinical applications sold by IDX to physician practices.

At the time of sale, the Company accounted for its investment in Allscripts under the equity method of accounting. Under the equity method of accounting, the Company recognized its pro-rata share of Allscripts losses during the 2001 fiscal year resulting in the elimination of the carrying value of this investment. At September 30, 2005, the Company owned approximately 17.35% of the outstanding shares of common stock of Allscripts. Due to the fact that the Company’s equity interest in Allscripts has fallen below 20% and that the Company no longer significantly influences the financial or operating policies of Allscripts, the Company discontinued its use of the equity method with respect to Allscripts during the third quarter of 2004. The Company accounts for its investment in Allscripts as available-for-sale securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Under SFAS 115, available-for-sale investments, which have readily determinable fair values, are reported at fair value with unrealized gains and losses, net of taxes, reported in Other Comprehensive Income as part of shareholders’ equity. Restricted stock does not meet the readily determinable fair value criterion under SFAS 115; however, any portion of the security holding that can be reasonably expected to qualify for sale within one year is not considered restricted. At September 30, 2005, all of the Company’s holdings in Allscripts common stock were reported in Marketable Securities, which represents the fair value at September 30, 2005 of Allscripts shares that can be sold within one year.

Certain information relative to the Company’s marketable securities at September 30, 2005 and December 31, 2004 is as follows:

	September 30, 2005		December 31, 2004
	(in thousands)
Cost	$	60,955	$	74,279
Gross unrealized gains		127,533		20,004
Gross unrealized losses		—		—
Market value	$	188,488	$	94,283

Unrealized gains and losses on marketable securities are recorded, net of any tax effect, as a separate component of stockholders’ equity. There were no gross unrealized gains for the three months ended September 30, 2005. Gross realized gains of approximately $248,000 were recorded during the three months ended September 30, 2004. Gross realized gains of approximately $3.0 million and $1.3 million were recorded during the nine months ended

16

September 30, 2005 and 2004, respectively. There were no gross realized losses from the sale of available-for-sale securities during the three and nine-month periods ended September 30, 2005 and 2004. Realized gains and losses from investments are based on the specific identification method.

The Company also has certain other minority equity investments in non-publicly traded securities. These investments are generally carried at cost as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The Company regularly evaluates the carrying value of its investments. When the carrying value of an investment exceeds the fair value and the decline in the fair value is deemed to be other-than-temporary, the Company writes down the value of the investment to its fair value. During the second quarter of 2005, the Company recorded $389,000 of impairment loss on other-than-temporary reductions in fair value of the Company’s minority equity investments. The carrying value of these investments was approximately $1.5 million and $9.3 million as of September 30, 2005 and December 31, 2004, respectively.

Realized gains of approximately $1.8 million and $2.2 million were recorded during the three and nine-month periods ended September 30, 2005, respectively, relating to gains on sales of minority equity investments. There were no realized gains or losses from the sale other investments during the three and nine-month periods ended September 30, 2004.

Note 5 – Derivative Financial Instruments and Hedging Agreements

From time to time, the Company enters into forward foreign exchange contracts to hedge, on a net basis, the foreign currency exposure of a portion of the Company’s assets and liabilities denominated in the British pound sterling, including inter-company accounts. Inter-company transactions are denominated in the functional currency of our foreign subsidiary in order to centralize foreign exchange risk in the parent company in the United States. Increases or decreases in our foreign currency exposures are partially offset by gains and losses on the forward contracts, so as to mitigate foreign currency transaction gains and losses. The terms of these forward contracts are generally for one to three months. The Company does not use forward contracts for trading or speculative purposes. The forward contracts are not designated as cash flow or fair value hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), as amended, and do not represent effective hedges. All outstanding forward contracts are marked to market at the end of the period and recorded on the balance sheet at fair value in other current assets and other current liabilities. The changes in fair value from these contracts and from the underlying hedged exposures are generally offsetting and are recorded in other income, net in the accompanying Consolidated Statement of Income.

During the three months ended September 30, 2005 and 2004, the Company recorded net foreign currency exchange losses of $1.3 million and net foreign currency exchange gains of $83,000, respectively. During the nine months ended September 30, 2005 and 2004, the Company recorded net foreign currency exchange losses of $2.9 million and net foreign currency exchange gains of $101,000, respectively.

At September 30, 2005, the Company had $55.0 million outstanding forward foreign exchange contracts to exchange British pounds for US dollars. The forward foreign exchange contracts mature during the fourth quarter of 2005 and had a book value that approximated fair value.

Note 6 – Goodwill and Intangible Assets

Goodwill

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Under SFAS 142, goodwill and other intangible assets with indefinite lives are not amortized. The statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be performed at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets with finite useful lives are amortized over their useful lives.

Consistent with prior years, the Company conducted its annual impairment test of goodwill during the second quarter of fiscal 2005. The fair value of the reporting units was estimated using the expected present value of future cash flows. The Company used an independent valuation and management’s estimates to determine goodwill acquired in 2005. The valuation was based upon expected future discounted operating cash flows as well as an analysis of recent sales or offerings of similar companies. During the second quarter of 2005, the Company recognized an impairment charge of $98,000, which represents all of the remaining goodwill related to a Technical Services acquisition completed in 1997 for which these services are no longer performed by that reporting unit. The charge was reported in selling, general and administrative expenses.

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The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 and for the year ended December 31, 2004 are as follows:

	September 30, 2005			December 31, 2004
	(in thousands)
Balance, beginning of year	$	7,163		$	2,508
Goodwill acquired		6,150			4,655
Impairment		(98	)		—
Balance, end of period	$	13,215		$	7,163

Intangible Assets

The Company’s intangible assets, other than goodwill, are summarized as follows:

	Weighted Average Amortization Period (Years)	September 30, 2005				December 31, 2004
		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
		(in thousands)
Acquired technologies	5.36	$	14,100	$	579	$	—	$	—

Acquired technologies are amortized at the greater of the ratio of current revenues that the product bears to the total of current and anticipated future gross revenues for that product, or the straight-line amount over the products’ estimated useful lives, ranging from five to seven years. The carrying values of acquired technology are reviewed if the facts and circumstances suggest that they may be impaired. Amortization expense related to identifiable intangible assets was $579,000 for the three and nine-month periods ended September 30, 2005. The Company incurred no amortization expense related to identifiable intangible assets for the three and nine-month periods ended September 30, 2004.

Estimated aggregate amortization expense for intangible assets is as follow:

Year	Total
	(in thousands)
2005 remaining	$	580
2006		2,407
2007		2,676
2008		2,676
2009		2,676
Thereafter		2,506
	$	13,521

Note 7 – Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities consist of the following:

	September 30, 2005		December 31, 2004
	(in thousands)
Accounts payable	$	21,411	$	35,524
Employee compensation and benefits		12,990		9,522
Accrued expenses		8,663		5,783
Accrued cost of sales		27,798		13,860
Payments due related to acquisitions		1,000		4,000
Reserve for restructuring costs and other charges		1,839		3,217
Income taxes		9,081		8,376
Other		6,336		4,106
	$	89,118	$	84,388

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Note 8 – Deferred Revenue

Deferred revenue consists of the following:

	September 30, 2005		December 31, 2004
	(in thousands)
Maintenance and services	$	58,756	$	54,975
Systems		15,856		8,771
Billings in excess of revenue earned on uncompleted contracts		484		9,897
	$	75,096	$	73,643
	September 30, 2005		December 31, 2004
	(in thousands)
Short-term deferred revenue	$	59,152	$	62,278
Long-term deferred revenue		15,944		11,365
	$	75,096	$	73,643

Note 9 – Contracts in Process

The components of uncompleted contracts are as follows:

	September 30, 2005			December 31, 2004
	(in thousands)
Revenue earned on uncompleted contracts	$	181,390		$	97,895
Less billings to date, net of foreign currency exchange		(161,513	)		(107,530	)
	$	19,877		$	(9,635	)

Revenue earned under the percentage-of-completion method of accounting in excess of billings on uncompleted contracts is recorded as unbilled receivables. Billings on contracts in excess of related revenue recognized under the percentage-of-completion method of accounting are recorded as deferred revenue. The components of uncompleted contracts are reflected in the balance sheet are as follows:

	September 30, 2005			December 31, 2004
	(in thousands)
Revenue earned in excess of billings on uncompleted contracts, net of foreign currency exchange	$	20,361		$	262
Billings in excess of revenues earned on uncompleted contracts		(484	)		(9,897	)
	$	19,877		$	(9,635	)

Note 10 – Financing Arrangements

The Company had a revolving line of credit agreement (the “Line”) allowing the Company to borrow up to $40.0 million, subject to certain restrictions, bearing interest at the bank’s base rate plus 0.25%. The Line was secured by deposit accounts, accounts receivable and other assets. On June 30, 2004, the Company provided notice to terminate the Line and the termination was effective as of July 30, 2004.

In December 2004, the Company entered into a $50.0 million Revolving Credit Facility with several banks. This agreement provides revolving credit for $50.0 million with additional minimum increments of $25.0 million available up to a maximum of $150.0 million. Interest on outstanding borrowings is based upon one of two options, which the Company selects at the time of the borrowing. The first option is the highest of the bank’s prime rate, the secondary market rate for three-month certificates of deposit plus 1.0%, and the federal funds effective rate plus 0.5%. The second option is the London Interbank Offered Rate (“LIBOR”) plus applicable margins ranging from

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75.0 to 175.0 basis points as defined in the agreement and is available only for borrowings in excess of $2.0 million. In addition, the Company may, subject to availability, request Letters of Credit in an aggregate amount not to exceed $10.0 million. The Credit Agreement contains customary representations, warranties and covenants, including financial covenants. No amounts are pledged as collateral against the Revolving Credit Facility. The Revolving Credit Facility will expire on December 22, 2009. At September 30, 2005, the bank’s prime rate, the secondary market rate for three-month certificates of deposit, the federal fund effective rate and the LIBOR rate were 6.75%, 4.07%, 3.86% and 3.84%, respectively. At September 30, 2005 and December 31, 2004, no amounts were outstanding under the Revolving Credit Facility and the Company had no letters of credit outstanding.

Note 11 – Income Taxes

The Company’s effective tax rates for the nine months ended September 30, 2005 and 2004 were 34.7% and 38.0%, respectively, which were lower than the Company’s statutory rate of 40.0%. The effective tax rate decreased during the three months ended September 30, 2005 as a result of the change in estimated amount of state net operating losses expected to be utilized. For 2005, the lower effective rate was due to the utilization of certain state net operating losses and research and development credits to offset income taxes. The Company’s effective income tax rate for 2004 was lower than the statutory rate primarily due to our use of research and development credits to offset income taxes. The Company currently expects to realize recorded deferred tax assets as of September 30, 2005 of approximately $5.7 million. Management’s conclusion that such assets will be recovered is based upon its expectation that future earnings of the Company combined with tax planning strategies available to the Company will provide sufficient taxable income to realize recorded tax assets. Such tax strategies include estimates and involve judgment relating to unrealized gains on the Company’s investment in publicly traded common stock. While the realization of the Company’s net recorded deferred tax assets cannot be assured, to the extent that future taxable income against which these tax assets may be applied is not sufficient, some or all of the Company’s net recorded deferred tax assets would not be realizable. The Company’s deferred tax liability increased $33.1 million principally due to unrealized gains on marketable securities.

Note 12 – Earnings Per Share

The following sets forth the computation of basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)
Numerator for basic and diluted earnings per share	$	3,101	$	9,774	$	16,791	$	19,432
Denominator:
Basic weighted average shares outstanding		31,221		30,396		31,073		30,152
Effect of employee stock options		1,229		1,288		1,227		1,411
Denominator for diluted earnings per share		32,450		31,684		32,300		31,563
Basic earnings per share	$	0.10	$	0.32	$	0.54	$	0.64
Diluted earnings per share	$	0.10	$	0.31	$	0.52	$	0.62

Options to acquire 431,453 and 909,713 shares for the three months ended September 30, 2005 and 2004, respectively, were excluded from the calculation of diluted earnings per share, as the effect would not have been dilutive. Options to acquire 353,715 and 473,347 shares for the nine months ended September 30, 2005 and 2004, respectively, were excluded from the calculation of diluted earnings per share, as the effect would not have been dilutive.

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Note 13 – Comprehensive Income

Components of comprehensive income consisted of unrealized gains (losses) on marketable securities and foreign currency translation adjustments as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
	(in thousands)
Net income	$	3,101		$	9,774		$	16,791		$	19,432
Other comprehensive income:
Unrealized gains (losses):
Unrealized holding gains (losses) arising during the period		9,979			25,308			108,629			25,312
Less reclassification adjustments for gains included in net income		—			—			(1,104	)		—
Foreign currency translation adjustments		(146	)		27			(396	)		(12	)
Deferred income taxes		(3,772	)		(10,123	)		(40,646	)		(10,123	)
Other comprehensive income		6,061		$	15,212			66,483		$	15,177
Comprehensive income	$	9,162		$	24,986		$	83,274		$	34,609

Note 14 – Commitments and Contingencies

Leases:

At September 30, 2005, minimum lease payments for certain facilities and equipment under noncancelable lease commitments and minimum sublease rental income to be received under noncancelable subleases were as follows:

Year	Leases		Subleases
	(in thousands)
2005 remaining	$	4,099	$	(53	)
2006		14,983		(252	)
2007		15,016		(294	)
2008		15,224		(25	)
2009		14,627		—
Thereafter		69,161		—
	$	133,110	$	(624	)

Of the $133.1 million in non-cancelable operating lease obligations, approximately $1.2 million is included in accrued expenses at September 30, 2005 relating to a lease abandonment charge. See Notes 3 and 7.

Total rent expense amounted to $4.5 million and $3.9 million during the three months ended September 30, 2005 and 2004, respectively. Total rent expense amounted to $13.1 million and $11.9 million during the nine months ended September 30, 2005 and 2004, respectively.

The Company leases office space to Allscripts in Burlington, Vermont. Total rent received from Allscripts was approximately $89,000 and $90,000 for the three months ended September 30, 2005 and 2004, respectively and $265,000 and $254,000 for the nine months ended September 30, 2005 and 2004, respectively.

Contingencies:

Federal regulations issued in accordance with the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), impose national health data standards on health care providers that conduct electronic health transactions, health care clearinghouses that convert health data between HIPAA-compliant and non-compliant formats, and health plans. Collectively, these groups, including most of IDX’s customers and IDX’s eCommerce Services clearinghouse business, are known as covered entities. These HIPAA standards include:

• transaction and code set standards (the “TCS Standards”) that prescribe specific transaction formats and data code sets for certain electronic health care transactions;

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• privacy standards (the “Privacy Standards”) that protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and

• data security standards (the “Security Standards”) that require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form.

All covered entities were required to comply with the TCS Standards by October 16, 2003. The Privacy Standards imposed by HIPAA have been in effect for most covered entities since April 14, 2003, while the compliance deadline for the Security Standards was April 21, 2005.

