UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from                                           to                                         .

Commission File Number 000-25311

AMICAS, Inc.

20 Guest Street, Suite 200, Boston MA 02135
(Address of principal executive offices, including zip code)

(617) 779-7878
(Registrant’s telephone number, including area code)

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 þ  No o

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

As of May 8, 2005 there were 44,930,073 shares of the registrant’s common stock, $.001 par value, outstanding.

AMICAS, Inc.

Form 10-Q

INDEX

For further information, refer to the AMICAS, Inc. Annual Report on Form 10-K filed on March 30, 2005.
AMICAS and VitalWorks are registered trademarks of AMICAS, inc. All other trademarks and company names mentioned are the property of their respective owners.

AMICAS, Inc.

See accompanying notes

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AMICAS, Inc.

See accompanying notes.

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AMICAS, Inc.

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AMICAS, Inc.

A. Business

     AMICAS, Inc. (“AMICAS” or the “Company”), formerly known as VitalWorks Inc., is a leader in radiology and medical image and information management solutions. The AMICAS Vision Series™ products provide a complete, end-to-end solution for imaging centers, ambulatory care facilities, and radiology practices. Acute care and hospital customers are provided a fully-integrated, hospital information system (“HIS”)/radiology information system (“RIS”)-independent picture archiving communication system (“PACS”), featuring advanced enterprise workflow support and scalable design. Complementing the Vision Series product family is AMICAS Insight Services^TM, a set of client-centered professional and consulting services that assist the Company’s customers with a well-planned transition to a digital enterprise. The Company provides its clients with ongoing software support, implementation, training, and electronic data interchange (“EDI”) services for patient billing and claims processing.

     On January 3, 2005, the Company completed the sale of substantially all of the assets and liabilities of its medical division, together with certain other assets, liabilities, properties and rights of the Company relating to its anesthesiology business (the “Medical Division”) to Cerner Corporation (“Cerner”) and certain of Cerner’s wholly-owned subsidiaries (the “Asset Sale”). The Asset Sale was completed in accordance with the terms and conditions of the Asset Purchase Agreement between the Company and Cerner dated as of November 15, 2004 (the “Purchase Agreement”).

     Effective January 3, 2005, the Company changed its name from VitalWorks Inc. to AMICAS, Inc.

B. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2005. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Amicas PACS, Corp. (“Amicas PACS”), formerly known as Amicas, Inc., which was acquired on November 25, 2003. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

     Certain prior year financial statement items have been reclassified to conform to the current year presentation.

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AMICAS, Inc.

Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Pronouncements

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123R, which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. See below for information related to the pro forma effects on the reported income (loss) from continuing operations and loss per share from continuing operations of applying the fair value recognition provisions of the previous Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

     On April 14, 2005, the standard was delayed to the first fiscal year beginning after June 15, 2005, the compliance date. Accordingly, beginning January 1, 2006, the Company will be required to apply the standard to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

	•	A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123(R) for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.
	•	A “prospective” 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(R) for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company is currently evaluating the impact of Statement No. 123R on its results of operations.

Stock-Based Compensation

     The Company periodically grants stock options for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of underlying the shares at the date of the grant. The Company accounts for stock option grants to employees and directors using the intrinsic value method. Under the intrinsic value method, compensation associated with stock awards to employees and directors is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price the employee or director must pay to exercise the award. The measurement date for employee awards is generally the date of grant.

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AMICAS, Inc.

     If stock-based compensation expense had been recorded based on the fair value of stock awards at the date of grant, the Company’s net income (loss) would have been adjusted to the pro forma amounts presented below (in thousands, except for per share amounts):

The fair value for stock option awards is estimated at the date of the grant using a Black-Scholes option-pricing model.

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AMICAS, Inc.

Net Income (Loss) Per Share

     Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect, if any, of potential common shares, which consists of stock options. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except for per share amounts):

     Stock options and warrants to purchase the Company’s common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2005 and 2004, because their effect would have been anti-dilutive. However, these options could be dilutive in the future.

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AMICAS, Inc.

Comprehensive Income

     Comprehensive income is a measure of all changes in equity of an enterprise that results from recognized transactions and other economic events of a period other than transactions with owners in their capacity as owners. For the Company, comprehensive income (loss) is equivalent to its consolidated net income (loss).

C. Gain on the Sale of Discontinued Operations

     On January 3, 2005, the Company completed the sale of its Medical Division to Cerner. The Asset Sale was completed in accordance with the terms and conditions of the Purchase Agreement. As consideration for the Asset Sale, the Company received cash proceeds of $100 million.

     In the first quarter of 2005, the Company recorded a net gain from the sale of approximately $46.1 million, which is net of approximately: (a) $16.2 million of net assets transferred to Cerner, (b) $1.2 million of post closing purchase price adjustments, (c) $34.6 million of income taxes, (d) $0.9 million relating to the modification of stock options granted to certain employees of the Medical Division and (e) $1.0 million of additional fees and transaction costs related to the sale.

     The $34.6 million income tax provision includes the realization of the $28.2 million deferred tax asset that the Company had previously recorded and a current tax liability at March 31, 2005 of $6.4 million.

     Under the terms of the Purchase Agreement, (a) Cerner agreed to pay the Company $100 million in cash, subject to a post-closing adjustment based on the Company’s net working capital as of the closing date, and (b) Cerner agreed to assume specified liabilities of the Medical Division and the anesthesiology business and certain obligations under assigned contracts and intellectual property. As of March 31, 2005, the Company accrued for approximately $1.2 million relating to the post-closing purchase price adjustment. The Company expects to finalize the post-closing adjustments in the second quarter of 2005.

     Condensed results of operations relating to the Medical Division for the three months ended March 31, 2004 (in thousands):

D. Business Combination

     On November 25, 2003, the Company acquired 100% of the outstanding capital stock of Amicas PACS, a developer of Web-based diagnostic image management software solutions, for $31 million in cash, including direct transaction costs. Commonly referred to in the marketplace as PACS (picture archiving and communication systems), these software solutions allow radiologists and other physicians to examine, store, and distribute digitized medical images. The Company financed $15 million of the purchase price through the use of its credit line (see Note F for payment of credit line). The merger agreement provided for an additional purchase payment of up to $25 million based on attainment of specified earnings targets through 2004. In addition, the Company assumed incentive plans for certain management employees of Amicas PACS that provided for up to $5 million of compensation, tied to the attainment of the earnings targets for the contingent earn-out period.

     On December 9, 2004, the merger agreement was amended. The amendment terminated the earn-out consideration obligations set forth in the merger agreement and provides that the Company will pay to Amicas PACS stockholders and certain Amicas PACS employees a total of up to $14.5 million. Amicas PACS stockholders received or will receive an additional $10.0 million, to be paid in the following manner. The Company paid out $4.3 million three days after distribution of escrow fund pursuant to the escrow notice dated December 9, 2004. The additional consideration paid to the Amicas PACS stockholders under the settlement of the earn-out provision was recognized as additional goodwill. As of March 31, 2005, the Company had an accrual for the remaining $5.7 million as a note payable.

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AMICAS, Inc.

     Additionally, certain Amicas PACS employees received or will receive a total of up to $4.5 million in satisfaction of certain obligations under Amicas PACS’ bonus plan, paid or to be paid in the following manner: approximately $2.2 million was paid in December 2004 and in January 2005. Additionally, $0.9 million will be paid in the second quarter of 2005 and the balance of $1.4 million is expected to be paid on or about December 31, 2005. In general, any payment to an Amicas PACS employee is contingent on such employee’s continued employment with the Company.

     In the first quarter of 2005, the Company recorded a charge of approximately $1.1 million of the total $2.3 million relating to the earn-out bonuses. The $1.1 million includes approximately $0.9 million relating to the acceleration of payment of earn-out bonuses of two former Amicas PACS executives (see Note E).