Many covered entities, including some of IDX’s customers, IDX’s eCommerce Services clearinghouse business, and trading partners of IDX’s clearinghouse business, are not fully compliant with the TCS Standards. However, IDX has deployed contingency plans to accept non-standard transactions. Because the entire healthcare system, including IDX’s eCommerce Services clearinghouse business and the business of IDX’s customers who use our information systems to generate claims data, has not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system implementation delays and cash flow reduction, with the attendant risk of liability and claims against IDX.

The Privacy Standards place on covered entities specific limitations on the use and disclosure of individually identifiable health information. IDX has made certain changes in products and services to comply with the Privacy Standards. Although IDX believes it is compliant with the Privacy Standards, there can be no assurances that IDX will adequately address the risks created by the Privacy Standards and their implementation or that IDX will be able to take advantage of any resulting opportunities.

Failure to comply with standards under HIPAA may subject IDX to civil monetary penalties and, in certain circumstances, criminal penalties. Under HIPAA, covered entities may be subject to civil monetary penalties in the amount of $100 per violation, capped at a maximum of $25,000 per year for violation of any particular standard. Also, the U.S. Department of Justice (“DOJ”), may seek to impose criminal penalties for certain violations of HIPAA. Criminal penalties under the statute vary depending upon the nature of the violation but could include fines of not more than $250,000 and/or imprisonment.

The effect of HIPAA on IDX’s business is difficult to predict and there can be no assurances that IDX will adequately address the business risks created by HIPAA and its implementation, or that IDX will be able to take advantage of any resulting business opportunities. Furthermore, IDX is unable to predict what changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in the future or how those changes could affect IDX’s business or the costs of compliance with HIPAA.

Indemnification:

IDX includes indemnification provisions in software license agreements with its customers. These indemnification provisions include provisions indemnifying the customer against losses, expenses, and liabilities from damages that could be awarded against the customer in the event that IDX’s software is found to infringe upon a patent or copyright of a third party. The scope of remedies available under these indemnification obligations is limited by the software license agreements. IDX believes that its internal business practices and policies and the ownership of information, works and rights agreements signed by all employees limits IDX’s risk in paying out any claims under these indemnification provisions. To date IDX has not been subject to any litigation and has not had to reimburse any customers for any losses associated with these indemnification provisions.

Other Commitments:

Under the agreement and plan of merger with PointDx, Inc., the Company has a commitment to pay $1.0 million, subject to reductions as defined under the terms of the agreement, in the event that the Company sells a certain number of products incorporating PointDx technology prior to November 1, 2006. See Note 2.

The Company has purchase commitments under certain subcontract arrangements amounting to approximately $3.0 million due in 2005 and $2.0 million due in 2006.

Note 15 – Legal Proceedings

In late 2001, the Company finalized a “Cooperative Agreement” with a non-regulatory federal agency within the U.S. Commerce Department’s Technology Administration, NIST, whereby the Company agreed to lead a $9.2

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million, multi-year project awarded by NIST to a joint venture composed of the Company and five other joint venture partners (the “SAGE Project”). The project entails research and development to be conducted by the Company and its partners in the grant. Subsequently, an employee of the Company made allegations that the Company had illegally submitted claims for labor expenses and license fees to NIST and that the Company never had a serious interest in researching the technological solutions described in the proposal to NIST.

On March 31, 2004, IDX submitted certain information to NIST, which NIST requested in conjunction with a proposed amendment to the Cooperative Agreement. As a result of the amendment, payment on the award was discontinued until IDX demonstrated regulatory compliance relating to certain aspects of its grant accounting and reporting procedures and relating to an in-kind contribution of software IDX made to the project. In issuing the amendment, NIST made no finding of regulatory noncompliance by IDX in connection with the award. On March 25, 2005, NIST issued another amendment to the Cooperative Agreement that lifted the suspension on funding, permitted IDX to recover project costs incurred during the period of the suspension and extended the project for another year.

From June through November 2004, the U.S. Commerce Department, Office of Inspector General (“OIG”), conducted an audit of the SAGE Project. On March 11, 2005, OIG issued a final audit report recommending that NIST disallow certain costs and, subsequently, the Company submitted its response contesting certain findings. On August 17, 2005, NIST issued an Audit Resolution Letter disagreeing with several of OIG’s audit recommendations but concluding that NIST was due a refund in the amount of $335,915. On September 21, 2005, the Company filed an administrative appeal of the determination that IDX owed NIST $335,915, and a decision of the NIST director is expected within the next two months.

The aforementioned employee filed an action against IDX in the name of the United States under the federal False Claims Act in the United States District Court for the Western District of Washington, sometimes referred to as a “qui tam” complaint. The DOJ, as it is statutorily required to do, conducted an investigation of the allegations in the suit in order to determine whether to intervene in the employee’s lawsuit. On August 1, 2005, the government notified IDX that it had concluded its investigation into the employee’s allegations and determined not to intervene in the matter. Notwithstanding the government’s determination not to intervene, the employee may pursue the claim on his own.

In May 2003, the employee filed a complaint against the Company with the Federal District Court for the Western District of Washington, entitled Mauricio A. Leon, M.D. v. IDX Systems Corporation (case no. CV03-1158P) asserting that the Company had knowledge that the employee engaged in “protected activity” and retaliated against the employee in violation of the Federal False Claims Act by, among other things, placing the employee on administrative leave on April 25, 2003. In addition, among other causes of action, the employee alleged that the Company had violated the Americans with Disabilities Act and its Washington State counterpart in part through retaliation against the employee for exercising the employee’s rights under the federal and state discrimination laws. The employee requested relief including, but not limited to, an injunction against the Company enjoining and restraining the Company from the alleged harassment and discrimination, wages, damages, attorneys’ fees, interest and costs. In addition, the employee’s complaint alleges that the Company submitted false statements to the government to obtain the grant and to obtain reimbursement from the government for project costs.

On September 30, 2004, the U.S. District Court issued an order dismissing all of the employee’s claims. The dismissal was based on the Court’s finding that the employee acted in bad faith in destroying evidence that he had a duty to preserve. The Court also awarded the Company $65,000 as sanctions, reflecting the cost of investigating and litigating the destruction of evidence. After entry of the dismissal order, the Company requested the District Court to enjoin proceedings before the U.S. Department of Labor (“DOL”) that had been brought by the employee based upon the same set of facts, as described further below. On February 15, 2005, the District Court declined to enjoin the DOL.

The employee has appealed the dismissal of his federal court lawsuit and the sanction order to the Ninth Circuit Court of Appeals. The Company has appealed the District Court’s denial of the Company’s request to enjoin the DOL proceedings described below. Briefing on these appeals has been completed and a ruling is expected in approximately one year.

On June 6, 2005, the District Court ordered the employee to reimburse the Company for certain costs incurred in the federal court litigation. The employee has filed a motion requesting the District Court to review and reconsider this order requiring payment of costs, and IDX has filed a cross-motion requesting that the District Court impose additional costs. On August 1, 2005, the District Court entered an order denying the employee’s request for a review of the order requiring payment of costs and granted in part the Company’s cross-motion by ordering the employee to pay an additional amount for certain costs.

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In May 2003, the employee filed a complaint against the Company with the DOL, pursuant to Section 1514A of the Sarbanes-Oxley Act of 2002 (“SOX”). The employee’s complaint asserts that, notwithstanding alleged notice to the Company of the employee’s allegations, Company management conspired to continue to defraud the government by allowing fraudulent activities to continue uncorrected and by concealing and avoiding its obligations to report any and all fraudulent activities to the proper authorities. In addition, the employee’s complaint alleges that the Company acted to retaliate, harass and intimidate the employee in contravention of SOX’s whistleblower provisions by, among other things, placing the employee on unpaid administrative leave on April 25, 2003. The employee’s complaint requests relief including, but not limited to, reinstatement, back-pay, with interest, compensation for any damages sustained by the employee as a result of the alleged discrimination, and attorney’s fees. The Occupational Health and Safety Administration (“OSHA”) is charged with the obligation to investigate the employee’s complaint on behalf of DOL.

On June 20, 2005, OSHA issued a preliminary order relating to its investigation. In its order, OSHA found reasonable cause to believe that the employee engaged in activity protected by SOX and that those protected activities contributed to the Company’s decision to place the employee on unpaid administrative leave on April 25, 2003. OSHA therefore found reasonable cause to believe that placement of the employee on unpaid administrative leave violated SOX. On July 20, 2005, the Company filed objections to the Secretary’s Findings and Preliminary Order, which also requested an evidentiary hearing before a DOL administrative law judge. The employee also filed objections and a request for a hearing.

The judge will hear the appeals and review OSHA’s preliminary order de novo. The effectiveness of OSHA’s preliminary order will be stayed pending the outcome of the appeals. Because the False Claims Act retaliation action dismissed by the federal district court may bar the SOX retaliation claim under the doctrine of res judicata, the employee has requested that the SOX proceedings be stayed pending the decision by the Ninth Circuit Court of Appeals, which is reviewing the federal district court’s dismissal order. The administrative law judge has not ruled on this request by the employee for a stay.

The Company intends to continue to vigorously defend against all of the employee’s claims, which the Company continues to maintain are without merit. However, the outcome or the impact these claims may have on the Company’s operations cannot currently be predicted.

From time to time, the Company is a party to or may be threatened with other litigation in the ordinary course of its business. The Company regularly analyzes current information, including, as applicable, the Company’s defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The ultimate outcome of these matters is not expected to materially affect the Company’s business, financial condition or results of operations.

Note 16 – Segment and Geographic Information

Segment Information

Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for reporting information about operating segments. SFAS 131 also establishes standards for related disclosures about major customers, products and services, and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions regarding how to allocate resources and assess performance. The Company internally identifies operating segments by the type of products produced and markets served, and in accordance with SFAS 131, the Company has aggregated similar operating segments into one segment: Information Systems and Services.

Information Systems and Services consist of IDX’s healthcare information solutions that include software, hardware and related services. IDX solutions are designed to enable healthcare organizations to redesign patient care and other workflow processes in order to improve efficiency and quality. The principal markets for this segment include physician groups, management service organizations, hospitals and integrated delivery networks primarily located in the United States, United Kingdom and Canada.

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Geographic Information

Revenues are attributed to countries based on the location of the client. Information concerning revenues of principal geographic areas is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(in thousands, except per share data)
United States	$	110,337	$	110,716	$	331,931	$	317,468
United Kingdom		37,080		23,815		101,616		45,389
Other		2,130		1,550		5,759		6,159
Total	$	149,547	$	136,081	$	439,306	$	369,016

Information concerning long-lived assets of principal geographic areas is as follows:

	September 30, 2005		December 31, 2004
	(in thousands)
Long-lived assets:
United States	$	92,852	$	88,384
United Kingdom		8,968		5,907
	$	101,820	$	94,291

Note 17 – Related Party Transactions

As a result of the sale of Channelhealth to Allscripts, the Company currently owns approximately 17.35% of the common stock of Allscripts at September 30, 2005. As part of a 10-year strategic alliance agreement beginning on January 9, 2001, Allscripts is obligated to pay IDX a percentage of Allscripts’ revenue related to the Company’s customers. The Company recorded revenues of approximately $210,000 and $1.2 million during the three months ended September 30, 2005 and 2004, respectively and $1.5 million and $2.1 million during the nine months ended September 30, 2005 and 2004, respectively. The Company also leases office space to Allscripts in Burlington, Vermont. Total rent received from Allscripts was approximately $89,000 and $90,000 during the three months ended September 30, 2005 and 2004, respectively and $265,000 and $254,000 during the nine months ended September 30, 2005 and 2004, respectively.

Until August 5, 2005, the Company owned 562,069 shares of Series D convertible preferred stock in Stentor, Inc. (“Stentor”), which approximated a 3.4% ownership on an as-converted basis. The Company’s investment in Stentor was liquidated in the quarter ended September 30, 2005 upon completion of the sale of Stentor to Royal Philips on August 5, 2005. The Company currently has a Distribution and Development agreement with Stentor, Inc. that allows the Company and Stentor to mutually distribute each other’s products to new and existing customers that may be merged into the collective MIMS system. The Company and Stentor pay each other one-time up-front initiation royalties based on execution of new customer agreements and ongoing sustaining royalties on a quarterly basis over the life of the customer agreements based on total new managed radiology studies for a given period. Royalty revenue included in system sales for the three months ended September 30, 2005 and 2004 was $726,000 and $690,000, respectively and $2.5 million and $1.8 million for the nine months ended September 30, 2005 and 2004, respectively. Royalty expense included in cost of system sales was $1.7 million and $929,000 for the three months ended September 30, 2005 and 2004, respectively and $6.2 million and $4.4 million during the nine months ended September 30, 2005 and 2004, respectively.

The Company leases office facilities in the UK from a customer, the University College of London Hospital (“UCLH”) under operating leases expiring through 2015. This quarter, Company began leasing additional space from UCLH to meet its operating needs. The leases provide for annual base rent of approximately £1.0 million (approximately $1.8 million using the exchange rate of 1.7696 at September 30, 2005), plus the Company’s share of taxes and maintenance costs. The leases include a provision for annual increases for maintenance, subject to a cap, in accordance with the UK Retail Price Index. In addition, certain leases contain a provision for an increase in the annual base rent in the fifth year of the term of the lease. Total rent expense for our lease with UCLH amounted to $420,000 and $197,000 for the three months ended September 30, 2005 and 2004, respectively and $1.2 million and $341,000 for the nine months ended September 30, 2005 and 2004, respectively.

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Note 18 – Subsequent Events

The Company, its Board and certain of its officers are named defendants in a shareholder class action lawsuit filed on October 24, 2005 in Vermont Superior Court entitled Stanley v. IDX Systems Corporation et al (case no. 1192-05-CnC). The lawsuit challenges the price of and the process leading to the Company’s announced merger with General Electric Company and a wholly owned subsidiary of GE. The complaint seeks to enjoin the consummation of the proposed merger with GE, as well as compensatory damages, among other relief. The defendants’ answer to the complaint is due on November 17, 2005. The Company intends to vigorously defend against the claims, which the Company maintains are without merit. The outcome or the impact these claims may have on the Company’s operations cannot currently be predicted.

On October 31, 2005, the Company acquired substantially all the assets of Healthcare Resource Solution, Inc., a privately held management services company with offices in Wibraham, Massachusetts for approximately $7.1 million, excluding acquisition costs. The assets acquired will be integrated into Flowcast’s Business Services Outsourcing. The acquisition was financed with cash on hand and will be accounted for using the purchase method of accounting.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and 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 Factors Affecting Future Performance” commencing on page 44, as well as those otherwise discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise specified or the context requires otherwise, the terms “we”, “us”, “our” and the “Company” refer to IDX Systems Corporation and its subsidiaries. There are a number of important factors that could cause results to differ materially from those indicated by these forward-looking statements, including among others, statements regarding the effect or timing of, or the ability to consummate, the proposed merger with GE, statements regarding the health care industry, statements regarding our products, product development and information technology, statements regarding future revenue or other financial trends, statements regarding future acquisitions, strategic alliances, or other agreements, including our agreements in the UK, and statements regarding our intellectual property. If any risk or uncertainty identified in the following factors actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline.