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AMICAS, Inc.

E. Restructuring Costs (Credits), Executive Termination Costs and Credit for Loan Losses

Restructuring Costs (Credits) –

Employee Termination Costs

     The 2004 Plan. On October 15, 2004, the Company notified 57 of its employees that, in connection with the relocation of the Company’s corporate headquarters from Ridgefield Connecticut to Boston, Massachusetts, their employment would be terminated under a plan of termination. Their employment was terminated in the first quarter of 2005 and pursuant to their termination agreements, the Company had agreed to pay their salary and provide certain benefits, during their severance period. In the first quarter ended March 31, 2005, the Company recorded $0.9 million of costs related to their termination; including $0.2 million in stock compensation expense for certain modified stock awards.

     As of March 31, 2005, there was approximately $1.8 million remaining to be paid in costs associated with their termination; including $0.3 million to be paid to an executive officer. The remaining unpaid amounts are expected to be paid over their severance periods, which are scheduled to be completed the second quarter of 2006.

     The 2000 Plan. In August 2000, the Company announced its intention to restructure its operations through a plan of employee reductions and consolidation of office facilities. Since then, the Company closed 14 facilities and terminated approximately 400 employees. The offices that were closed are subject to operating leases that expire at various dates through 2005. In the first quarter ended March 31, 2005, the Company recorded a credit of approximately $0.1 million. As of March 31, 2005, there was no remaining amounts accrued.

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AMICAS, Inc.

Executive and Employee Termination Costs

Executive Termination Costs

     On March 31, 2005, the Company entered into a Separation Agreement with two former executives of the Company, also former executives of Amicas PACS. Pursuant to their agreements, the Company has agreed to pay the executives two months of salary and other compensation obligations. In the first quarter ended March 31, 2005, the Company recorded approximately $80,000 in costs related to the termination of employment of these executives. As of March 31, 2005, no amounts related to the executives’ termination were paid. The Company expects the entire amount to be paid in the second quarter of 2005.

     Additionally, under the Separation Agreement, the Company accelerated the payment of certain earn-out bonus amounts in the amount of $0.9 million (see Note D).

F. Debt

Debt consists of the following:

     On January 3, 2005, using the proceeds from the sale of the Medical Division, the Company repaid the entire outstanding balance of approximately $23.2 million under its credit facility with Wells Fargo and the credit facility was terminated. As a result of the credit facility termination, the Company had written off $0.7 million in deferred financing costs in the first quarter of 2005.

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AMICAS, Inc.

G. Commitments and Contingencies

Commitments

     Future minimum lease payments under all operating and capital leases with non-cancelable terms in excess of one year as follows:

     On March 8, 2005, the Company entered a sublease agreement to extend the lease term of its office space at its Boston, Massachusetts corporate headquarters. The term of the sublease extends the original sublease term until July 31, 2006, with a Company option to extend the lease term for an additional seventeen months through December 31, 2007. The base rent is $28,539 per month through May 31, 2005 and will then increase to $30,577 per month through July 31, 2006. If the Company extends the lease for the additional seventeen months the base rent will increase to $33,975 per month until the end of the extended term.

     Additionally, on March 4, 2005, the Company entered into a sublease agreement for additional office space at the same location as its Boston, Massachusetts headquarters, effective as of February 15, 2005. The term of the sublease expires on January 11, 2008. The base rent is $12,485 per month for 10,455 square feet from February 15, 2005 until June 30, 2006. The base rent will increase to a total of $55,377 per month.

     On January 3, 2005, the Company entered into a Transition Services Agreement with Cerner in connection with the sale of the Medical Division. Pursuant to the Transition Services Agreement, in exchange for specified fees, the Company will provide to Cerner services including accounting, tax, information technology, customer support and use of facilities, and Cerner will provide services to the Company such as EDI services including patient billing and claims processing, and use of facilities. Certain of the Company-provided services extend through December 31, 2005 and other Cerner-provided services extend through March 31, 2009. As of March 31, 2005, approximately $1.1 million was owed to the Company under the Transition Services Agreement.

     In connection with Transition Services Agreement with Cerner, the Company assigned its agreement with a third-party provider of EDI services for patient claims processing to Cerner. For the month of April 2005, the Company is now committed to pay approximately $30,000 to Cerner for processing services. For months thereafter, the annual services fee will range from $0.2 million to $0.3 million based on the Company’s and Cerner’s combined volume usage in the last month of the preceding year. The Company assigned its agreement with National Data Corporation (“NDC”) to Cerner. The Company is committed to minimum quarterly volumes and is required to pay a minimum quarterly fee of $0.6 million to Cerner through March 2006. Thereafter, the minimum quarterly volume commitments will be reduced by 1.25% per quarter until April 2009. The Company is also committed to paying Cerner approximately $0.2 million per year through April 2007 for certain EDI services.

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AMICAS, Inc.

     In January 2005, in connection with the sale of the Medical Division to Cerner, the Company’s operating lease agreements relating to the Medical Division were assigned to Cerner. As a result, the Company’s future payments due under our outstanding lease agreements decreased to a total of $4.1 million with $1.3 million due in 2005, $1.2 million due in 2006, $1.2 million due in 2007 and $.4 million due in 2008.

     In connection with the Company’s employee savings plans, the Company has committed, for the 2005 plan year, to contribute to the plans. The matching contribution for 2005 is estimated to be approximately $0.5 million and will be made 75% in cash and 25% in shares of the Company’s common stock.

     The Company is committed to pay up to $2.3 million to certain Amicas PACS employees on December 31, 2005 as additional earn-out consideration under the amendment to the Amicas PACS merger agreement (see Note D). In general, any payment to an Amicas PACS employee is contingent on such employee’s continued employment with the Company. The Company expects to pay $0.9 million in the second quarter of 2005, and $1.4 million on or about December 31, 2005.

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AMICAS, Inc.

Contingencies

     From time to time, in the normal course of business, various claims are made against the Company. Except for the proceeding described below, there are no material proceedings to which the Company is a party, and management is unaware of any material contemplated actions against the Company.

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure Corporation (now known as AMICAS, Inc.), et al., was filed in Boone County Superior Court in Indiana and the case was subsequently transferred to the Northern District Court of Georgia. The complaint alleged state securities law violations, breach of contract, and fraud claims against the defendants. The complaint did not specify the amount of damages sought by plaintiffs, but sought rescission of a transaction that the plaintiffs valued at $5 million, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. In October 2001, the plaintiffs’ request for a preliminary injunction to preserve their remedy of rescission was denied and part of their complaint was dismissed. The plaintiffs’ subsequent appeal of this decision was denied. Thereafter, plaintiffs retained new counsel and served an amended complaint that added additional former officers and directors as defendants, dropped the claim for rescission, and asserted new state securities law violations. After disqualification of plaintiffs’ second counsel in May 2003, plaintiffs retained new counsel and, in July 2003, served a second amended complaint upon the Company which added, among other things, a claim for Georgia RICO violations. In August 2003, the Company filed with the Court a partial motion to dismiss the second amended complaint which motion was granted in part and denied in part on January 9, 2004. On February 6, 2004, the Company served an answer to the second amended complaint. The discovery process is now complete. On December 20, 2004, the defendants filed a motion for summary judgment and the plaintiffs filed a motion for partial summary judgment. These motions are now fully submitted.

     While management believes that the Company has meritorious defenses in the foregoing pending matter and the Company intends to pursue its positions vigorously, litigation is inherently subject to many uncertainties. Thus, the outcome of this matter is uncertain and could be adverse to the Company. Depending on the amount and timing of an unfavorable resolution of the contingencies, it is possible that the Company’s financial position, future results of operations or cash flows could be materially affected in a particular reporting period(s).