We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results.

INTRODUCTION

Founded in 1969, IDX Systems Corporation provides information technology (software and services) solutions designed to maximize value in the delivery of healthcare by improving the quality of patient service and reducing the costs of care. We offer business performance and clinical software solutions. Healthcare providers purchase IDX systems to improve their patients’ experience through simpler access, safer care delivery and more streamlined accounting.

We generate revenues from system sales and from maintenance and service fees for the implementation and support of system sales. Our system sales are comprised of a combination of IDX software licensed under the IDX^® Flowcast™, IDX^® Groupcast™, IDX^® Carecast™ System, and IDX^® Imagecast™ brands to primarily end-user customers, as well as bundled third party hardware and software. IDX patient access, financial and business intelligence products for hospitals, integrated delivery networks and group practices are packaged under Flowcast and Groupcast. Clinical solutions are generally packaged as the Carecast Clinical Enterprise System, which require more configurations and have a longer install period than our business performance solutions. Specialty care products, which include IDX’s radiology and imaging products, are marketed under Imagecast. Our maintenance and service fees consist of software maintenance fees, installation fees, development fees, professional and technical service fees, consulting fees, outsourcing services and other miscellaneous fees. Maintenance and service fees also

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include our IDX eCommerce Services business, which offers web-based electronic data interchange (“EDI”) claims, remittance and statement services. We also enter into a number of contractual arrangements where we do not deliver a software product to be installed at customer site. Rather, we make the software available to the customer through a hosted environment. We run the software on our own servers and the customer gains access to the software through a secure data line. As such, we act as an application service provider (“ASP”). Costs relating to system sales consist primarily of external costs for bundled third party hardware and software purchases. Costs relating to maintenance and service fees consist primarily of employee costs and related infrastructure costs incurred in providing installation services, post-installation support and training and consulting services.

Our revenue growth is driven by demand for new healthcare information technology systems and services as well as installation, maintenance and service to our existing customers. Our ability to increase earnings is driven primarily by IDX software sales, which yield significantly higher gross profit margins than our hardware and services revenue components. Our ability to maintain or increase our services revenue in the future depends primarily on our ability to increase our installed customer base, to resubscribe existing customers to maintenance agreements and to maintain or increase current levels of our professional services business.

Overview

On September 28, 2005, we entered into a definitive merger agreement (“Merger Agreement”) with General Electric Company (“GE”), a New York corporation, for GE to acquire IDX. Each issued and outstanding share of our common stock will be cancelled and converted automatically into the right to receive $44 in cash. Each outstanding option to purchase the Company’s common stock will be cancelled in return for a cash payment equal to $44 less the exercise price of the option. The merger, which has been approved by both the IDX and GE board of directors, is also subject to IDX shareholder approval and other customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). IDX and GE filed pre-merger notifications with the U.S. antitrust authorities pursuant to the HSR Act on October 21, 2005. The Federal Trade Commission and the Department of Justice granted early termination of the waiting period under the HSR Act on November 4, 2005. On October 26, 2005, we filed a preliminary proxy statement with the Securities and Exchange Commission (the “SEC”) with respect to the Merger Agreement. The Merger Agreement contains certain termination rights and provides that, upon the termination of the Merger Agreement under certain circumstances, we would be required to pay GE a termination fee of $43 million.

Revenues and earnings for the quarter were adversely affected as a result of the merger announcement, as customers delayed purchase decisions pending the completion of the transaction and clarification regarding GE’s plans for IDX products following the merger. We anticipate this trend may continue during the fourth quarter of 2005. We do not believe this trend will have any bearing on our ability to complete the planned merger with GE. We also incurred significant additional expenses relating to professional fees in connection with the merger. Increases in employee compensation costs reflect the accrual of a portion of existing performance bonuses, which we vested due to the impact the announcement of the pending merger and its impact on our ability to meet financial targets.

Total revenues increased 9.9% to $149.5 million during the three months ended September 30, 2005 from $136.1 million for the corresponding period in 2004. Total operating expenses increased 21.1% resulting in operating income of $2.5 million or an operating margin of 1.7% for the three months ended September 30, 2005 as compared to an operating margin of 10.8% for the same period in 2004. For the three months ended September 30, 2005, we reported income of $3.1 million, or $0.10 diluted earnings per share. At September 30, 2005, cash and marketable securities totaled $224.1 million.

A more detailed discussion of our results is presented in “RESULTS OF OPERATIONS” below.

CRITICAL ACCOUNTING POLICIES

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. We base our estimates and judgments on our experience, our current knowledge, including terms of existing contracts, and our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements and could potentially create materially different results under different assumptions and conditions.

• revenue recognition,

• allowance for doubtful accounts and credits,

• capitalization of software development costs,

• income taxes, and

• accounting for contingencies.

This is not a comprehensive list of all of IDX’s accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 of Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2004.

Revenue Recognition – We enter into contracts to license software and sell hardware and related ancillary products to customers through our direct sales force. The majority of our system sales attributable to software license revenue are earned from software that does not require significant customization or modification. We recognize revenue for the licensing of software in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition (“SOP 97-2”), as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, and clarified by Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB No. 101”), and SAB No. 104, Revenue Recognition (“SAB No.104”), and Emerging Issues Task Force (“EITF”) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables (“EITF 00-21”) and, accordingly, we recognize revenue from software licenses, hardware, and related ancillary products when:

• persuasive evidence of an arrangement exists, which is typically when a customer has signed a non-cancelable sales and software license agreement;

• delivery, which is typically FOB shipping point for perpetual licenses, and for term base licenses the later of FOB shipping point or the commencement of the term, is complete for the software (either physically or electronically), hardware and related ancillary products;

• the customer’s fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; and

• collectibility is probable.

We must exercise our judgment when we assess the probability of collection and the current creditworthiness of each customer. For example, if the financial condition of our customers were to deteriorate, it could affect the timing and the amount of revenue we recognize on a contract to the extent of cash collected. In addition, in certain instances judgment is required in assessing if there are uncertainties in determining the fee. If there are significant uncertainties, the revenue is not recognized until the uncertainties are resolved.

We use the residual method to recognize revenue when a contract includes one or more elements to be delivered at a future date and vendor specific objective evidence (“VSOE”) of the fair value of all undelivered elements (typically maintenance and professional services) exists. Under the residual method, we defer revenue recognition of the fair value of the undelivered elements and we allocate the remaining portion of the arrangement fee to the delivered elements and recognize it as revenue, assuming all other conditions for revenue recognition have been satisfied. We recognize substantially all of our product revenue in this manner. If we cannot determine the fair value of any undelivered element included in an arrangement, we will defer revenue recognition until all elements are delivered, services are performed or until fair value can be objectively determined.

As part of an arrangement, we typically sell maintenance contracts as well as professional services to customers. Maintenance services include telephone and web-based support as well as rights to unspecified upgrades and enhancements, when and if we make them generally available. Professional services are deemed to be non-essential and typically are for implementation planning, loading of software, installation of hardware, training, building simple interfaces, running test data, assisting in the development and documentation of process rules, and best practices consulting.

We recognize revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased

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separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. We classify the allocated fair value of revenues pertaining to contractual maintenance obligations as a current liability, since they are typically for the twelve-month period subsequent to the balance sheet date.

We recognize revenues from professional services based on VSOE of fair value when: (1) a non-cancelable agreement for the services has been signed or a customer’s purchase order has been received; and (2) the professional services have been delivered. VSOE of fair value is based upon the price charged when professional services are sold separately and is typically based on an hourly rate for professional services.

Our arrangements with customers generally include acceptance provisions. However, these acceptance provisions are typically based on our standard acceptance provision, which provides the customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. This right generally expires 40 to 90 days after installation is completed. The product is deemed accepted unless the customer notifies us otherwise. Generally, we determine that these acceptance provisions are not substantive and historically have not been exercised, and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service level requirements. Certain of our system specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. Historically, we have not incurred substantial costs relating to this guarantee and we currently accrue for such costs as they are incurred. We review these costs on a regular basis as actual experience and other information becomes available; and should they become more substantial, we would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on our license arrangements. We have not accrued any costs related to these warranties in our consolidated financial statements.

At the time we enter into an arrangement, we assess the probability of collection of the fee and the terms granted to the customer. Our typical payment terms include a deposit and subsequent payments based on specific milestone events and dates. If we consider the payment terms for the arrangement to be extended or if the arrangement includes a substantive acceptance provision, we defer revenue not meeting the criterion for recognition under SOP 97-2 and classify this revenue as deferred revenue, including deferred product revenue. Our payment terms are generally fewer than 90 days and payments from customers are typically due within 30 days of invoice date. We recognize this revenue, assuming all other conditions for revenue recognition have been satisfied, when the payment of the arrangement fee becomes due and/or when the uncertainty regarding acceptance is resolved as generally evidenced by written acceptance or payment of the arrangement fee.

Additionally, we enter into certain arrangements for the sale of software that require significant customization. In these instances, we account for the contract in accordance with Accounting Research Bulletin No. 45, Long-term Construction-Type Contracts and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (“SOP 81-1”). In those situations, we generally recognize revenue on a percentage-of-completion basis using labor input measures, which involves the use of estimates. Labor input measures are used because they reasonably measure the stage of completion of the contract. Revisions to cost estimates, which could be material, are recorded to income in the period in which the facts that give rise to the revision become known.

We recognize losses, if any, on fixed price contracts when the amount of the loss is determined. The complexity of the estimation process and the assumptions inherent in the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. We record revenue earned in excess of billings on uncompleted contracts as an asset with unbilled receivables. We record billings in excess of revenue earned on uncompleted contracts as deferred revenue until revenue recognition criteria are met. Deferred contract costs represent costs incurred for the acquisition of goods or services associated with contracts, including contracts accounted for under the percentage-of-completion method of accounting, and certain pre-contract costs for which revenue has not yet been earned.

We also enter into arrangements that involve the delivery or performance of multiple products and services that include the development and customization of software, implementation services, and licensed software and support services. For these contracts, we apply the consensus of EITF 00-21 to determine whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes. Accordingly, if the elements qualify as separate units of accounting, and fair value exists for the elements of the contract that are unrelated to the customization services, these elements are accounted for separately, and the related revenue is recognized as the products are delivered or the services are rendered. We have concluded that the following qualify for separate units of accounting under EITF 00-21: software licenses, including certain integrated

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third party software products; implementation and training services, some of which are provided by third parties; and software support and maintenance services, some of which are provided by third parties.

We also enter into arrangements under which we provide hosted software applications. We recognize revenue for these arrangements based on the provisions of EITF No. 00-3, Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware (“EITF 00-3”), and the provisions of Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, when there is persuasive evidence of an arrangement, collection of the resulting receivable is probable, the fee is fixed or determinable and acceptance has occurred. Our revenues related to these arrangements consist of system implementation service fees and software subscription fees. We have determined that the system implementation services represent set-up services that do not qualify as separate units of accounting from the software subscriptions as the customer would not purchase these services without the purchase of the software subscription. As a result, we recognize system implementation fees ratably over a period of time from when the core system implementation services are completed and accepted by the customer over the remaining customer relationship life, which we have determined is the contractual life of the customer’s subscription agreement. We recognize software subscription fees, which typically commence upon completion of the related system implementation, ratably over the applicable subscription period. Amounts billed prior to satisfying our revenue recognition policy are reflected as deferred revenue.

As of September 30, 2005 and December 31, 2004, we had deferred revenue totaling $11.6 million and $5.5 million, respectively related to system implementation and subscription fees under hosting arrangements. Prior to the year ended December 31, 2004, the revenues associated with system implementation services were not material.

The application of SOP 97-2 and EITF 00-21 requires significant judgment, including whether a software arrangement includes multiple elements, and if so, whether fair value exists for those elements. Software revenue recognition rules are very complex and prone to subjective interpretations in practical application. Typically our contracts contain multiple elements, and while the majority of our contracts contain standard terms and conditions, there are instances where our contracts contain non-standard terms and conditions. As a result, contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes in accordance with SOP 97-2 or EITF 00-21, and if so, the relative fair value that should be allocated to each of the elements and when to recognize revenue for each element. Interpretations would not affect the amount of revenue recognized but could impact the timing of recognition.

We record reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and services in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred (“EITF 01-14”). EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in the income statement.

We include shipping and handling fees billed to customers in revenues in accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Shipping and handling costs are included in cost of sales.

Allowance for Doubtful Accounts and Credits – We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. Substantially all of the Company’s end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom and Canada. We perform ongoing credit evaluations of the financial condition of our customers and generally do not require collateral. Although we are directly affected by the overall financial condition of the healthcare industry, we do not believe significant credit risk exists at September 30, 2005. We generally have not experienced any material losses related to receivables or deferred costs associated with contractual arrangements from individual customers or groups of customers in any specific industry or geographic area. We maintain an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. Our losses related to collection of trade accounts receivables have consistently been within management’s expectations. Due to these factors, no additional credit risk beyond amounts provided for collection losses, which we re-evaluate on a monthly basis based on specific review of the age of our receivables and the period that any receivables are beyond the standard payment terms, is believed by us to be probable.

We also record a provision for estimated credits on product and service related sales in the same period the related revenues are recorded. These estimates are based on an analysis of historical credits issued and other known factors. If the historical data we use to calculate these estimates does not properly reflect the future credits, then a change in

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the credit reserve would be made in the period in which such a determination is made and revenues in that period would be affected.

Capitalization of Software Development Costs – We expense all costs incurred in the research, design and development of software for sale to others until technological feasibility is established. Technological feasibility is established when planning, designing, coding and testing activities have been completed so that the working model is consistent with the product design as confirmed by testing. Thereafter, we capitalize and amortize software development costs to software development expense on a straight-line basis over the lesser of 12 to 18 months or the estimated lives of the respective products, beginning when the products are offered for sale. We capitalize software acquired if the related software under development has reached technological feasibility and if there are alternative future uses for the software. We evaluate the recoverability of capitalized software based on estimated future gross revenues reduced by the estimated cost of completing the products and of performing maintenance and customer support. If our gross revenues were to be significantly less than our estimates, the net realizable value of our capitalized software intended for sale would be impaired.

While we believe that our current estimates and the underlying assumptions regarding capitalized software development costs are appropriate, future events could necessitate adjustments to these estimates, resulting in additional software development expense in the period of adjustment.

Income Taxes – We account for income taxes under the liability method. We determine deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities, measured using the enacted tax rates that will be in effect when these differences are expected to reverse. In assessing the realization of our deferred tax assets, we evaluated certain relevant criteria, including future taxable income, and tax planning strategies designed to generate future taxable income. We currently believe that future earnings and current tax planning strategies will be sufficient to recover substantially all of our recorded deferred tax assets. These strategies include estimates and involve judgments relating to certain unrealized gains in our marketable securities. To the extent that facts and circumstances change – for example, if there is a decline in the fair value of the marketable securities – this tax-planning strategy may no longer be sufficient to support certain deferred tax assets and we may be required to increase the valuation allowance. Furthermore, to the extent that future taxable income against which these tax assets may be applied is not sufficient, some portion or all of our recorded deferred tax assets would not be realizable.

The valuation allowance as of September 30, 2005 and December 31, 2004 relate primarily to state net operating losses and state research and development and other tax credits generated in fiscal 1999 to 2004 through which we can only recognize a benefit through future taxable income.

The American Jobs Creation Act of 2004 (the “Act”) introduced a special one-time dividend received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. The President signed the Act into law on October 22, 2004. Even in light of the Act, the Company did not provide for U.S. income taxes on earnings of the Company’s subsidiaries outside of the U.S. The Company’s current intention is to reinvest the total amount of the Company’s unremitted earnings of approximately $3.2 million permanently or repatriate the earnings only when tax-effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.

Accounting for Contingencies – We are currently involved in certain legal proceedings, which, if unfavorably determined, could have a material adverse effect on our operating results and financial condition. In connection with our assessment of these legal proceedings, we must determine if an unfavorable outcome is probable and evaluate the costs for resolution of these matters, if reasonably estimable. We have developed these determinations and related estimates in consultation with outside counsel handling our defense in these matters, and through an analysis of potential results assuming a combination of litigation and defense strategies. See Part II, Item 1, “Legal Proceedings” and Note 15 of Notes to Consolidated Financial Statements included in this Quarterly Report on 10-Q.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2004 which contain accounting policies and other disclosures required by generally accepted accounting principles.

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NEW ACCOUNTING STANDARDS

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised 2004) (“Statement 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R) is effective for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1, 2006.

Statement 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

We currently plan to adopt Statement 123(R) using the modified-prospective method.

As permitted by SFAS 123, we currently account for share-based payments to employees using the intrinsic value method of APB No. 25 and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on the our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact would have approximated that of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, future stock grants and when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $3.0 million and $4.5 million for the nine months ended September 30, 2005 and 2004, respectively.

In May 2005, the FASB issued FASB Statement No. 154 (“SFAS No. 154”), Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In June 2005, the SEC adopted Securities Offering Reform, which will become effective December 1, 2005. Among other things, the final rule requires all issuers (excluding asset-backed issuers and small business issuers) to disclose “risk factors” in Form 10-K and Form 20-F for fiscal years ending on or after December 1, 2005. Material changes in an issuer’s risk factors are required to be disclosed in Form 10-Q and Form 10-QSB only after the issuer is first required to disclose risk factors in its Form 10-K. We already disclose “risk factors” in our annual report filed in Form 10-K and any material changes in interim report filed in Form 10-Q.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004

The following table indicates the percentage of total revenues and the dollar and percentage of period-over-period change represented by line items in our condensed consolidated statements of income from continuing operations:

	Three months ended September 30, 2005					Three months ended September 30, 2004					Change Three months ended September 30, 2005 Over Three months ended September 30, 2004
	$			% Revenues		$			% Revenues		$ Variance			% Variance
	(in thousands, except percentages and per share amounts)
System sales	$	34,566		23.1	%	$	34,201		25.1	%	$	365		1.1	%
Maintenance and service fees		114,981		76.9	%		101,880		74.9	%		13,101		12.9	%
Total revenues		149,547		100.0	%		136,081		100.0	%		13,466		9.9	%
Cost of system sales		15,172		10.1	%		14,753		10.8	%		419		2.8	%
Cost of maintenance and services		76,281		51.0	%		63,203		46.4	%		13,078		20.7	%
Selling, general and administrative		37,230		24.9	%		27,940		20.5	%		9,290		33.2	%
Software development costs		18,280		12.2	%		15,542		11.4	%		2,738		17.6	%
Restructuring costs and other charges		80		0.1	%		—		—			80			*
Total operating expenses		147,043		98.3	%		121,438		89.2	%+		25,605		21.1	%
Operating income		2,504		1.7	%		14,643		10.8	%		(12,139	)	-82.9	%
Other income (expense), net		1,468		1.0	%		1,080		0.8	%		388		35.9	%
Income tax provision		(871	)	-0.6	%		(5,949	)	-4.4	%		5,078		-85.4	%
Net Income	$	3,101		2.1	%	$	9,774		7.2	%	$	(6,673	)	-68.3	%
Diluted earnings per share	$	0.10				$	0.31				$	(0.21	)	-67.7	%

+ Does not total due to rounding.

* Not meaningful

Total Revenues

Total revenues consist of system sales and maintenance and service fees. Our system sales consist of our software licensed to primarily end-user customers, along with third party hardware and software and royalty income. Revenue recognized under system sales is dependent upon the timing of many variables such as the signing of the contract, the delivery of the hardware and software components, and the achievement of milestones through our implementation efforts. Under certain royalty and revenue-sharing arrangements, we recognize royalty revenue from sales by third parties that incorporate technology licensed from IDX, or we share in revenues received by third parties from IDX customers. Royalty revenues are generated from the execution of new customer agreements and from ongoing sustaining royalties based on total new managed radiology studies for a given period. Maintenance and service fees represent services to implement and support our system sales. More specifically, our maintenance and service fees consist of software maintenance fees, installation fees, professional and technical service fees, training fees, outsourcing services, fees associated with ASP arrangements and other miscellaneous fees. We also enter into a number of contractual arrangements where we do not deliver a software product to be installed at customer site. Rather, we make the software available to the customer through a hosted environment. We run the software on our own servers and the customer gains access to the software through a secure data line. As such, we act as an application service provider (“ASP”). Our revenues generated under ASP arrangements have historically been classified with system sales. These revenues have been reclassified to be included with maintenance and service fees. For the three months ended September 30, 2005 and 2004, ASP revenues totaled $3.1 million and $2.1 million, respectively.

System Sales

System sales increased $365,000 or 1.1% during the three months ended September 30, 2005 as compared to the same period last year. System sales for the quarter fell below our expectations due to the announcement of the GE merger. Several contracts at the end of the quarter did not sign as customers evaluated the implications of the GE merger and product strategy. We anticipate this trend may continue during the fourth quarter of 2005.

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The increase of $365,000 was primarily attributable to an increase in software license revenues of $1.7 million, offset with a decrease in hardware sales of $1.1 million. The increase in software license revenues was primarily attributable to our financial and business intelligence products for hospitals and integrated delivery networks that are packaged under Flowcast. During the three months ended September 30, 2005, we experienced growth in our hosted software applications, which contributed to the decline in hardware sales. Under hosted software arrangements, we do not deliver a software product to be installed at the customer’s site. Instead, we make the software available to the customer through a hosted environment whereby the software is run on our own servers and the customer gains access to the software through a secure data line. This eliminates the need for up-front hardware purchases by the customer and software license revenue is recognized ratably over the customer relationship life, commencing with the completion of and acceptance of implementation services and the hosted site made available for use in production.

Maintenance and Service Fees

The following table indicates the percentage of total revenues and the dollar and percentage of period over period change by line items comprising maintenance and service fees as represented in our condensed consolidated statements of income:

	Three months ended September 30, 2005				Three months ended September 30, 2004				Change Three months ended September 30, 2005 Over Three months ended September 30, 2004
	$		% Revenues		$		% Revenues		$ Variance		% Variance
	(in thousands, except percentages)
Maintenance fees	$	46,825	31.3	%	$	40,335	29.6	%	$	6,490	16.1	%
Installation fees		21,086	14.1	%		20,682	15.2	%		404	2.0	%
Development services		21,068	14.1	%		16,089	11.8	%		4,979	30.9	%
Consulting, professional and other fees		26,002	17.4	%		24,774	18.2	%		1,228	5.0	%
Total maintenance and service fees	$	114,981	76.9	%	$	101,880	74.9	%+	$	13,101	12.9	%

+ Does not total due to rounding.

The increases in development services, which represent revenues for our development efforts associated with the production and customization of certain product functionalities required under our UK contracts, and installation fees were both primarily related to work performed for our UK customers. Our contract with BT contains a provision for an annual increase in service fees (development fees, installation fees and maintenance fees) due to retail price index increases. The annual increase recorded in the quarter ended September 30, 2005 represented approximately $1.1 million of the increase in maintenance and service fees related to our work in the UK. The increase in maintenance fees for software and hardware support was primarily due to an increase in our installed base of $5.0 million combined with annual maintenance price increases of approximately $1.5 million. Consulting, professional and other fees increased 5.0% primarily attributable to increases in our eCommerce revenues of $0.9 million and ASP revenues of $1.0 million. The growth in our eCommerce revenues was primarily due to an increase in our installed base from our medical and physician group practice customers. The growth in our ASP revenues is due to the increased trend in the marketplace to license software under hosted arrangements. Under hosted software arrangements, we do not deliver a software product to be installed at the customer’s site. Instead, we make the software available to the customer through a hosted environment whereby the software is run on our own servers and the customer gains access to the software through a secure data line. This eliminates the need for up-front hardware purchases by the customer and software license revenue is recognized ratably over the customer relationship life, commencing with the completion of and acceptance of implementation services and the hosted site made available for use in production. The shift in the mix from traditional software license purchases to hosted arrangements results in a reduction in system sales in the short-term with revenues being recognized over longer periods of time in future periods. We expect this trend to continue and regard this shift in product mix favorably as it provides better visibility and predictability of future revenue streams.

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Cost of Sales

The following table indicates the total cost of system sales and maintenance and service fees as a percentage of total revenues and the cost of system sales and maintenance and service fees as a percentage of their respective revenues:

	Three months ended September 30,
	2005			2004
	(in thousands, except percentages)
Total revenues	$	149,547		$	136,081
Total cost of system sales and maintenance and service fees		91,453			77,956
Total cost of system sales and maintenance and service fees as a percentage of total revenues		61.2	%		57.3	%
System sales:
System sales	$	34,566		$	34,201
Cost of system sales		15,172			14,753
Cost of system sales as a percentage of system sales		43.9	%		43.1	%
Maintenance and service fees:
Maintenance and service fees	$	114,981		$	101,880
Cost of maintenance and service fees		76,281			63,203
Cost of maintenance and service fees as a percentage of maintenance and service fees		66.3	%		62.0	%

The cost components of our total revenues vary based on the type of products and services we provide, namely system sales and maintenance and service fees. Our cost of system sales consists primarily of external costs relating to third party hardware and software purchases, while the costs of maintenance and service fees are employee-driven and consist primarily of employee and related infrastructure costs incurred in providing maintenance and installation services, post-installation support and training and consulting services. These costs as a percentage of total revenues typically have varied as the mix of revenue (software, bundled third party software, hardware, maintenance and service fees) components carry different margin rates from period to period. In addition, fluctuations in our cost of system sales typically result from the revenue mix of our software license revenue, which has a lower cost percentage and higher margins, and third party hardware and software sales, which have higher cost percentages and lower margins. Under certain royalty agreements, we incur royalty expense from sales that incorporate technology licensed from third parties, which is included in our cost of system sales.

Our costs incurred under ASP arrangements have historically been classified with system sales. These costs are now included with maintenance and service fees. For the three months ended September 30, 2005 and 2004, the ASP cost of revenues totaled $294,000 for each period, respectively.

Cost of System Sales

The cost of system sales as a percentage of system sales increased principally as a result of an increase in royalty expense due to an increase in our installed base that incorporates technology from third parties. This was partially offset by the change in the product mix between our software license revenue and third party hardware and software sales. IDX software sales, which carry a lower cost of revenue percentage, represented a larger portion of system sales during the three months ended September 30, 2005 as compared to the same period in 2004.

Cost of Maintenance and Service Fees

The increase in the cost of maintenance and service fees of $13.1 million was primarily driven by labor and related support costs to support the growth in our revenues from our operations in the UK. The cost of maintenance and service fees as a percentage of maintenance and service fee revenue for the three months ended September 30, 2005 as compared to the same period in 2004 increased to 66.3% from 62.0% primarily due to development costs and related services provided in the UK, which carry higher cost percentages than installation and maintenance services and due to the utilization of consultants which have a higher cost of revenue percentage than internal labor. We are currently working to reduce our labor costs in the UK by replacing consultants with employees. Our cost of maintenance and service fees as a percentage of maintenance and service fee revenue for the three months ended September 30, 2005 was 66.3%, down 2.8% from 69.1% for the three months ended June 30, 2005.

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We recognize revenue and costs relating to our development work in the UK on a percentage-of-completion basis, which involves the use of estimates. Revisions to cost estimates are recorded to income in the period in which the facts that give rise to the revision become known. This quarter we renegotiated the costs for development work in the UK with one of our subcontractors, which resulted in a reduction in the cost of maintenance and service fees of approximately $1.3 million for the three months ended September 30, 2005.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of employee compensation and benefit costs for sales, corporate, financial and administrative personnel, advertising and trade show costs, related infrastructure costs and professional fees. As a percentage of total revenues, selling, general and administrative expenses were 24.9% for three months ended September 30, 2005 as compared to 20.5% for the same period in 2004. The increase of $9.3 million was primarily due to an increase of approximately $5.8 million in employee compensation, benefit and related infrastructure costs, $2.0 million in professional fees and $1.5 million in bad debt expense.

Compensation, benefit and related infrastructure costs increased to support our overall growth. In addition, we incurred incremental compensation costs for the accrual of a portion of existing performance bonuses, which we vested due to the impact the announcement of the pending merger and its impact on our ability to meet financial targets. Professional fees increased principally due to expenses incurred in connection with the pending GE acquisition. Bad debt expense increased for three months ended September 30, 2005 as compared to the same period in 2004 primarily as a result of an increase in specifically identified collection risks this quarter, which is contrary to the result in 2004 that included a reduction in specifically identified collection risks and improved collection experience.

Software Development Costs

Software development costs consist primarily of costs related to our software developers, acquired technologies, associated infrastructure costs required to fund product development initiatives and amortization of such costs. A portion of our research and development costs, principally employee compensation and benefit costs, are allocated to the cost of maintenance and services that relate to the development work in the UK.

As described in Note 1 to the notes to the accompanying condensed consolidated financial statements, which contain accounting policies and other disclosures required by generally accepted accounting principles, software development costs incurred subsequent to the establishment of technological feasibility until general release of the related products are capitalized. Technological feasibility is established upon the completion of a working model or detail program design. Historically, costs incurred after establishment of technological feasibility have not been significant; however, as we develop products that use more complex technologies as well as more comprehensive clinical systems, the time and effort required to complete testing after technological feasibility has been established may become significantly more extensive. Consequently, we anticipate that as we continue to focus our development efforts on enhancing functionality and developing new applications for our current product suites, capitalized software development costs may become more significant in future reporting periods. Approximately $295,000 and $889,000 of software development costs were capitalized during the three months ended September 30, 2005 and 2004, respectively. Amortization of software development costs was approximately $133,000 and $770,000 during the three months ended September 30, 2005 and 2004, respectively.