     In September 2004, a lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and Amicas, Inc. was filed in the United States District Court for the Southern District of California. The complaint alleged that VitalWorks and Amicas infringed the plaintiff’s patent through the manufacture, use, importation, sale and/or offer for sale of automated medical imaging and archival systems. The plaintiff sought monetary damages, treble damages and a permanent injunction. On November 3, 2004, the Company served its answer. On January 26, 2005, the parties entered into a Settlement, Release and License agreement, and on February 4, 2005, a stipulation of dismissal, dismissing the lawsuit with prejudice, was entered. In connection with this agreement, the Company paid the plaintiff $0.5 million in 2005. This amount was expensed in the fourth quarter of 2004.

     As permitted under Delaware law, the Company has agreements under which it indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, with respect to certain events or occurrences after March 6, 2001, the Company has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. Given the insurance coverage in effect, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 31, 2005.

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AMICAS, Inc.

     The Company generally includes intellectual property indemnification provisions in its software license agreements. Pursuant to these provisions, the Company holds harmless and agrees to defend the indemnified party, generally its business partners and customers, in connection with certain patent, copyright, trademark and trade secret infringement claims by third parties with respect to the Company’s products. The term of the indemnification provisions varies and may be perpetual. In the event an infringement claim against the Company or an indemnified party is made, generally the Company, in its sole discretion, agree to do one of the following: (i) procure for the indemnified party the right to continue use of the software, (ii) provide a modification to the software so that its use becomes noninfringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund all or the residual value of the software license fees paid by the indemnified party for the infringing software. The Company believes the estimated fair value of these intellectual property indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of March 31, 2005.

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AMICAS, Inc.

H. Income Tax Benefit

     In the first quarter of 2005, the Company recorded an income tax benefit attributed to continuing operations of approximately $1.48 million. The income tax benefit is based upon the Company projected effective income tax rate of 39% for 2005 applied against the Company’s loss from continuing operations.

I. Stockholders’ Equity

     In the first quarter of 2005, the Company issued 527,812 shares of its common stock, consisting of 425,585 shares in connection with the exercise of stock options by certain employees (proceeds of approximately $1.0 million), and 102,227 shares with respect to the Company-sponsored employee stock purchase plan and proceeds of approximately $0.3 million. As a result, the Company recognized approximately $1.0 million as a credit to additional paid-in capital.

J. Subsequent Events

     In April 2005, the Company repaid the entire outstanding balance of the note payable to the former Amicas PACS shareholders for $5.7 million (see Note D). Additionally, in April and May 2005, the Company paid an aggregate $0.9 million related to the earn-out bonuses of two former Amicas PACS executives pursuant to their separation agreements.

     On May 6, 2005, the Company announced that its Board of Directors has authorized the repurchase of up to $15 million of the Company’s common stock from time to time in open market or privately negotiated transactions. The timing and amount of any share repurchases will be determined by the Company’s management based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with its stock plans or other corporate purposes. The repurchase program will be funded using the Company’s working capital.

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AMICAS, Inc.

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

Forward-Looking Statements and Risk Factors That May Affect Future Results

     Our disclosure and analysis in this Annual Report on Form 10-K contains forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we may also provide forward-looking statements in other materials that we release to the public as well as oral forward-looking statements. Forward-looking statements discuss our strategy, expected future financial position, results of operations, cash flows, financing plans, intellectual property, competitive position, and plans and objectives of management. We often use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions to identify forward-looking statements. In particular, the statements regarding the potential results of our acquisition of Amicas PACS and the effects on our operations of the Asset Sale are forward-looking statements. Additionally, forward-looking statements include those relating to future actions, prospective products, future performance, financing needs, liquidity, sales efforts, expenses, interest rates and the outcome of contingencies, such as legal proceedings, and financial results.

     We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected by our forward-looking statements. You should bear this in mind as you consider forward-looking statements.

     We undertake no obligation to publicly update forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are important factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

Our operating results will vary from period to period. In addition, we have experienced losses in the past and may never achieve consistent profitability.

     Our operating results will vary significantly from quarter to quarter and from year to year. We had a net income of $43.8 million (which includes $46.1 million net gain from the sale of the Medical Division) in the first quarter of 2005, and a net loss of $(12.5) million for the year ended December 31, 2004. Although we had net income of $8.0 million and $24.2 million for the years ended December 31, 2003 and 2002, we had consistently experienced net losses prior to that. Our net loss was $(27.8) million for the year ended December 31, 2001 and $(78.1) million for the year ended December 31, 2000. On a continuing operations basis, we had losses of $(2.3) million, $(26.5) million and $(10.7) million, respectively, for the three months ended March 31, 2005 and years ended December 31, 2004 and 2003 and income of $4.0 million for the year ended December 31, 2002.

     Our operating results have been and/or may be influenced significantly by factors such as:

	•	release of new products, product upgrades and services, and the rate of adoption of these products and services by new and existing customers;
	•	timing, cost and success or failure of our new product and service introductions and upgrade releases;
	•	length of sales and delivery cycles;

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	•	size and timing of orders for our products and services;
	•	changes in the mix of products and/or services sold;
	•	availability of specified computer hardware for resale;
	•	deferral and/or realization of deferred software license and system revenues according to contract terms;
	•	interpretations of accounting regulations, principles or concepts that are or may be considered relevant to our business arrangements and practices;
	•	changes in customer purchasing patterns;
	•	changing economic, political and regulatory conditions, particularly with respect to the IT-spending environment;
	•	competition, including alternative product and service offerings, and price pressure;
	•	customer attrition;
	•	timing of, and charges or costs associated with, mergers, acquisitions or other strategic events or transactions, completed or not completed;
	•	timing, cost and level of advertising and promotional programs;
	•	changes of accounting estimates and assumptions used to prepare the prior periods’ financial statements and accompanying notes, and management’s discussion and analysis of financial condition and results of operations (e.g., our valuation of assets and estimation of liabilities); and
	•	uncertainties concerning threatened, pending and new litigation against us, including related professional services fees.

     Quarterly and annual revenues and operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of the fiscal quarter, generally with a concentration of our quarterly revenues earned in the final ten business days of that month. Also, our projections for revenues and operating results include significant sales of new product and service offerings, including our new image management systems, AMICAS^® Vision Series™ PACS, and our radiology information system, Vision Series™ RIS, which may not be realized. Due to these and other factors, our revenues and operating results are very difficult to forecast. A major portion of our costs and expenses, such as personnel and facilities, is of a fixed nature and, accordingly, a shortfall or decline in quarterly and/or annual revenues typically results in lower profitability or losses. As a result, comparison of our period-to-period financial performance is not necessarily meaningful and should not be relied upon as an indicator of future performance. Due to the many variables in forecasting our revenues and operating results, it is likely that our results for any particular reporting period will not meet our expectations or the expectations of public market analysts or investors. Failure to attain these expectations would likely cause the price of our common stock to decline.

Our future success is dependent in large part on the success of our current products.

     In the first quarter of 2005 we sold our Medical Division, which represented 63%, 69%, and 67% of our total revenues in 2004, 2003 and 2002, respectively. We have devoted substantial resources to the development and marketing of our current products. We believe that our future financial performance will be dependent in large part on the success of our ability to market our PACS and RIS solutions.

We may fail to realize the long-term financial benefits that we anticipate will result from our acquisition of Amicas PACS.