Significant changes in our software development costs consisted of an increase of $2.1 million in labor and related support costs and an increase of $0.6 million in amortization related to the RTI acquired technology this quarter. Research and development headcount increased 20%, which was consistent with the increase in our personnel related costs.

Restructuring Costs and Other Charges

In connection with the termination of our arrangement with Fujitsu (See Note 1—Cost of Sales), we re-evaluated our operating costs and staffing requirements related to our operations in the United Kingdom. In July and August 2005, we finalized and approved a headcount reduction plan under which we terminated 20 client-serving personnel in our Carecast operating unit in the UK. The reduction plan resulted in a charge to earnings of approximately $163,000 this quarter in connection with costs associated principally with employee severance payments of $490,000, net of an estimated $327,000 in reimbursements from Fujitsu for qualifying redundancy costs.

In August 2005, we entered into an agreement to terminate a portion of our remaining contractual commitments under our Seattle lease resulting in a reduction in the liability and a credit to earnings of approximately $83,000.

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Total Other Income (Expense), Net

The following table sets forth the components of total other income, net:

	Three months ended September 30,
	2005			2004
	(in thousands)
Other income (expense)
Interest income	$	1,018		$	812
Interest expense		(81	)		(63	)
Foreign currency exchange (losses) gains, net		(1,277	)		83
Gain on investments		1,808			248
Total other income, net	$	1,468		$	1,080

Interest Income

The increase in interest income was due primarily to higher domestic interest rates for the three months ended September 30, 2005 as compared to the same period in 2004.

Foreign Currency Exchange (Losses) Gains, net

Receivables generated for IDX from certain contractual arrangements with customers in the UK are primarily denominated in British pounds sterling. In addition, since we have both the intent and ability to settle our inter-company balances, we have designated these balances, which are denominated in British pounds sterling, as short-term in nature and therefore, record foreign currency exchange gains (losses) to our consolidated statements of income.

Gain on Investments

During the three months ended September 30, 2005 and 2004 we realized a gain of $1.8 million and $248,000, respectively on the sale of investments. On August 5, 2005, Royal Philips Electronics acquired Stentor and our preferred shares were converted, on a one for one basis, into common stock and liquidated for approximately $9.3 million resulting in a gain of $1.8 million.

Income Tax Provision

Our effective income tax rate was 21.9% for the three months ended September 30, 2005 and 38.0% for the three months ended September 30, 2004, resulting in an income tax provision of $871,000 and $5.9 million for the three months ended September 30, 2005 and 2004, respectively. The effective tax rate decreased during the three months ended September 30, 2005 as a result of the change in estimated amount of state net operating losses expected to be utilized. We currently expect an effective tax rate of 36.0% for 2005 which is lower than the statutory rate of 40.0% due to the utilization of $679,000 and $438,000 in state net operating losses and research and development credits, respectively, to offset income taxes. Our effective income tax rates for 2004 was lower than the statutory rate primarily due to our use of research and development credits to offset income taxes.

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NINE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004

The following table indicates the percentage of total revenues and the dollar and percentage of period over period change represented by line items in our condensed consolidated statements of income from continuing operations:

	Nine months ended September 30, 2005					Nine months ended September 30, 2004					Change Nine months ended September 30, 2005 Over Nine months ended September 30, 2004
	$			% Revenues		$			% Revenues		$ Variance			% Variance
	(in thousands, except percentages and per share amounts)
System sales	$	106,296		24.2	%	$	105,616		28.6	%	$	680		0.6	%
Maintenance and service fees		333,010		75.8	%		263,400		71.4	%		69,610		26.4	%
Total revenues		439,306		100.0	%		369,016		100.0	%		70,290		19.0	%
Cost of system sales		44,342		10.1	%		44,081		11.9	%		261		0.6	%
Cost of maintenance and services		223,547		50.9	%		168,268		45.6	%		55,279		32.9	%
Cost of sales – loss on contract termination, net		3,545		0.8	%		—		—			3,545			*
Selling, general and administrative		99,490		22.6	%		82,831		22.4	%		16,659		20.1	%
Software development costs		47,440		10.8	%		44,688		12.1	%		2,752		6.2	%
Restructuring costs and other charges		80		—			387		0.1	%		(307	)		*
Total operating expenses		418,444		95.3	%+		340,255		92.2	%+		78,189		23.0	%
Operating income		20,862		4.7	%		28,761		7.8	%		(7,899	)	-27.5	%
Other income (expense), net		4,840		1.1	%		2,540		0.7	%		2,300		90.6	%
Income tax provision		(8,911	)	-2.0	%		(11,869	)	-3.2	%		2,958		-24.9	%
Net Income	$	16,791		3.8	%	$	19,432		5.3	%	$	(2,641	)	-13.6	%
Diluted earnings per share	$	0.52				$	0.62				$	(0.10	)	-16.1	%

+ Does not total due to rounding.

* Not meaningful

Total Revenues

Our revenues generated under ASP arrangements have historically been classified with system sales. These revenues are now included with maintenance and service fees. For the nine months ended September 30, 2005 and 2004, ASP revenues totaled $8.9 million and $6.9 million, respectively.

System Sales

System sales increased 0.6% during the nine months ended September 30, 2005 as compared to the same period in 2004. System sales for the three months ended September 30, 2005 fell below our expectations due to the announcement of the GE merger. Several contracts at the end of the quarter did not sign as customers evaluated the implications of the GE merger and product strategy.

The increase of $679,000 was primarily attributable to increases in software license revenues of $4.5 million and royalty revenue of $1.8 million, offset by a decrease in hardware sales of $5.6 million. The increase in software license revenues was primarily attributable to our financial and business intelligence products for hospitals and integrated delivery networks that are packaged under Flowcast. The increase in royalty revenues was generated from the execution of new customer agreements by third parties that incorporate technology licensed from IDX and from ongoing sustaining royalties based on total new managed radiology studies for a given period. During the nine months ended September 30, 2005, we experienced growth in our hosted software applications, which contributed to the decline in hardware sales. Under hosted software arrangements, we do not deliver a software product to be installed at the customer’s site. Instead, we make the software available to the customer through a hosted environment whereby the software is run on our own servers and the customer gains access to the software through a secure data line. This eliminates the need for up-front hardware purchases by the customer. Software license revenue is recognized ratably over the customer relationship life, commencing with the completion of and acceptance of implementation services and the hosted site made available for use in production.

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Maintenance and Service Fees

The following table indicates the percentage of total revenues and the dollar and percentage of period-over-period change by line items comprising maintenance and service fees as represented in our condensed consolidated statements of income:

	Nine months ended September 30, 2005				Nine months ended September 30, 2004				Change Nine months ended September 30, 2005 Over Nine months ended September 30, 2004
	$		% Revenues		$		% Revenues		$ Variance		% Variance
	(in thousands, except percentages)
Maintenance fees	$	133,543	30.4	%	$	114,805	31.1	%	$	18,738	16.3	%
Installation fees		58,824	13.4	%		51,227	13.9	%		7,597	14.8	%
Development services		65,756	15.0	%		29,710	8.1	%		36,046	121.3	%
Consulting, professional and other fees		74,887	17.0	%		67,658	18.3	%		7,229	10.7	%
Total maintenance and service fees	$	333,010	75.8	%	$	263,400	71.4	%	$	69,610	26.4	%

The increase in maintenance and service fees was driven largely by our business in the UK. We began recognizing revenues associated with our work in connection with our contract with BT in the UK during the second quarter of 2004. As a result, the nine months ended September 30, 2004 represents only six months of revenues under the BT contract as compared to nine months during the same period in 2005. The increases in development services, which represent revenues for our development efforts associated with the production and customization of certain product functionalities required under our UK contracts, and installation fees were both primarily related to work performed for our UK customers. Our contract with BT contains a provision for an annual increase in service fees (development fees, installation fees and maintenance fees) due to retail price index increases. This annual increase represented approximately $1.1 million of the increase in maintenance and service fees related to our work in the UK. The increase in maintenance fees for software and hardware support was primarily due to an increase in our installed base of $14.8 million combined with annual maintenance price increases of approximately $3.9 million. Consulting, professional and other fees increased 10.7%, primarily attributable to increases in our eCommerce revenues of $3.3million, BSO services revenues of $2.7million and ASP revenues of $2.0 million. The growth in our eCommerce revenues was primarily due to an increase in our installed base from our medical and physician group practice customers. BSO is a new offering that was launched during the latter part of the second quarter of 2004. The increase in ASP revenues for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004 is the same as previously described for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004.

Cost of Sales

Our costs incurred under ASP arrangements have historically been classified with system sales. These costs are now included with maintenance and service fees. For the three months ended September 30, 2005 and 2004, the ASP cost of revenues totaled $813,000 and $660,000, respectively.

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The following table indicates the total cost of system sales and maintenance and service fees as a percentage of total revenues and the cost of system sales and maintenance and service fees as a percentage of their respective revenues:

	Nine months ended September 30,
	2005			2004
	(in thousands, except percentages)
Total revenues	$	439,306		$	369,016
Total cost of system sales and maintenance and service fees		267,889			212,349
Total cost of system sales and maintenance and service fees as a percentage of total revenues		61.0	%		57.5	%
System sales:
System sales	$	106,296		$	105,616
Cost of system sales		44,342			44,081
Cost of system sales as a percentage of system sales		41.7	%		41.7	%
Maintenance and service fees:
Maintenance and service fees	$	333,010		$	263,400
Cost of maintenance and service fees		223,547			168,268
Cost of maintenance and service fees as a percentage of maintenance and service fees		67.1	%		63.9	%

Cost of System Sales

Our cost of system sales as a percentage of system sales remained constant at 41.7% as a result of the product mix among our software license revenue and third party hardware and software sales remaining relatively consistent during the nine months ended September 30, 2005.

Cost of Maintenance and Service Fees

The increase in the cost of maintenance and service fees of $55.3 million was primarily driven by labor and related support costs to support the growth in our revenues from our operations in the UK and our installed base of software applications. The nine months ended September 30, 2004 represents only three months of operations in the UK as compared to nine months of operations during the same period in 2005. The cost of maintenance and service fees as a percentage of maintenance and service fee revenue for the nine months ended September 30, 2005 as compared to the same period in 2004 increased to 67.1% from 63.9% due primarily to development costs and related services provided in the UK, which carry higher cost percentages due to the use of third party subcontractors.

We recognize revenue and costs relating to our development work in the UK on a percentage-of-completion basis, which involves the use of estimates. Revisions to cost estimates are recorded to income in the period in which the facts that give rise to the revision become known. In 2005, we renegotiated the costs for development work in the UK with some of our subcontractors, which resulted in a reduction in the cost of maintenance and service fees of approximately $4.1 million for the nine months ended September 30, 2005.

Cost of Sales – Loss on Contract Termination, net

On June 1, 2005, we entered into a letter of agreement with the NHS, Fujitsu and BT to terminate the agreement in principle between the Company and Fujitsu dated December 15, 2003 (the “Fujitsu Arrangement”) to provide a clinical information system for the Southern Cluster of the UK NHS Connecting for Health Program. The termination of the Fujitsu Arrangement resulted in a charge during the second quarter of 2005 totaling $3.5 million in connection with the write-off of costs incurred-to-date classified as Deferred Contract Costs of $8.7 million, offset by $5.2 million collected from Fujitsu in consideration for agreeing to the termination of the Agreement. The charge includes a liability for estimated costs for obligations under certain subcontract agreements.

Selling, General and Administrative Expenses

Selling, general and administrative expenses as a percentage of total revenues were 22.5% for the nine months ended September 30, 2005 as compared to 22.6% for the same period last year. The increase of $16.7 million was primarily due to increases of approximately $13.7 million in employee compensation, benefit and related infrastructure costs, $2.1 million in professional fees and $0.9 million in bad debt expense.

Compensation, benefit and related infrastructure costs increased to support our overall growth. In addition, we incurred incremental compensation costs for the accrual of a portion of existing performance bonuses, which we

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vested due to the impact the announcement of the pending merger and its impact on our ability to meet financial targets. Professional fees increased principally due to expenses incurred in connection with the pending GE acquisition. Bad debt expense increased for nine months ended September 30, 2005 as compared to the same period in 2004 primarily as a result of an increase in specifically identified collection risks in 2005 combined with reduction in specifically identified collection risks and improved collection experience in 2004.

Software Development Costs

Significant changes in our software development costs consisted of an increase of $2.2 million in labor and related support costs and an increase of $0.6 million in amortization related to the RTI acquired technology this quarter.

Restructuring Costs and Other Charges

2005

The change in restructuring costs and other charges for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004 is the same as previously described for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004.

2004

On June 1, 2004, we entered into an agreement to terminate our contractual commitments under the remaining lease associated with the 2001 restructuring program. We paid $1.5 million to terminate the lease, which was approximately $387,000 higher than the amount accrued at the date of termination.

Total Other Income (Expense), Net

The following table sets forth the components of total other income, net:

	Nine months ended September 30,
	2005			2004
	(in thousands)
Other income (expense)
Interest income	$	3,119		$	1,741
Interest expense		(228	)		(559	)
Foreign currency exchange (losses) gains, net		(2,887	)		101
Gain on sale of investments		5,225			1,257
Other-than-temporary impairment of cost method investments		(389	)		—
Total other income, net	$	4,840		$	2,540

Interest Income

The increase in interest income was due primarily to higher domestic interest rates for the nine months ended September 30, 2005 as compared to the same period in 2004.

Foreign Currency Exchange (Losses) Gains, net

Receivables generated for IDX from certain contractual arrangements with customers in the UK are primarily denominated in the pound sterling. In addition, since we have both the intent and ability to settle our inter-company balances, we have designated these balances, which are denominated in pounds sterling, as short-term in nature and therefore, record foreign currency exchange gains (losses) to our consolidated statements of income.

Gain on Sale of Investments

During the nine months ended September 30, 2005 and 2004 we realized a gain of $5.2 million and $1.3 million, respectively, on the sale of investments and from distributions received from the sale of securities in our investment in an unrelated investment partnership.

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Other-than-Temporary Impairment of Cost Method Investments

We hold certain minority equity investments in non-publicly traded securities, which are generally carried at cost. We regularly review these investments for indications of impairment and impairment losses are charged to income for other-than-temporary declines in fair value. During the second quarter of 2005, we recorded $389,000 of impairment loss on other-than-temporary reductions in fair value of the Company’s minority equity investments.