     Our expectations with regard to the long-term financial benefits that we anticipate will result from our acquisition of Amicas PACS are subject to significant risks and uncertainties including:

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	•	our ability to retain Amicas PACS key personnel or integrate them into our operations. In particular, the loss of these employees would compromise the value of the Amicas PACS client base and/or its software products and technologies;
	•	our ability to integrate the RIS and PACS products as may be, and/or to the extent, required by the marketplace, including our ability to deliver the related professional services;
	•	our ability to sell Amicas PACS products and services into the imaging center market, including to our existing radiology customers;
	•	our ability to execute on our strategy and realize our revenue goals and control costs and expenses relating to the acquisition;
	•	our ability to coordinate the business cultures of the two organizations;
	•	the integrity of the intellectual property of Amicas PACS; and
	•	continued compliance with all government laws, rules and regulations for all applicable products.

If our new products, including product upgrades, and services do not achieve sufficient market acceptance, our business, financial condition, cash flows, revenues, and operating results will suffer.

     The success of our business will depend in large part on the market acceptance of:

•

new products and services, such as our medical image management systems and our radiology information system, or RIS, existing products and services; and

•

enhancements to our existing products and services.

     There can be no assurance that our customers will accept any of these products, product upgrades, or services. In addition, there can be no assurance that any pricing strategy that we implement for any of our new products, product upgrades, or services will be economically viable or acceptable to our target markets. Failure to achieve significant penetration in our target markets with respect to any of our new products, product upgrades, or services could have a material adverse effect on our business.

     Achieving market acceptance for our new products, product upgrades and services is likely to require substantial marketing and service efforts and the expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products or product upgrades may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional sales and customer service personnel. There can be no assurance that the revenue opportunities for our new products, product upgrades and services will justify the amounts that we spend for their development, marketing and rollout.

     If we are unable to sell our new and next-generation software products to healthcare providers that are in the market for healthcare information and/or image management systems, such inability will likely have a material adverse effect on our business, revenues, operating results, cash flows and financial condition. If new software sales do not materialize, our maintenance and electronic data interchange, or EDI, services revenues can be expected to decrease over time due to the combined effects of attrition of existing customers and a shortfall in new client additions.

Our business could suffer if our products and services contain errors, experience failures, result in loss of our customers’ data or do not meet customer expectations.

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     The products and services that we offer are inherently complex. Despite testing and quality control, we cannot be certain that errors will not be found in prior, current or future versions, or enhancements of our products and services. We also cannot assure you that our products and services will not experience partial or complete failure, especially with respect to our new product or service offerings. It is also possible that as a result of any of these errors and/or failures, our customers may suffer loss of data. The loss of business, medical, diagnostic, or patient data or the loss of the ability to process data for any length of time may be a significant problem for some of our customers who have time-sensitive or mission-critical practices. We could face breach of warranty or other claims or additional development costs if our software contains errors, if our customers suffer loss of data or are unable to process their data, if our products and/or services experience failures, do not perform in accordance with their documentation, or do not meet the expectations that our customers have for them. Even if these claims do not result in liability to us, investigating and defending against them could be expensive and time-consuming and could divert management’s attention away from our operations. In addition, negative publicity caused by these events may delay or reduce market acceptance of our products and services, including unrelated products and services. Such errors, failures or claims could materially adversely affect our business, revenues, operating results, cash flows and financial condition.

Our competitive position could be significantly harmed if we fail to protect our intellectual property rights from third-party challenges.

     Our ability to compete depends in part on our ability to protect our intellectual property rights. We rely on a combination of copyright, trademark, and trade secret laws and restrictions on disclosure to protect the intellectual property rights related to our software applications. Most of our software technology is not patented and existing copyright laws offer only limited practical protection. In addition, prior to 2002 we did not generally enter into confidentiality agreements with our employees. Our practice is to require all new employees to sign a confidentiality agreement and most of our employees have done so. However, not all existing employees have signed confidentiality agreements. We cannot assure you that the legal protections that we rely on will be adequate to prevent misappropriation of our technology.

     Further, we may need to bring lawsuits or pursue other legal or administrative proceedings to enforce our intellectual property rights. Generally, lawsuits and proceedings of this type, even if successful, are costly, time consuming and could divert our personnel and other resources away from our business, which could harm our business.

     Moreover, these protections do not prevent independent third-party development of competitive technology or services. Unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring use of our technology is difficult, and we cannot assure you that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States.

Intellectual property infringement claims against us could be costly to defend and could divert our management’s attention away from our business.

     As the number of software products and services in our target markets increases and as the functionality of these products and services overlaps, we may become increasingly subject to the threat of intellectual property infringement claims. Any infringement claims alleged against us, regardless of their merit, can be time-consuming and expensive to defend. Infringement claims may also divert our management’s attention and resources and could also cause delays in the delivery of our applications to our customers. Settlement of any infringement claims could require us to enter into royalty or licensing agreements on terms that are costly or cost-prohibitive. If a claim of infringement against us were to be successful and if we were unable to license the infringing or similar

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technology or redesign our products and services to avoid infringement, our business, financial condition, cash flows, and results of operations could be harmed.

We may undertake additional acquisitions, which may involve significant uncertainties and may increase costs, divert management resources from our core business activities, or we may fail to realize anticipated benefits of such acquisitions.

     We may undertake additional acquisitions if we identify companies with desirable applications, services, businesses or technologies. We may not achieve any of the anticipated synergies and other benefits that we expected to realize from these acquisitions. In addition, software companies depend heavily on their employees to maintain the quality of their software offerings and related customer services. If we are unable to retain acquired companies’ personnel or integrate them into our operations, the value of the acquired products, technology, and/or client base could be compromised. The amount and timing of the expected benefits of any acquisition are also subject to other significant risks and uncertainties. These risks and uncertainties include:

	•	our ability to cross-sell products and services to customers with which we have established relationships and those with which the acquired business had established relationships;
	•	diversion of our management’s attention from our existing business;

•

potential conflicts in customer and supplier relationships;

•

our ability to coordinate organizations that are geographically diverse and may have different business cultures;

•

dilution to existing stockholders if we issue equity securities in connection with acquisitions;

•

assumption of liabilities or other obligations in connection with the acquisition; and

•

compliance with regulatory requirements.

     Further, our profitability may also suffer because of acquisition-related costs and/or amortization or impairment of intangible assets.

Technology solutions may change faster than we are able to update our technologies, which could cause a loss of customers and have a negative impact on our revenues.

     The information management technology market in which we compete is characterized by rapidly changing technology, evolving industry standards, emerging competition and the frequent introduction of new services, software and other products. Our success depends partly on our ability to:

•

develop new or enhance existing products and services to meet our customers’ changing needs in a timely and cost-effective way; and

•

respond effectively to technological changes, new product offerings, product enhancements and new services of our competitors.

     We cannot be sure that we will be able to accomplish these goals. Our development of new and enhanced products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. In addition, there can be no assurance that the products and/or services we develop or license will be able to compete with the alternatives available to our customers. Our competitors may develop products or technologies that are better or more attractive than our products or technologies, or that may render our products or technologies obsolete. If we do not succeed in adapting our products, technology and services or developing new products, technologies and services, our business could be harmed.

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The nature of our products and services exposes us to product liability claims that may not be adequately covered by insurance or contractual indemnification.

     As a product and service provider in the healthcare industry, we operate under the continual threat of product liability claims being brought against us. Errors or malfunctions with respect to our products or services could result in product liability claims. In addition, certain agreements require us to indemnify and hold others harmless against certain matters. Although we believe that we carry adequate insurance coverage against product liability claims, we cannot assure you that claims in excess of our insurance coverage will not arise. In addition, our insurance policies must be renewed annually. Although we have been able to obtain what we believe to be adequate insurance coverage at an acceptable cost in the past, we cannot assure you that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.

     In many instances, agreements which we enter into contain provisions requiring the other party to the agreement to indemnify us against certain liabilities. However, any indemnification of this type is limited, as a practical matter, to the creditworthiness of the indemnifying party. If the contractual indemnification rights available under such agreements are not adequate, or inapplicable to the product liability claims that may be brought against us, then, to the extent not covered by our insurance, our business, operating results, cash flows and financial condition could be materially adversely affected.