Income Tax Provision

Our effective income tax rate was 34.7% for the nine months ended September 30, 2005 and 38.0% for the nine months ended September 30, 2004, resulting in an income tax provision of $8.9 million and $11.9 million for the nine months ended September 30, 2005 and 2004, respectively. The effective tax rate decreased during the three months ended September 30, 2005 as a result of the change in estimated amount of state net operating losses expected to be utilized. We currently expect an effective tax rate of 36.0% for 2005 which is lower than the statutory rate of 40.0% due to the utilization of $679,000 and $438,000 in state net operating losses and research and development credits, respectively, to offset income taxes. Our effective income tax rates for 2004 was lower than the statutory rate primarily due to our use of research and development credits to offset income taxes.

LIQUIDITY AND CAPITAL RESOURCES

We primarily generate cash from the sale of our software, maintenance fees, which are typically paid on a monthly basis, the provision of implementation services and the provision of professional and consulting services. We primarily use cash to pay employees’ salaries, commissions and benefits, pay rent for office facilities, procure insurance, pay taxes and pay vendors for services and supplies. We also use cash to procure capital assets to support our business and complete acquisitions of other businesses and technology. We principally have funded our operations, working capital needs and capital expenditures from operations and short-term borrowings under revolving secured lines of credit. At September 30, 2005, we had no debt, $35.6 million in cash and cash equivalents, $188.5 million in short-term investments, and $236.4 million of working capital.

Operating Activities:

Net cash provided by (used in) continuing operations is principally comprised of net income and is primarily affected by the net change in accounts and unbilled receivables, deferred contract costs, accounts payable and accrued expenses, deferred revenues and non-cash items relating to depreciation and amortization, deferred taxes, and certain components of lease abandonment and restructuring charges. Due to the nature of our business, accounts and unbilled receivables, deferred contract costs, deferred revenue, and accounts payable can fluctuate considerably due to, among other things, the length of installation efforts, which is dependent upon the size of the transaction, the changing business plans of the customer, the effectiveness of customers’ management and general economic conditions. As we continue to market more comprehensive clinical systems, the required amount of customization and length of the delivery cycle has also increased.

Net cash of $13.6 million was used in operating activities during the nine months ended September 30, 2005 primarily due to an increase in accounts receivable and deferred contract costs relating to our UK contracts. Our accounts receivable balance fluctuates from period to period, which affects our cash flow from operating activities. Fluctuations result from the timing of sales and billing activity and cash collections. Billed and unbilled accounts receivable increased $20.3 million primarily due to an increase in unbilled receivables of $17.3 million attributable to revenue earned under the percentage-of-completion method of accounting in excess of billings. We use days’ sales outstanding, or DSO, calculated on a quarterly basis, as a measurement of the quality and age of our receivables. We define DSO as (a) accounts receivable and unbilled receivables, net of allowance for doubtful accounts, divided by total revenue for the most recent quarter, multiplied by (b) the number of days in that quarter. Our DSO was 90 days for the three months September 30, 2005 as compared to 80 days during the same period in 2004 and 86 days for the year ended December 31, 2004. During the fourth quarter of 2004, we completed one contract that was accounted for under the completed-contract method of accounting whereby revenues and costs are included in operations in the year during which the contract is completed. Included in 2004 revenues were approximately $13.5 million in revenues related to this contract. Excluding the completed contract revenues, our DSO was 88 days during the year ended December 31, 2004. The increase in DSO at September 30, 2005 was primarily due to the increase in revenue earned under the percentage-of-completion method of accounting in excess of billings and due to a delayed customer payment.

Deferred contract costs, which represent costs incurred on revenues not yet recognized, increased $29.7 million to $89.3 million during the nine months ended September 30, 2005 primarily due to payments for goods and services related to future deliverables under certain of our UK contracts. We determine the amount of revenues and contract costs to be recognized in operations, including deferred contract costs, based upon a measurement of progress to

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completion in accordance with the provisions of SOP 81-1. The costs that accumulate in the deferred contract costs account are contract costs as contemplated by SOP 81-1 and consist primarily of third party networking and software licensing costs, IDX labor costs and third party labor costs. These costs pertain to the customization and modification of the software required under these contracts. Certain of our contracts provide for fixed, date-dependent payments that, during the software customization phase of the arrangement, are payable to IDX after the associated services are performed. We deem this schedule of payments to constitute extended payment terms. Accordingly, we limit the revenue to be recognized to the amount of payments that are due. We currently expect billings and associated revenues to occur according to the contract terms on contracts where costs have been incurred in excess of billings and associated revenues. The deferred revenues and billings in excess of revenues earned will be earned as services are performed.

During the nine months ended September 30, 2005, deferred tax liabilities increased by $33.1 million primarily as a result of the recognition of a deferred tax liability on the unrealized gains relating to available-for-sale securities due to the increase in the amount of Allscripts shares that can be sold within one year.

Investing Activities:

Cash flows used in investing activities have historically been related to the purchase of computer and office equipment, leasehold improvements and the purchase and sale of investment grade marketable securities. We invested approximately $25.8 million through December 31, 2004 on the acquisition and implementation of an Enterprise Resource Planning (“ERP”) system and have invested an additional $3.5 million in the ERP system during the nine months ended September 30, 2005.

Investing activities may also include purchases of, interests in, loans to and acquisitions of businesses for access to complementary products and technologies. During this quarter, cash flows used in investing activities included the acquisition of RealTimeImage for $17.2 million. We currently expect to acquire substantially all the assets of Healthcare Resources, Inc. during the fourth quarter of 2005 for approximately $7.1 million in cash.

In April 2002, we acquired a minority interest in Stentor, Inc., one of our strategic partners, by exercising a warrant to purchase 562,069 shares of preferred stock of Stentor for $7.5 million. On August 5, 2005, Royal Philips Electronics acquired Stentor and our preferred shares were converted, for a one for one basis, into common stock and liquidated for approximately $9.3 million.

We currently own, through a wholly owned subsidiary, approximately 7.1 million shares of common stock of Allscripts Healthcare Solutions, Inc., a public company listed on the NASDAQ National Market under the symbol MDRX. This investment had a quoted market value of approximately $127.5 million as of September 30, 2005, based on the last reported sales price per share of Allscripts common stock on the NASDAQ National Market on that date. We are allowed to sell only 25% of our initial Allscripts shares during 2005. All shares of Allscripts held by the Company are available for sale within twelve months of September 30, 2005. As a result, the fair value of all shares is reflected in marketable securities in the accompanying consolidated balance sheets as of September 30, 2005.

Financing Activities:

Cash flows provided by (used in) financing activities historically relate to the issuance of common stock through the exercise of employee stock options and in connection with the employee stock purchase plan and proceeds from our line of credit. In December 2004, we entered into a new $50.0 million Revolving Credit Facility with several banks. This agreement provides for a revolving credit line of $50.0 million with additional minimum increments of $25.0 million available, up to a maximum of $150.0 million. Interest on outstanding borrowings is based upon one of two options, which we select at the time of the borrowing. The first option is the highest of the bank’s prime rate, the secondary market rate for three-month certificates of deposit plus 1.0%, and the federal funds effective rate plus 0.5%. The second option is the London Interbank Offered Rate (“LIBOR”) plus applicable margins ranging from 75.0 to 175.0 basis points, as defined in the agreement, and is available only for borrowings in excess of $2.0 million. In addition, we may, subject to availability, request Letters of Credit in an aggregate amount not to exceed $10.0 million. The Revolving Credit Facility will expire on December 22, 2009. At September 30, 2005, no amounts were outstanding under the Revolving Credit Facility and the Company had no letters of credit outstanding.

FASB Statement 123(R) will require the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current accounting literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among

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other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $3.0 million and $4.5 million during the nine months ended September 30, 2005 and 2004, respectively.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2005, and the effect such obligations are expected to have on our liquidity and cash in the future periods:

(in thousands)	Remainder of 2005		2006		2007		2008		2009		Thereafter		Total
Non–cancelable leases	$	4,099	$	14,983	$	15,016	$	15,224	$	14,627	$	69,161	$	133,110
Purchase commitments		2,950		1,966		—		—		—		—		4,916
Acquisition related commitments		1,000		—		—		—		—		—		1,000
Total contractual obligations	$	8,049	$	16,949	$	15,016	$	15,224	$	14,627	$	69,161	$	139,026

Of the $133.1 million in non-cancelable lease obligations, approximately $1.2 million is accrued at June 30, 2005 as a lease abandonment charge and as a restructuring cost. See Notes 3 and 7 of the Notes to Consolidated Financial Statements.

We believe that the level of our cash and investment balances, anticipated cash flow from operations and our $50 million revolving credit facility will be sufficient to satisfy our cash requirements for the next eighteen months. To date, inflation has not had a material impact on our revenues or income.

FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE

We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Because of these and other factors, past financial performance should not be considered an indicator of future performance. Investors should not use historical trends to anticipate future results.

The following important factors affect our business and operations:

RISKS ASSOCIATED WITH THE COMPANY’S ACQUISITION BY GE. We have entered into a Merger Agreement with GE pursuant to which GE will acquire all of the Company’s issued and outstanding shares at a price of $44 per share. The transaction is subject to IDX shareholder and regulatory approvals, and other customary conditions. On October 26, 2005, the Company filed a preliminary proxy statement with the SEC with respect to the Merger Agreement.

If our shareholders do not approve the Merger Agreement or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to the Company will be offered or that our business, prospects or results of operations will not be adversely impacted. In addition, if the Merger Agreement is terminated, we will, under certain circumstances, be required to pay a termination fee to GE in an amount of $43 million.

Significant management attention and financial resources were required to enter into this agreement and will be required to complete this acquisition. Failure to complete this acquisition could negatively affect our future results in a variety of ways. These include:

• delays in customers’ purchasing decisions due to concerns about Company stability and product viability;

• difficulties in retaining and incenting key employees;

• delays in development of certain products or initiatives;

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• costs and effects on the business as a result of termination of the integration process, including the diversion of resources and personnel to the process;

• negative media coverage related to the failure of the acquisition; and

• stock volatility or shareholder litigation, including the class action lawsuit filed on October 24, 2005 that challenges the price of and the process leading to the Company’s announced merger with GE and a wholly owned subsidiary of GE.

RISKS ASSOCIATED WITH OPERATIONS AND CONTRACTS IN THE UNITED KINGDOM. We have been awarded a contract to perform services in relation to a large information systems project for the British government, which requires the expansion of our operations in the United Kingdom, including additions to and changes in management. Significant management attention and financial resources are required to develop our UK operations, and our future results could be adversely affected by a variety of changing factors. These include:

• significant start-up costs, resulting in initial lower operating margins for our UK operations;

• changes in the relationship between our prime contractor, BT and the National Health Service (“NHS”), including any changes relating to the timeliness or willingness of the NHS to pay BT for goods and services;

• termination or renegotiation of all or a portion of the prime contract between BT and NHS, which could lead to a corresponding termination or renegotiation of our subcontracts;

• uncertainties and complexities in interpreting the broad range of functional and technical requirements;

• difficulties and costs of staffing and managing complex projects and operations, especially in another country;

• uncertainties and difficulties in working with multiple parties in defining these functional and technical requirements and moving toward acceptance of a deliverable meeting those requirements;

• difficulties and costs associated with delays in the process of defining these functional and technical requirements and meeting evolving contractual requirements;

• unexpected changes in UK regulatory requirements;

• difficulties with respect to development of our products to meet applicable standards;

• fluctuations in foreign currency exchange rates;

• changes in our relationships with our prime contractor or our sub-contractors, pressure to re-negotiate the terms of these relationships or terminate them;

• difficulties in the development of new products contemplated by our contracts in the UK; and

• difficulties in the deployment of our products in the UK.

QUARTERLY OPERATING RESULTS MAY VARY. Our quarterly operating results have varied in the past and may vary in the future. We expect our quarterly results of operations to continue to fluctuate. Because a significant percentage of our expenses are relatively fixed, the following factors could cause these fluctuations:

• delays in customers’ purchasing decisions due to a variety of factors;

• long sales cycles;

• long installation and implementation cycles for the larger, more complex and costlier systems;

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• recognizing revenue at various points during the installation process, typically based on milestones; and

• timing of new product and service introductions and product upgrade releases.

In light of the above, we believe that our results of operations for any particular quarter or fiscal year are not necessarily meaningful or reliable indicators of future performance.

INTERNAL CONTROLS. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. Management assessed all deficiencies on both an individual basis and in combination to determine if, when aggregated, they constitute more than an inconsequential deficiency. We identified a number of control deficiencies related to revenue recognition. Due to the concentration of such deficiencies in this area, management concluded that the deficiencies, in aggregate, represented a material weakness in internal controls relating to revenue recognition. We have established a remediation program, which includes additional accounting and finance personnel, the evaluation and purchase of contracting software and the implementation of a comprehensive training program. We cannot provide any assurance to you that they will be effective in remediating the material weakness, or that they will be effective in preventing other material weaknesses or significant deficiencies in our internal controls.

We continue to monitor controls for any additional weaknesses or deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within IDX to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. In addition, if we continue to expand globally, the challenges involved in implementing appropriate internal controls will increase and will require that we continue to improve our internal controls.

RISKS ASSOCIATED WITH ACQUISITION STRATEGY. We may decide to meet business objectives in part through either acquisitions of complementary products, technologies and businesses or alliances with complementary businesses. We may not be successful in these acquisitions or alliances, or in integrating any such acquired or aligned products, technologies or businesses into our current business and operations. Factors which may affect our ability to expand successfully include:

• the generation of sufficient financing to fund potential acquisitions and alliances;

• the successful identification and acquisition of products, technologies or businesses;

• effective integration and operation of the acquired or aligned products, technologies or businesses despite technical difficulties, geographic limitations and personnel issues;

• our ability to exercise effective internal controls over the newly acquired business and implement effective compliance programs; and

• our ability to overcome significant competition for acquisition and alliance opportunities from companies that have significantly greater financial and management resources.

VOLATILITY OF STOCK PRICE. We have experienced, and expect to continue to experience, fluctuations in our stock price due to a variety of factors, including:

• actual or anticipated quarterly variations in operating results;

• changes in expectations of future financial performance;

• changes in estimates of securities analysts;

• market conditions, particularly in the computer software, healthcare, and Internet industries;

• announcements of technological innovations, including web-based delivery of information, clinical information systems advances and use of application service provider technology;

• new product introductions by us or our competitors;

• delay in customers’ purchasing decisions due to a variety of factors;

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• market prices of competitors;

• healthcare reform measures and healthcare regulation; and

• changes in laws and regulations, including changes in accounting standards.

These factors have had a significant impact on the market price of our common stock, and may have a significant impact on the future market price of our common stock.

These fluctuations may affect our operating results by affecting:

• our ability to access financial markets;

• our ability to transact stock acquisitions; and

• our ability to retain and incent key employees.

In addition, if our acquisition by GE is not consummated, our stock price may be materially adversely affected.