We may be subject to claims resulting from the activities of our strategic partners.

     We rely on third parties to provide certain services and products critical to our business. For example, we use national clearinghouses in the processing of insurance claims and we outsource some of our hardware maintenance services and the printing and delivery of patient billings for our customers. We also have relationships with certain third parties where these third parties serve as sales channels through which we generate a portion of our revenues. Due to these third-party relationships, we could be subject to claims as a result of the activities, products, or services of these third-party service providers even though we were not directly involved in the circumstances leading to those claims. Even if these claims do not result in liability to us, defending against and investigating these claims could be expensive and time-consuming, divert personnel and other resources from our business and result in adverse publicity that could harm our business.

We are subject to government regulation and legal uncertainties, the compliance with which could have a material adverse effect on our business.

   HIPAA

     Federal regulations impact the manner in which we conduct our business. We have been, and may continue to be, required to expend additional resources to comply with regulations under HIPAA. The total extent and amount of resources to be expended is not yet known. Because some of these regulations are relatively new, there is uncertainty as to how they will be interpreted and enforced.

     Although we have made, and will continue to make, a good faith effort to ensure that we comply with, and that our go-forward products enable compliance with, applicable HIPAA requirements, we may not be able to conform all of our operations and products to such requirements in a timely manner, or at all. The failure to do so could subject us to penalties and damages, as well as civil liability and criminal sanctions to the extent we are a business associate of a covered entity or regulated directly as a covered entity. In addition, any delay in developing or failure to develop products and or deliver services that would enable HIPAA compliance for our current and prospective customers could put us at a significant disadvantage in the marketplace. Accordingly, our

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business, and the sale of our products and services, could be materially harmed by failures with respect to our implementation of HIPAA regulations.

   Other E-Commerce Regulations

     We may be subject to additional federal and state statutes and regulations in connection with offering services and products via the Internet. On an increasingly frequent basis, federal and state legislators are proposing laws and regulations that apply to Internet commerce and communications. Areas being affected by these regulations include user privacy, pricing, content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our products and services are subject to these laws and regulations, the sale of our products and services could be harmed.

     FDA

     The Food and Drug Administration, or FDA, is responsible for ensuring the safety and effectiveness of medical devices under the 1976 Medical Device Amendments to the Food, Drug and Cosmetic Act, as well as the 1990 Safe Medical Devices Act, and the Food and Drug Administration Modernization Act of 1997. Certain computer applications and software are generally subject to regulation as medical devices, requiring registration with the FDA, application of detailed record-keeping and manufacturing standards, and FDA approval or clearance prior to marketing when such products are intended to be used in the diagnosis, cure, mitigation, treatment, or prevention of disease. Our PACS product is subject to FDA regulation. If the FDA were to decide that any of our other products and services should be subject to FDA regulation or, if in the future we were to expand our application and service offerings into areas that may subject us to further FDA regulation, the costs of complying with FDA requirements would most likely be substantial. Application of the approval or clearance requirements would create delays in marketing, and the FDA could require supplemental filings or object to certain of these products. In addition, we are subject to periodic FDA inspections and there can be no assurances that we will not be required to undertake specific actions to further comply with the Federal Food, Drug and Cosmetic Act, its amendments and any other applicable regulatory requirements. The FDA has available several enforcement tools, including product recalls, seizures, injunctions, civil fines and/or criminal prosecutions. FDA compliance efforts with regard to our PACS product are time consuming and very significant and any failure to comply could have a material adverse effect on our business, revenues, operating results, cash flows, and financial condition.

Changes in state and federal laws relating to confidentiality of patient medical records could limit our customers’ ability to use our services.

     The confidentiality of patient records and the circumstances under which records may be released are already subject to substantial governmental regulation. Although compliance with these laws and regulations is principally the responsibility of the healthcare provider, under these current laws and regulations patient confidentiality rights are evolving rapidly. In addition to the obligations being imposed at the state level, there is also legislation governing the dissemination of medical information at the federal level. The federal regulations may require holders of this information to implement security measures, which could entail substantial expenditures on our part. Adoption of these types of legislation or other changes to state or federal laws could materially affect or restrict the ability of healthcare providers to submit information from patient records using our products and services. These kinds of restrictions would likely decrease the value of our applications to our customers, which could materially harm our business.

Changes in the regulatory and economic environment in the healthcare industry could cause us to lose revenue and incur substantial costs to comply with new regulations.

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     The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operations of healthcare organizations. Changes in current healthcare financing and reimbursement systems could require us to make unplanned enhancements of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our services by our strategic partners and others. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services.

Larger competitors and consolidation of competitors could cause us to lower our prices or to lose customers.

     Our principal competitors include both national and regional practice management and clinical systems vendors. Until recently, larger, national vendors have targeted primarily large healthcare providers. We believe that the larger, national vendors may broaden their markets to include both small and large healthcare providers. In addition, we compete with national and regional providers of computerized billing, insurance processing and record management services to healthcare practices. As the market for our products and services expands, additional competitors are likely to enter this market. We believe that the primary competitive factors in our markets are:

•

product features and functionality;

•

customer service, support and satisfaction;

•

price;

•

ongoing product enhancements; and

•

vendor reputation and stability.

     We have experienced, and we expect to continue to experience, increased competition from current and potential competitors, many of which have significantly greater financial, technical, marketing and other resources than us. Such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than us. Also, certain current and potential competitors have greater name recognition or more extensive customer bases that could be leveraged, thereby gaining market share to our detriment. We expect additional competition as other established and emerging companies enter into the practice management and clinical software markets and as new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect our business, operating results, cash flows, and financial condition.

     Current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing their abilities to address the needs of our existing and prospective customers. Further competitive pressures, such as those resulting from competitors’ discounting of their products, may require us to reduce the price of our software and complementary products, which would materially adversely affect our business, operating results, cash flows and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, and our failure to do so would have a material adverse effect upon our business, operating results, cash flows and financial condition.

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We depend on partners/suppliers for delivery of electronic data interchange (e.g., insurance claims processing and invoice printing services), commonly referred to as EDI, hardware maintenance services, third-party software or software or hardware components of our offerings, and sales lead generation. Any failure, inability or unwillingness of these suppliers to perform these services or provide their products could negatively impact customer satisfaction and revenues.

     We use various third-party suppliers to provide our customers with EDI transactions and on-site hardware maintenance. EDI revenues would be particularly vulnerable to a supplier failure because EDI revenues are earned on a daily basis. We rely on numerous third-party products that are made part of our software offerings and/or that we resell. Although other vendors are available in the marketplace to provide these products and services, it would take time to switch suppliers. If these suppliers were unable or unwilling to perform such services, provide their products or if the quality of these services or products declined, it could have a negative impact on customer satisfaction and result in a decrease in our revenues, cash flows, and operating results.

Our systems may be vulnerable to security breaches and viruses.

     The success of our strategy to offer our EDI services and Internet solutions depends on the confidence of our customers in our ability to securely transmit confidential information. Our EDI services and Internet solutions rely on encryption, authentication and other security technology licensed from third parties to achieve secure transmission of confidential information. We may not be able to stop unauthorized attempts to gain access to or disrupt the transmission of communications by our customers. Some of our customers have had their use of our software significantly impacted by computer viruses. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our, or our customers’, operations. In addition, our EDI and Internet solutions may be vulnerable to viruses, physical or electronic break-ins, and similar disruptions. Any failure to provide secure electronic communication services could result in a lack of trust by our customers causing them to seek out other vendors, and/or damage our reputation in the market making it difficult to obtain new customers.

If the marketplace demands subscription pricing and/or application service provider, or ASP, delivered offerings, our revenues may be adversely impacted.

     We currently derive substantially all of our revenues from traditional software license, maintenance and service fees, as well as from the resale of computer hardware. Today, customers pay an initial license fee for the use of our products, in addition to a periodic maintenance fee. If the marketplace demands subscription pricing and/or ASP-delivered offerings, we may be forced to adjust our strategy accordingly, by offering a higher percentage of our products and services through these means. Shifting to subscription pricing and/or ASP-delivered offerings could materially adversely impact our financial condition, cash flows and quarterly and annual revenues and results of operations, as our revenues would initially decrease substantially. We cannot assure you that the marketplace will not embrace subscription pricing and/or ASP-delivered offerings.

Our growth could be limited if we are unable to attract and retain qualified personnel.

     We believe that our success depends largely on our ability to attract and retain highly skilled technical, managerial and sales personnel to develop, sell and implement our products and services. Individuals with the information technology, managerial and selling skills we need to further develop, sell and implement our products and services are in short supply and competition for qualified personnel is particularly intense. We may not be able to hire the necessary personnel to implement our business strategy, or we may need to pay higher compensation for employees than we currently expect. We cannot assure you that we will succeed in attracting and retaining the personnel we need to continue to grow and to implement our business strategy. In addition, we

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depend on the performance of our executive officers and other key employees. The loss of any member of our senior management team could negatively impact our ability to execute our business strategy.

We may be subject to product related liability lawsuits.

     Our software is used by healthcare providers in providing care to patients. Although no product liability lawsuits have been brought against us to date related to the use of our software solutions, such lawsuits may be made against us in the future. We maintain product liability insurance coverage in an amount that we believe is adequate; such coverage may not be adequate or such coverage may not continue to remain available on acceptable terms, if at all. A successful lawsuit brought against us, which is uninsured or underinsured, could materially harm our business and financial condition.

We may be exposed to credit risks of our customers.

     We recorded revenues from continuing operations of $12.1 million and $9.5 million in the first quarter of 2005 and 2004, respectively, and we bill substantial amounts to many of our customers. A deterioration of the credit worthiness of any of our customers could impact our ability to collect revenue or provide future services, which could negatively impact the results of our operations. While we are focused on managing working capital, we can give no assurances that the deterioration of the credit risks relative to our customers would not have an adverse impact on our results of operations, financial condition or cash flow from operations.

Our future success depends on our ability to successfully develop new products and adapt to new technology change.

     To remain competitive, we will need to develop new products, evolve existing ones, and adapt to technology change. Technical developments, customer requirements, programming languages and industry standards change frequently in our markets. As a result, success in current markets and new markets will depend upon our ability to enhance current products, develop and introduce new products that meet customer needs, keep pace with technology changes, respond to competitive products, and achieve market acceptance. Product development requires substantial investments for research, refinement and testing. There can be no assurance that we will have sufficient resources to make necessary product development investments. We may experience difficulties that will delay or prevent the successful development, introduction or implementation of new or enhanced products. Inability to introduce or implement new or enhanced products in a timely manner would adversely affect future financial performance. Our products are complex and may contain errors. Errors in products will require us to ship corrected products to customers. Errors in products could cause the loss of or delay in market acceptance or sales and revenue, the diversion of development resources, injury to our reputation, or increased service and warranty costs which would have an adverse effect on financial performance.

Overview

     AMICAS, Inc. is a leader in radiology and medical image and information management solutions. The AMICAS Vision Series™ products provide a complete, end-to-end solution for imaging centers, ambulatory care facilities, and radiology practices. Acute care and hospital customers are provided a fully-integrated, HIS/RIS-independent PACS, featuring advanced enterprise workflow support and scalable design. Complementing the Vision Series product family is AMICAS Insight Services™, a set of client-centered professional and consulting services that assist our customers with a well-planned transition to a digital enterprise. We provide our clients with ongoing software support, implementation, training, and electronic data interchange, or EDI, services for patient billing and claims processing.

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AMICAS, Inc.

     Software license fees and system revenues are derived from the sale of software product licenses and computer hardware. Maintenance and services revenues come from providing ongoing product support, implementation, training and transaction processing services.

     On January 3, 2005, we completed the sale of substantially all of the assets and liabilities of our medical division together with certain other assets, liabilities, properties and rights of ours relating to our anesthesiology business, together the Medical Division, to Cerner Corporation. The Asset Sale was completed in accordance with the terms and conditions of the Asset Purchase Agreement between us and Cerner dated as of November 15, 2004. As a result of this transaction, historical consolidated statements of operations have been reclassified to present the results of the Medical Division as discontinued operations. As consideration for the Asset Sale, we received $100 million in cash, subject to a post-closing purchase price adjustment to be determined within 90 days following the closing. We expect to pay Cerner approximately $1.2 million relating to the post-closing purchase price adjustment. We recorded net gain on the sale of $46.1 million, net of income taxes, in the first quarter of 2005.

     On January 3, 2005, we repaid the entire outstanding balance of approximately $23.2 million under our credit facility with Wells Fargo Foothill, Inc. and the credit facility was terminated.

     On November 25, 2003, we acquired 100% of the outstanding capital stock of Amicas PACS, Corp., formerly known as Amicas, Inc., a developer of Web-based diagnostic image management software solutions. The addition of Amicas PACS provided us with the ability to offer radiology groups and imaging center customers a comprehensive, integrated information and image management solution that incorporates the key components of a complete radiology data management system (e.g., image management, workflow management and financial management).

     We purchased Amicas PACS for $31 million in cash, including direct transaction costs. Additionally, we financed $15 million of the purchase price of Amicas PACS through the use of our credit line. The merger agreement provided for an additional purchase payment of up to $25 million based on attainment of specified earnings targets through 2004. In addition, we assumed incentive plans for certain management employees of Amicas PACS that provided for up to $5 million of compensation, tied to the attainment of the earnings targets for the contingent earn-out period. On December 9, 2004, the merger agreement was amended. The amendment terminated the earn-out consideration obligations set forth in the merger agreement and provides that we will pay to former Amicas PACS stockholders and certain Amicas PACS employees a total of up to $14.5 million. Pursuant to the amendment, former Amicas PACS stockholders received a total of $10.0 million, paid in the following manner: $4.3 million was paid three business days after distribution of the escrow fund pursuant to the escrow notice dated December 9, 2004 and $5.7 million was paid in April 2005. As such, the note payable to Amicas PACS shareholders was paid in full.

     Additionally, certain Amicas PACS employees received or will receive a total of up to $4.5 million in satisfaction of certain obligations under Amicas PACS bonus plan, paid or to be paid in the following manner: approximately $2.2 million was paid in December 2004 and in January 2005. Additionally, $0.9 million will be paid in the second quarter of 2005 and $1.4 million is expected to be paid on or about December 31, 2005. In general, any payment to an Amicas PACS employee is contingent on such employee’s continued employment with us. The additional consideration paid or to be paid to the former Amicas PACS stockholders under the settlement of the earn-out provisions was recognized as additional goodwill. In the first quarter of 2005, the employment of two former Amicas PACS executives was terminated by mutual agreement.

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AMICAS, Inc.

Critical Accounting Policies

     The discussion and analysis of our financial condition and results of operations are based on our financial statements and accompanying notes, which we believe have been prepared in conformity with generally accepted accounting principles. The preparation of these financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, assumptions and judgments, including those related to revenue recognition, allowances for future returns, discounts and bad debts, tangible and intangible assets, deferred costs, income taxes, restructurings, commitments, contingencies, claims and litigation. We base our judgments and estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, our actual results could differ from those estimates.

     Management believes the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of its consolidated financial statements.

•

Revenue Recognition.