GOVERNMENT REGULATION IN THE UNITED STATES. Virtually all of our U.S. customers and the other entities with which we have a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation. Because our products and services are designed to function within the structure of the healthcare financing and reimbursement systems currently in place in the United States, and because we are pursuing a strategy of developing and marketing products and services that support our customers’ regulatory and compliance efforts, we may become subject to the reach of, and liability under, these regulations.

Anti-Kickback Law

The federal Anti-Kickback Law, among other things, prohibits the direct or indirect payment or receipt of any remuneration for Medicare, Medicaid and certain other federal or state healthcare program patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal health care programs. If the activities of one of the entities with which we have a business relationship were found to constitute a violation of the federal Anti-Kickback Law and, as a result of the provision of products or services to the customer or entity which engaged in these activities, we were found to have knowingly participated in such activities, we could be subject to sanction or liability, including exclusion from government health programs. As a result of exclusion from government health programs, our customers might not be permitted to make any payments to us.

HIPAA and Related Regulations

Federal regulations issued in accordance with HIPAA impose national health data standards on health care providers that conduct electronic health transactions, health care clearinghouses that convert health data between HIPAA-compliant and non-compliant formats, and health plans. Collectively, these groups, including most of our customers and our e-Commerce Services clearinghouse business, are known as covered entities. These HIPAA standards include:

• transaction and code set standards, which we refer to as TCS Standards, that prescribe specific transaction formats and data code sets for certain electronic health care transactions;

• Privacy Standards that protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and

• data security standards, which we refer to as Security Standards, that require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form.

Failure to comply with these standards under HIPAA may subject us to civil monetary penalties and, in certain circumstances, criminal penalties. Under HIPAA, covered entities may be subject to civil monetary penalties in the amount of $100 per violation, capped at a maximum of $25,000 per year for violation of any particular standard. Also, the U.S. Department of Justice, or DOJ, may seek to impose criminal penalties for certain violations of

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HIPAA. Criminal penalties under the statute vary depending upon the nature of the violation but could include fines of not more than $250,000 and/or imprisonment.

The effect of HIPAA on our business is difficult to predict, and there can be no assurances that we will adequately address the business risks created by HIPAA and its implementation, or that we will be able to take advantage of any resulting business opportunities. Furthermore, we are unable to predict what changes to HIPAA, or the regulations issued pursuant to HIPAA, might be made in the future or how those changes could affect our business or the costs of compliance with HIPAA.

HIPAA – Transaction and Code Set Standards

Many covered entities, including some of our customers, our eCommerce Services clearinghouse business, and trading partners of our clearinghouse business, have not achieved full compliance with the TCS Standards. However, we have deployed contingency plans to accept non-standard transactions, as contemplated in the “Guidance on Compliance with HIPAA Transactions and Code Sets after the October 16, 2003 Implementation Deadline” (which we refer to as the CMS Guidance) issued by the Centers for Medicare & Medicaid Services, or CMS, on July 24, 2003.

Although the CMS Guidance indicates that CMS will follow a complaint-driven approach, we cannot provide any assurances regarding how CMS would apply the CMS Guidance in general or to our e-Commerce Services clearinghouse business in particular. In the event of enforcement action by CMS against us, there can be no assurances that we will be able to establish good faith efforts sufficient to protect us from liability for the civil monetary penalties described above. There can also be no assurances that the DOJ will not seek the criminal penalties described above for our failure to comply with the TCS Standards.

Because the entire healthcare system, including customers who use our information systems to generate claims data, has not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system implementation delays and cash flow reduction, with the attendant risk of liability and claims against us.

The CMS Guidance also indicates that in connection with its enforcement activities, CMS might require non-compliant covered entities to submit and implement corrective action plans to achieve compliance in a time and manner acceptable to CMS. In the event that we were required to submit and implement a corrective action plan, we could be required to take steps and incur costs to achieve compliance in a different manner or shorter timeframe than we would otherwise choose, which could have an adverse impact on our business operations.

HIPAA – Privacy Standards

The Privacy Standards place on covered entities specific limitations on the use and disclosure of individually identifiable health information. We made certain changes in our products and services to comply with the Privacy Standards. The effect of the Privacy Standards on our business is difficult to predict and there can be no assurances that we have adequately addressed the risks created by the Privacy Standards and their implementation or that we will be able to take advantage of any resulting opportunities.

HIPAA – Security Standards

The Security Standards establish detailed requirements for safeguarding patient information that is electronically transmitted or electronically stored.

Some of the Security Standards are technical in nature, while others may be addressed through policies and procedures for using information systems. The Security Standards may require us to incur significant costs in evaluating our products and in ensuring that our systems meet all of the implementation specifications. We are unable to predict what changes might be made to the Security Standards prior to the 2005 implementation deadline or how those changes might impact our business. The effect of the Security Standards on our business is difficult to predict and there can be no assurances that we will adequately address the risks created by the Security Standards and their implementation or that we will be able to take advantage of any resulting opportunities.

Medical Device Regulations

We expect that the United States Food and Drug Administration, or FDA, is likely to become increasingly active in regulating computer software intended for use in healthcare settings. The FDA has increasingly focused on the

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regulation of computer products and computer-assisted products as medical devices under the Food, Drug, and Cosmetic Act, or the FDC Act. If computer software is considered to be a medical device under the FDC Act, as a manufacturer of such products, we could be required, depending on the product, to:

• register and list our products with the FDA;

• notify the FDA and demonstrate substantial equivalence to other products on the market before marketing our products; or

• obtain FDA approval by demonstrating safety and effectiveness before marketing a product.

LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. Our success and competitiveness are dependent to a significant degree on the protection of our proprietary technology. We rely primarily on a combination of copyrights, trade secret laws, patent laws and restrictions on disclosure to protect our proprietary technology. Despite these precautions, others may be able to copy or reverse engineer aspects of our products, to obtain and use information that we regard as proprietary or to independently develop similar technology. In addition, as we continue to grow globally, we may do business in countries where laws are less protective of intellectual property rights than in the United States. Litigation may continue to be necessary to enforce or defend our proprietary technology or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management and technical resources.

FINANCIAL TRENDS. If financial trends are unfavorable some of our customers might delay making purchasing decisions with respect to some of our software systems, resulting in longer sales cycles for such systems. These delays can occur as a result of a number of factors, including customer organization changes, government approvals, pressure to reduce expenses, product complexity, competition and terrorist attacks on the United States. If these delays occur, they may cause unanticipated revenue volatility, decreased revenue visibility and affect our future financial performance.

NEW PRODUCT DEVELOPMENT AND RAPIDLY CHANGING TECHNOLOGY. To be successful, we must continuously enhance our existing products, respond effectively to technology changes, and help our customers adopt new technologies. In addition, we must introduce new products and technologies to meet the evolving needs of our customers in the healthcare information systems market. We may have difficulty in accomplishing these tasks because of:

• the continuing evolution of industry standards; and

• the creation of new technological developments, such as web-based and application service provider technologies.

We devote significant resources toward the development of enhancements to our existing products. However, we may not successfully complete these product developments or their adaptation in a timely fashion, and our current or future products may not satisfy the needs of the healthcare information systems market. Any of these developments may adversely affect our competitive position or render our products or technologies noncompetitive or obsolete.

CHANGES AND CONSOLIDATION IN THE HEALTHCARE INDUSTRY. We currently derive substantially all of our revenues from sales of financial, administrative and clinical healthcare information systems, and other related services within the healthcare industry. As a result, our success is dependent in part on the political and economic conditions in the healthcare industry.

Virtually all of our customers and the other entities with which we have a business relationship operate in the healthcare industry and, as a result, are subject to governmental regulation, including Medicare and Medicaid regulation. Accordingly, our customers and the other entities with which we have a business relationship are affected by changes in such regulations and limitations in governmental spending for Medicare and Medicaid programs. Recent actions by Congress have limited governmental spending for the Medicare and Medicaid programs, limited payments to hospitals and other providers under Medicare and Medicaid programs, and increased emphasis on competition and other programs that potentially could have an adverse effect on our customers and the other entities with which we have a business relationship. In addition, federal and state legislatures have considered proposals to reform the U.S. healthcare system at both the federal and state level. If enacted, these proposals could increase government involvement in healthcare, lower reimbursement rates and otherwise change the business environment of our customers and the other entities with which we have a business relationship. Our customers and

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the other entities with which we have a business relationship could react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services.

In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our products and services. If we are forced to reduce our prices, our operating margins would likely decrease. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will increase.

COMPETITION FOR HEALTHCARE INFORMATION SYSTEMS. The market for healthcare information systems is intensely competitive, rapidly evolving and subject to rapid technological change. We believe that the principal competitive factors in this market include the breadth and quality of system and product offerings, the features and capabilities of the systems, the price of the system and product offerings, the ongoing support for the systems, the potential for enhancements and future compatible products.

Some of our competitors have greater financial, technical, product development, marketing and other resources than we do, and some of our competitors offer products that we do not offer. Our principal existing competitors include Eclipsys Corporation, McKesson Corporation, Siemens AG, Epic Systems Corporation, GE Medical and Cerner Corporation. Each of these competitors offers a suite of products that competes with many of our products. There are other competitors that offer a more limited number of competing products. We may be unable to compete successfully against these organizations. In addition, we expect that major software information systems companies, large information technology consulting service providers and system integrators, Internet-based start-up companies and others specializing in the healthcare industry may offer competitive products or services.

PRODUCT LIABILITY CLAIMS. Any failure by our products that provide applications relating to patient treatment could expose us to product liability claims for personal injury and wrongful death. These potential claims may exceed our current insurance coverage. Unsuccessful claims could be costly to defend and divert our management’s time and resources. In addition, we cannot make assurances that we will continue to have appropriate insurance available to us in the future at commercially reasonable rates.

PRODUCT MALFUNCTION FINANCIAL CLAIMS. Any failure by our eCommerce electronic claims submission service, or by elements of our systems that provide administrative and financial management applications could expose us to liability claims for incorrect billing and electronic claims. These potential claims may exceed our current insurance coverage. Unsuccessful claims could be costly to defend and divert management time and resources. In addition, we cannot make assurances that we will continue to have appropriate insurance available to us in the future at commercially reasonable rates.

KEY PERSONNEL. Our success is dependent to a significant degree on our key management, sales, marketing, and technical personnel. To be successful we must attract, motivate, and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including programmers, consultants and systems architects skilled in the technical environments in which our products operate. Competition for such personnel in the software and information services industries is intense. We do not maintain “key man” life insurance policies on any of our executives. Not all of our personnel have executed noncompetition agreements. Noncompetition agreements, even if executed, are difficult and expensive to enforce, and enforcement efforts could result in substantial costs and diversion of our management and technical resources.

SYSTEM ERRORS, SECURITY BREACHES AND WARRANTIES. Our healthcare information systems are very complex. As with all complex information systems, our healthcare information systems may contain errors, especially when first introduced. Our healthcare information systems are intended to provide information to healthcare providers for use in the diagnosis and treatment of patients. Therefore, users of our products may have a greater sensitivity to system errors than the market for software products generally. Failure of a customer’s system to perform in accordance with its documentation could constitute a breach of warranty and require us to incur additional expenses in order to make the system comply with the documentation. If such failure is not timely remedied, it could constitute a material breach under a contract allowing our customer to cancel the contract and subject us to liability.

A security breach could damage our reputation or result in liability. We retain and transmit confidential information, including patient health information, in our processing centers and other facilities. It is critical that these facilities and infrastructure remain secure and be perceived by the marketplace as secure. We may be required to expend significant capital and other resources to protect against security breaches and hackers or to alleviate problems caused by breaches. Despite the implementation of security measures, this infrastructure or other systems that we

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interface with, including the Internet and related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any compromise of our security, whether as a result of our own systems or systems with which they interface, could reduce demand for our services and products.

Customer satisfaction and our business could be harmed if our business experiences delays, failures or loss of data in its systems. The occurrence of a major catastrophic event or other system failure at any of our facilities or at any third-party facility, including telecommunications provider facilities, could interrupt data processing or result in the loss of stored data, which could harm our business.

POTENTIAL INFRINGEMENT OF PROPRIETARY RIGHTS OF OTHERS. If any of our products violate third-party proprietary rights, we may be required to re-engineer our products or seek to obtain licenses from third parties to continue offering our products without substantial re-engineering. Any efforts to reengineer our products or obtain licenses from third parties may not be successful, in which case we may be forced to stop selling the infringing product or remove the infringing functionality or feature. We may also become subject to damage awards as a result of infringing the proprietary rights of others, which could cause us to incur additional losses and have an adverse impact on our financial position. We do not conduct comprehensive patent searches to determine whether the technologies used in our products infringe patents held by others. In addition, product development is inherently uncertain in a rapidly evolving technological environment in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies.

STRATEGIC ALLIANCE WITH ALLSCRIPTS HEALTHCARE SOLUTIONS. In 2001, we entered into a ten-year strategic alliance with Allscripts to cooperatively develop, market and sell integrated clinical and practice management products.

During the term of the alliance, we are prohibited from cooperating with direct competitors of Allscripts to develop or provide any products similar to or in competition with Allscripts products in the practice management systems market. If the strategic alliance is not successful, or the restrictions placed on us during the term of the strategic alliance prohibit us from successfully marketing and selling certain products and services, our operating results may suffer. Additionally, if either Allscripts or IDX breaches the strategic alliance, we may be left without critical clinical components for our information systems offerings in the physician group practice markets.

ANTI-TAKEOVER DEFENSES. Our Second Amended and Restated Articles of Incorporation and Second Amended and Restated Bylaws contain certain anti-takeover provisions, which could deter an unsolicited offer to acquire our company. For example, our board of directors is divided into three classes, only one of which will be elected at each annual meeting. These provisions may delay or prevent a change in control of our company.

LITIGATION. We are involved in litigation matters, which are described in greater detail in Part II, Item 1, Legal Proceedings and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. An unfavorable resolution of pending litigation could have a material adverse effect on our financial condition. Litigation may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome. There can be no assurance that we will be able to achieve a favorable settlement of pending litigation or obtain a favorable resolution of litigation if it is not settled. In addition, current litigation could lead to increased costs or interruptions of our normal business operations.

Because the investigation described in greater detail in Part II, Item 1, Legal Proceedings may still be underway, we lack sufficient information to determine with certainty the ultimate scope of this investigation and whether the government authorities will assert claims resulting from this investigation that could implicate or reflect adversely upon us. Because our reputation for integrity is an important factor in our business dealings with U.S. Commerce Department’s Technology Administration, NIST, and other governmental agencies, if a government authority were to make an allegation, or if there were to be a finding, of improper conduct on the part of or attributable to us in any matter, including in respect of the U.S. Attorney’s investigation, such an allegation or finding could have a material adverse effect on our business, including our ability to retain existing contracts and to obtain new or renewal contracts. In addition, adverse publicity resulting from this investigation and related matters could have such a material adverse effect.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Rate Risk

Internationally, we principally operate in Canada and the United Kingdom. Our international business is subject to risks, including, but not limited to: unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

We invoice Canadian customers in U.S. dollars. Our United Kingdom customers are invoiced in British pounds sterling, and to a lesser extent in U.S. dollars. Expenses to service our UK contracts are incurred both by our UK subsidiary in the local currency and by the parent company in U.S. dollars. As such, our operating results and certain assets and liabilities that are denominated in the British pound sterling are affected by changes in the relative strength of the U.S. dollar against the British pound sterling. Our revenues are adversely affected when the U.S. dollar strengthens against the British pound sterling and are positively affected when the United States dollar weakens. Conversely our expenses are positively affected when the U.S. dollar strengthens against the British pound sterling and adversely affected when the U.S. dollar weakens.