•

Accounts Receivable.

•

Long-lived Assets.

•

Goodwill Assets and Business Combinations.

•

Income Taxes.

     These policies are unchanged from those used to prepare the 2004 annual consolidated financial statements. We discuss our critical accounting policies in Item 7 under the heading “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, Statement No. 123R, which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. See below for information related to the pro forma effects on the reported income (loss) from continuing operations and loss per share from continuing operations of applying the fair value recognition provisions of the previous Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

     On April 14, 2005, the standard was delayed to the first fiscal year beginning after June 15, 2005, the compliance date. Accordingly, beginning January 1, 2006, the Company will be required to apply the standard to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

•

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

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AMICAS, Inc.

•

A “prospective” 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(R) for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company is currently evaluating the impact of Statement No. 123R on its results of operations.

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AMICAS, Inc.

Results of Continuing Operations

Revenues

     We recognize software license revenues and system (computer hardware) sales upon execution of a master license agreement and delivery of the software (off-the-shelf application software) and/or hardware. In all cases, however, the fee must be fixed or determinable, collection of any related receivable must be considered probable, and no significant post-contract obligations of ours shall be remaining. Otherwise, we defer the sale until all of the requirements for revenue recognition have been satisfied. Maintenance fees for routine client support and unspecified product updates are recognized ratably over the term of the maintenance arrangement. Training, implementation and EDI services revenues are recognized as the services are performed.

Maintenance and services

     The increase in maintenance and services revenues of approximately $1.9 million is primarily due to an increase of implementation and training services revenues of $1.0 million, $0.7 million in maintenance revenues, and $0.1 million in EDI services revenues. The $1.0 million increase in implementation and training revenues us the result of providing services as well as achieving implementation milestones. Additionally, the increase is attributable to the addition of new customers and associated sales revenues. The $0.7 million in maintenance revenues is the result of the addition of new customers and associated maintenance revenues.

Software licenses and system sales

     Software license and system revenues increased primarily as a result of an increase in the number of licenses and systems sold by approximately $0.7 million or 25.2%. This increase is the result of an increase in software sales of $0.6 million and an increase of $0.1 million in system sales.

     Quarterly and annual revenues and related operating results are highly dependent on the volume and timing of the signing of license agreements and product deliveries during each quarter, which are very difficult to forecast. A significant portion of our quarterly sales of software product licenses and computer hardware is concluded in the last month of each quarter, generally with a concentration of our quarterly revenues earned in the final ten business days of that month. Also, our projections for revenues and operating results include significant sales of new product and service offerings, including our new image management systems, AMICAS® Vision Series™ PACS, and our new radiology information system, Vision Series ™ RIS. Due to these and other factors, our revenues and operating results are very difficult to forecast. As a result, comparison of our period-to-period financial performance is not necessarily meaningful and should not be relied upon as an indicator of future performance. Moreover, if new software sales do not materialize, our maintenance and EDI services revenues can

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AMICAS, Inc.

be expected to decrease over time due to the combined effects of attrition of existing clients and a shortfall in new client additions.

Cost of revenues

Costs of maintenance and services revenues

     Cost of maintenance and services revenues consists primarily of the cost of EDI insurance claims processing, outsourced hardware maintenance and EDI billing and statement printing services, and postage. The decrease of approximately $0.4 million is primarily the result of a $0.3 million decrease in third party consultant costs related to our product implementations and a $0.1 million decrease in EDI supplier costs.

Cost of software license and hardware revenues

     Cost of software license and system revenues consists primarily of costs incurred to purchase computer hardware, third-party software and other items for resale in connection with sales of new systems and software, and amortization of software product costs. These dollar amounts remained constant but decreased as a percentage of revenue due to increased software license and system sales. The decrease is primarily the result of a decrease of amortization of capitalized software costs of approximately $0.2 million, which is the result of the fourth quarter of 2004 $3.2 million write-off of capitalized software costs. The decrease is offset by an increase in system costs.

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Operating expenses

Selling, general and administrative

     Selling, general and administrative expenses include fixed and variable compensation and benefits of all personnel (other than research and development personnel), facilities, travel, communications, bad debt, legal, marketing, insurance and other administrative expenses. The decrease of $0.3 million in selling, general and administrative is primarily due a decrease in salaries of $0.2 million, marketing expenditures of $0.2 million, and $0.1 million in discretionary travel, meals and entertainment. This is partially offset by an increase in legal and accounting fees of $0.2 million.

Research and development

     The decrease in research and development expenses of approximately $50,000 is primarily due a decrease in third party development costs of $0.1 million and $50,000 in recruiting fees, which is partially offset with an increase of salaries of our research and development staff of $0.1 million.

Depreciation and amortization

     The decrease in depreciation and amortization of approximately $0.1 million is primarily due to a decrease in assets as a result of our $1.4 million related to write-down of our Enterprise Resource Planning system in the fourth quarter of 2004.

Settlement of earn-out

     In the first quarter of 2005, approximately $1.1 million was recorded as charges related to the earn-out bonus which included approximately $0.9 million for the acceleration of earn-out bonuses pursuant to agreements with two former Amicas PACS whose employment was terminated by mutual agreement. We expect to record an additional $1.2 million of charges related to the earn-out bonus throughout 2005.

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Non-operating income (expense)

Interest Income

     The increase of approximately $0.4 million in interest income is primarily due to the increase in cash and cash equivalent balance from the January 2005 sale of the Medical Business for $100.0 million in cash proceeds less approximately $23.2 million repayment of the Wells Fargo Foothill credit facility. Additionally, the increase is attributable due to an increased interest rate being earned on our cash and cash equivalent balance.

Interest Expense

     The increase in interest expense is primarily due to the approximately $0.7 million write-off of deferred financing costs related to our Wells Fargo Foothill credit facility as a result of the full pay-off of the credit facility in January 2005. In conjunction with the pay-off the credit facility was terminated.

(Benefit) provision for income taxes

     In the three-month months ended March 31, 2005, we recorded an income tax benefit of $1.48 million attributed to continuing operations as compared to an income tax provision of approximately $0.1 million in the three months ended March 31, 2004. The income tax benefit is based upon our projected effective income tax rate of 39.0% for 2005 applied against our loss from continuing operations.

Gain on the Sale of Discontinued Operations

     On January 3, 2005, the Company completed the sale of its Medical Division to Cerner. The Asset Sale was completed in accordance with the terms and conditions of the Purchase Agreement. As consideration for the Asset Sale, the Company received cash proceeds of approximately $100 million.

     In the first quarter of 2005, the Company recorded a net gain from the sale of approximately $46.1 million which is net of approximately: (a) $16.2 million of net assets transferred to Cerner (b) $1.2 million of post closing purchase price adjustments, (c) $34.6 million of income taxes, (d) $0.9 million relating to the modification of stock options granted to certain employees of the Medical Division and (e) $1.0 million of additional fees and transaction costs related to the sale.

     The $34.6 million income tax provision includes the realization of the $28.2 million deferred tax asset that the Company had previously recorded and a current tax liability at March 31, 2005 of $6.4 million.

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     Under the terms of the Purchase Agreement, (a) Cerner agreed to pay the Company $100 million in cash, subject to a post-closing adjustment based on the Company’s net working capital as of the closing date, and (b) Cerner agreed to assume specified liabilities of the Medical Division and the anesthesiology business and certain obligations under assigned contracts and intellectual property. As of March 31, 2005, the Company accrued for approximately $1.2 million relating to the post-closing purchase price adjustment. The Company expects to finalize the post-closing adjustments in the second quarter of 2005.