As described in Note 5 in the Notes to Consolidated Financial Statements contained in Part I; Item 1 of this Quarterly Report on Form 10-Q, from time to time we use forward foreign exchange contracts to mitigate our foreign currency exchange rate exposures related to our foreign currency denominated assets and liabilities, and more specifically, to hedge, on a net basis, the foreign currency exposure of a portion of our assets and liabilities denominated in the British pound sterling. The terms of these forward contracts are for periods matching the underlying exposures and generally are for one to three months. At September 30, 2005, the Company had $55.0 million outstanding forward foreign exchange contracts to exchange British pounds for U.S. dollars. The forward foreign exchange contracts mature during the fourth quarter of 2005 and had a book value that approximated fair value. We do not use forward contracts for trading or speculative purposes.

The market risk associated with the forward foreign exchange contracts resulting from currency exchange rate or interest rate movements is expected to mitigate the market risk of the underlying assets and liabilities being hedged. Our foreign currency denominated net assets were approximately $53.5 million at September 30, 2005. A hypothetical 10% movement in the foreign currency exchange rate would increase or decrease net assets by approximately $5.3 million with a corresponding charge to operations. With $55.0 million in forward foreign exchange contracts outstanding, a hypothetical 10% movement in the foreign currency exchange rate would increase or decrease net assets by approximately $241,000 with a corresponding charge to operations. During the nine months ended September 30, 2005, fluctuations in foreign currency exchange rates did not have a material impact on our results of operations.

Interest Rate Risk

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that experience a decline in market value due to changes in interest rates. A hypothetical 10% increase or decrease in interest rates, however, would not have a material adverse effect on our financial condition. Interest income on our investments is included in “Other Income”.

Interest rates on short-term borrowings with floating rates carry a degree of interest rate risk. Our future interest expense may increase if interest rates fluctuate. A hypothetical 10% increase or decrease in interest rates, however, would not have a material adverse effect on our financial condition.

Equity Price Risk

We account for cash equivalents and marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents are short-term highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value. Our marketable securities are classified as available-for-sale and are recorded at fair value with any unrealized gain or loss recorded as an element of stockholders’ equity. We generally place our marketable securities in high credit quality instruments: primarily U.S. Government and federal agency obligations, tax-exempt municipal obligations and corporate obligations with contractual maturities of a year or less. Although these investments in available-for-sale securities are subject to price risk, we do not expect any material loss from our marketable security investments.

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The only significant equity investment that we hold is our investment in Allscripts. The fair value of the available-for-sale portion of our investment in Allscripts recorded in marketable securities as of September 30, 2005 was $127.5 million. An adverse change in the stock price of Allscripts would result in a reduction in the fair value of our investment; however, it would not result in a loss since our investment in Allscripts was previously accounted for under the equity method of accounting, which resulted in the elimination of the carrying value of the investment. The Company also has certain other minority equity investments in non-publicly traded securities. These investments are generally carried at cost, which is only adjusted if an other-than-temporary impairment exists, as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The carrying value of these investments at September 30, 2005 was approximately $1.5 million. These investments are inherently high risk as the market for technologies and content by these companies are usually early stage at the time of the investment by the Company and such markets may never be significant. The Company could lose its entire investment in certain or all of these companies. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s 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 September 30, 2005. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of September 30, 2005, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in internal control over financial reporting

During the third quarter of 2005, the Company initiated use of certain ERP applications in the United Kingdom, principally contract management, order management, project management, resource management, time and expense reporting, purchasing, accounts payable, billing, accounts receivable and general ledger. Management believes that the utilization of the ERP system in the United Kingdom will ultimately enhance our internal controls over financial reporting, and therefore, the implementation has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004. The Company’s Report of Management on Internal Control over Financial Reporting is contained in the Annual Report on Form 10-K for the year ended December 31, 2004. The Company identified, based on its assessment, a number of control deficiencies related to revenue recognition. Due to the concentration of such deficiencies in this area, management concluded that the deficiencies, in aggregate, represented a material weakness in internal controls relating to revenue recognition.

Management concluded that the underlying weakness relates primarily to the accounting for software revenue and the interpretation of technical accounting guidance related to software revenue recognition. Management determined that a lack of sufficient, specialized, technical accounting personnel to determine the appropriate application of authoritative accounting literature to its software contracts resulted in the material weakness in internal control over financial reporting related to revenue recognition. This material weakness affects revenue, unbilled receivables, deferred revenue, cost of sales and deferred contract costs.

Management continues to address the remediation of the material weakness in internal controls over financial reporting relating to revenue recognition. Actions taken to date include:

• Management has performed an assessment of its accounting and finance resources to ensure that the Company has the sufficient depth of resources and technical expertise to address the identified material weakness. To date, in 2005, the Company has added seven positions, which consist of a Director of Revenue Accounting, a Principal Revenue Analyst, a Revenue Analyst, two additional Technical Accounting Specialists, a Senior Internal Auditor and a Senior IT Internal Auditor, six of whom are Certified Public Accountants.

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• Management has commenced a “Standard Contracting Process Project” utilizing Six Sigma tools to refine and enhance controls relating to the standardized contracting process. Six Sigma is a business process improvement program that is being implemented company-wide across all functional areas. Management believes that the Six Sigma tools will better enable IDX to meet customer needs, make data driven decisions, reduce variability and increase standardization in processes. Management has engaged a consultant to facilitate this process.

• Management has implemented a comprehensive training program on software revenue recognition accounting for personnel involved in the contracting process using Company resources and outside consultants with software revenue recognition expertise.

Management is committed to remediating the material weakness as quickly as possible, although there can be no assurance that management will be able to do so.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In late 2001, we finalized a “Cooperative Agreement” with a non-regulatory federal agency within the U.S. Commerce Department’s Technology Administration, NIST, whereby we agreed to lead a $9.2 million, multi-year project awarded by NIST to a joint venture composed of IDX and five other joint venture partners (the “SAGE Project”). The project entails research and development to be conducted by IDX and its partners in the grant. Subsequently, an employee of IDX made allegations that we had illegally submitted claims for labor expenses and license fees to NIST and that we never had a serious interest in researching the technological solutions described in the proposal to NIST.

On March 31, 2004, we submitted certain information to NIST, which NIST requested in conjunction with a proposed amendment to the Cooperative Agreement. As a result of the amendment, payment on the award was discontinued until we demonstrated regulatory compliance relating to certain aspects of its grant accounting and reporting procedures and relating to an in-kind contribution of software we made to the project. In issuing the amendment, NIST made no finding of regulatory noncompliance by us in connection with the award. On March 25, 2005, NIST issued another amendment to the Cooperative Agreement that lifted the suspension on funding, permitted us to recover project costs incurred during the period of the suspension and extended the project for another year.

From June through November 2004, the U.S. Commerce Department, Office of Inspector General (“OIG”), conducted an audit of the SAGE Project. On March 11, 2005, OIG issued a final audit report recommending that NIST disallow certain costs and, subsequently, we submitted our response contesting certain findings. On August 17, 2005, NIST issued an Audit Resolution Letter disagreeing with several of OIG’s audit recommendations but concluding that NIST was due a refund in the amount of $335,915. On September 21, 2005, we filed an administrative appeal of the determination that IDX owed NIST $335,915, and a decision of the NIST director is expected within the next two months.

The aforementioned employee filed an action against IDX in the name of the United States under the federal False Claims Act in the U.S. District Court for the Western District of Washington, sometimes referred to as a “qui tam” complaint. The DOJ, as it is statutorily required to do, conducted an investigation of the allegations in the suit in order to determine whether to intervene in the employee’s lawsuit. On August 1, 2005, the government notified us that it had concluded its investigation into the employee’s allegations and determined not to intervene in the matter. Notwithstanding the government’s determination not to intervene, the employee may pursue the claim on his own.

In May 2003, the employee filed a complaint against the Company with the Federal District Court for the Western District of Washington, entitled Mauricio A. Leon, M.D. v. IDX Systems Corporation (case no. CV03-1158P) asserting that we had knowledge that the employee engaged in “protected activity” and retaliated against the employee in violation of the Federal False Claims Act by, among other things, placing the employee on administrative leave on April 25, 2003. In addition, among other causes of action, the employee alleged that we had violated the Americans with Disabilities Act and its Washington State counterpart in part through retaliation against the employee for exercising the employee’s rights under the federal and state discrimination laws. The employee requested relief including, but not limited to, an injunction against us enjoining and restraining us from the alleged harassment and discrimination, wages, damages, attorneys’ fees, interest and costs. In addition, the employee’s complaint alleges that we submitted false statements to the government to obtain the grant and to obtain reimbursement from the government for project costs.

On September 30, 2004, the U.S. District Court issued an order dismissing all of the employee’s claims. The dismissal was based on the Court’s finding that the employee acted in bad faith in destroying evidence that he had a duty to preserve. The Court also awarded us $65,000 as sanctions, reflecting the cost of investigating and litigating the destruction of evidence. After entry of the dismissal order, we requested the District Court to enjoin proceedings before the U.S. Department of Labor (“DOL”) that had been brought by the employee based upon the same set of facts, as described further below. On February 15, 2005, the District Court declined to enjoin the DOL.

The employee has appealed the dismissal of his federal court lawsuit and the sanction order to the Ninth Circuit Court of Appeals. The Company has appealed the District Court’s denial of our request to enjoin the DOL proceedings described below. Briefing on these appeals has been completed and a ruling is expected in approximately one year.

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On June 6, 2005, the District Court ordered the employee to reimburse us for certain costs incurred in the federal court litigation. The employee has filed a motion requesting the District Court to review and reconsider this order requiring payment of costs, and we have filed a cross-motion requesting that the District Court impose additional costs. On August 1, 2005, the District Court entered an order denying the employee’s request for a review of the order requiring payment of costs and granted in part our cross-motion by ordering the employee to pay an additional amount for certain costs.

In May 2003, the employee filed a complaint against us with the DOL, pursuant to Section 1514A of the Sarbanes-Oxley Act of 2002 (“SOX”). The employee’s complaint asserts that, notwithstanding alleged notice to us of the employee’s allegations, Company management conspired to continue to defraud the government by allowing fraudulent activities to continue uncorrected and by concealing and avoiding its obligations to report any and all fraudulent activities to the proper authorities. In addition, the employee’s complaint alleges that we acted to retaliate, harass and intimidate the employee in contravention of SOX’s whistleblower provisions by, among other things, placing the employee on unpaid administrative leave on April 25, 2003. The employee’s complaint requests relief including, but not limited to, reinstatement, back-pay, with interest, compensation for any damages sustained by the employee as a result of the alleged discrimination, and attorney’s fees. The Occupational Health and Safety Administration (“OSHA”) is charged with the obligation to investigate the employee’s complaint on behalf of DOL.

On June 20, 2005, OSHA issued a preliminary order relating to its investigation. In its order, OSHA found reasonable cause to believe that the employee engaged in activity protected by SOX and that those protected activities contributed to our decision to place the employee on unpaid administrative leave on April 25, 2003. OSHA therefore found reasonable cause to believe that placement of the employee on unpaid administrative leave violated SOX. On July 20, 2005, we filed objections to the Secretary’s Findings and Preliminary Order, which also requested an evidentiary hearing before a DOL administrative law judge. The employee also filed objections and a request for a hearing.

The judge will hear the appeals and review OSHA’s preliminary order de novo. The effectiveness of OSHA’s preliminary order will be stayed pending the outcome of the appeals. Because the False Claims Act retaliation action dismissed by the federal district court may bar the SOX retaliation claim under the doctrine of res judicata, the employee has requested that the SOX proceedings be stayed pending the decision by the Ninth Circuit Court of Appeals, which is reviewing the federal district court’s dismissal order. The administrative law judge has not ruled on this request by the employee for a stay.

We intend to continue to vigorously defend against all of the employee’s claims, which we continue to maintain are without merit. However, the outcome or the impact these claims may have on our operations cannot currently be predicted.

IDX, its Board and certain of its officers are named defendants in a shareholder class action lawsuit filed on October 24, 2005 in Vermont Superior Court entitled Stanley v. IDX Systems Corporation et al (case no. 1192-05-CnC). The lawsuit challenges the price of and the process leading to the Company’s announced merger with General Electric Company and a wholly owned subsidiary of GE. The complaint seeks to enjoin the consummation of the proposed merger with GE, as well as compensatory damages, among other relief. The defendants’ answer to the complaint is due on November 17, 2005. We intend to vigorously defend against the claims, which we maintain are without merit. The outcome or the impact these claims may have on our operations cannot currently be predicted.

From time to time, IDX is a party to or may be threatened with other litigation in the ordinary course of its business. We regularly analyze current information, including, as applicable, our defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The ultimate outcome of these matters is not expected to materially affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

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Item 5. Other Information

None.

Item 6. Exhibits

The exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements 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.

	IDX SYSTEMS CORPORATION
Date: November 8, 2005	By:	/s/    JOHN A. KANE
		John A. Kane
		Sr. Vice President, Finance and
		Administration, Chief Financial
		Officer and Treasurer
		(Principal Financial and Chief
		Accounting Officer)

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EXHIBIT INDEX

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Exhibit No.	Description
10.1	Amendment, dated September 29, 2005, to the Employment, Noncompetition and Nondisclosure Agreement by and between the Company and James H. Crook, effective as of January 1, 2003, incorporated herein by reference to the Company’s Report on Form 8-K dated September 28, 2005, filed on October 3, 2005
10.2	Amendment, dated September 29, 2005, to the Employment, Noncompetition and Nondisclosure Agreement by and between the Company and Thomas Butts, dated January 14, 2002, incorporated herein by reference to the Company’s Report on Form 8-K dated September 28, 2005, filed on October 3, 2005
10.3	Form of Shareholder Agreements, incorporated herein by reference to the Company’s Report on Form 8-K dated September 28, 2005, filed on October 3, 2005
12.1	Agreement and Plan of Merger, dated as of September 28, 2005, by and among IDX Systems Corporation, General Electric Company and Igloo Acquisition Corporation, incorporated herein by reference to the Company’s Report on Form 8-K dated September 28, 2005, filed on October 3, 2005
31.1	Certification of the CEO of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2	Certification of the CFO of the Company pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1	Certification of CEO and CFO of the Company pursuant to 18 U.S.C. Section 1350

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