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Liquidity and Capital Resources

     To date, we have financed our business through cash flows from operations, proceeds from the issuance of common stock and long-term borrowings. In addition, we sold our Medical Division for approximately $100.0 million in cash and repaid $23.2 million of our debt. Our cash and cash equivalent balance was $88.6 million as of March 31, 2005, as compared to $12.6 million as of December 31, 2004. Additionally, as of March 31, 2005, we increased our working capital by $48.7 million from December 31, 2004. Cash used in operating activities for the first quarter of 2005 amounted to $1.1 million.

     Cash provided by financing activities for the first quarter of 2005 resulted in cash provided by investing activities was $99.1 million. This total includes $100.0 million in cash received from the sale of the Medical Division and $0.3 million from the sale of certain assets, offset by $1.0 million in payment of transaction costs related to the sale of the discontinued operations and $0.2 million used primarily for purchases of computer equipment and software.

     Cash used in investing activities for the first quarter of 2005 amounted to $21.9 million, consisting of $23.2 million for the pay-off of our debt with Wells Fargo Foothill, partially offset by $1.3 million of payments received in connection with the exercise of stock options by certain employees.

     On December 9, 2004, we amended the November 25, 2003 Amicas PACS merger agreement. The amendment terminated the earn-out consideration obligations set forth in the merger agreement and provided that we pay to former Amicas PACS stockholders and certain Amicas PACS employees a total of up to approximately $14.5 million.

     Pursuant to the amended merger agreement, former Amicas PACS stockholders would receive a total of $10.0 million. Of the $10.0 million, we paid $4.3 million three business days after distribution of the escrow fund pursuant to the escrow notice dated December 9, 2004 and $5.7 in April 2005. As of April 2005, the obligation was paid in full.

     Additionally, pursuant to the amended merger agreement, we paid approximately $2.2 million to certain Amicas PACS employees as additional earn-out consideration in December 2004 and January 2005. We are also committed to pay an additional amount of approximately $2.2 million under the amendment to the Amicas PACS merger agreement. In general, any payment to an Amicas PACS employee is contingent on such employee’s continued employment with us. Per the terms of their separation agreements of two former Amicas PACS executives, we expect to pay out approximately $0.9 million in the second quarter of 2005 and the balance of $1.4 million to other Amicas PACS employees on or about December 31, 2005.

     On January 3, 2005, we repaid the entire outstanding balance under our credit facility with Wells Fargo Foothill of approximately $23.2 million and our credit facility was terminated.

     As consideration for the sale of the Medical Division to Cerner, we received approximately $100 million in cash, subject to a post-closing purchase price adjustment to be determined within 90 days following the closing. We estimate that we may need to pay Cerner approximately $1.2 million relating to the post-closing purchase price adjustment. In addition, we paid approximately $1 million in the first quarter of 2005 for additional fees and transaction costs relating to the sale. In connection with the Transition Services Agreement between us and Cerner dated January 3, 2005, we have committed to pay Cerner approximately $0.2 million to $0.3 million per year through April 2007 for certain EDI services.

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     The following table summarizes, as of March 31, 2005, the general timing of future payments under our outstanding loan agreements, lease agreements that include noncancellable terms, and other long-term contractual obligations (amounts listed under operating leases and other commitments include amounts which were subsequently assigned to Cerner in January 2005):

     On May 6, 2005, we announced that our Board of Directors has authorized us to repurchase of up to $15 million of our common stock from time to time in open market or privately negotiated transactions. The timing and amount of any share repurchases will be determined by us based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with our stock plans or other corporate purposes. The repurchase program will be funded using our working capital.

     On March 8, 2005, we entered a sublease agreement to extend the lease term of its office space at its Boston, Massachusetts corporate headquarters. The term of the sublease extends the original sublease term until July 31, 2006, with a Company additional option to extend the lease term for an additional seventeen months through December 31, 2007. The base rent is $28,539 per month through May 31, 2005 and will increase to $30,577 per month through July 31, 2006. If the Company extends the lease for the additional seventeen months the base rent will increase then to $33,975 per month until the end of the extended term.

     Additionally, on March 4, 2005, we entered into a sublease agreement for additional office space at the same location as its Boston, Massachusetts headquarters, effective as of February 15, 2005. The term of the sublease expires on January 11, 2008. The base rent is $12,485 per month from February 15, 2005 until June 30, 2006. The base rent will increase to a total of $55,377 per month.

     On January 3, 2005, we entered into a Transition Services Agreement with Cerner (the “Transition Services Agreement”) in connection with the sale of the Medical Division. Pursuant to the Transition Services Agreement, in exchange for specified fees, we will provide to Cerner services including accounting, tax, information technology, customer support and use of facilities, and Cerner will provide services to us such as EDI services including patient billing and claims processing, and use of facilities. Certain of the services we provide extend through December 31, 2005 and other Cerner-provided services extend through March 31, 2009.

     In January 2005, in connection with the Transition Services Agreement with Cerner, we assigned our agreement with a third-party provider of EDI services for patient claims processing to Cerner. For the month of April 2005, we are now committed to pay approximately $30,000 to Cerner for processing services. For months thereafter, the annual services fee will range from $0.2 million to $0.3 million based on our and Cerner’s combined volume usage in the last month of the preceding year. We assigned its agreement with NDC to Cerner. We are committed to minimum quarterly volumes and are required to pay a minimum quarterly fee of $0.6 million to Cerner through March 2006. Thereafter, the minimum quarterly volume commitments will be reduced by 1.25% per quarter until April 2009. We are also committed to paying Cerner approximately $0.2 million per year through April 2007 for certain EDI services.

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AMICAS, Inc.

     In January 2005, in connection with the sale of the Medical Division to Cerner, we assigned certain operating lease agreements relating to the Medical Division to Cerner. As a result, the Company’s future payments due under our outstanding lease agreements, including the March 2005 leases which is reflected in the commitment table described above, which decreased to a total of $4.1 million with $1.3 million due in 2005, $1.2 million due in 2006, $1.2 million due in 2007 and $0.4 million due in 2008.

     In connection with our employee savings plans, we are committed, for the 2005 plan year, to contribute to the plans. The matching contribution for 2005 is estimated to be approximately $0.5 million and will be made 75% in cash and 25% in shares of our common stock.

     We anticipate capital expenditures of approximately $1.2 million for 2005.

     To date, the overall impact of inflation on us has not been material.

     We expect to pay approximately $1.8 million in 2005 for severance-related costs relating to the termination of employment from the relocation of our corporate headquarters office.

     From time to time, in the normal course of business, various claims are made against us. Except for the proceeding described below, there are no material proceedings to which we are a party, and management is unaware of any material contemplated actions against us.

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure Corporation (now known as AMICAS, Inc.), et al., was filed in Boone County Superior Court in Indiana and the case was subsequently transferred to the Northern District Court of Georgia. The complaint alleged state securities law violations, breach of contract, and fraud claims against the defendants. The complaint did not specify the amount of damages sought by plaintiffs, but sought rescission of a transaction that the plaintiffs valued at $5 million, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. In October 2001, the plaintiffs’ request for a preliminary injunction to preserve their remedy of rescission was denied and part of their complaint was dismissed. The plaintiffs’ subsequent appeal of this decision was denied. Thereafter, plaintiffs retained new counsel and served an amended complaint that added additional former officers and directors as defendants, dropped the claim for rescission, and asserted new state securities law violations.

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AMICAS, Inc.

     After disqualification of plaintiffs’ second counsel in May 2003, plaintiffs retained new counsel and, in July 2003, served a second amended complaint upon us which added, among other things, a claim for Georgia RICO violations. In August 2003, we filed with the Court a partial motion to dismiss the second amended complaint which motion was granted in part and denied in part on January 9, 2004. On February 6, 2004, we served an answer to the second amended complaint. The discovery process is now complete. On December 20, 2004, the defendants filed a motion for summary judgment and the plaintiffs filed a motion for partial summary judgment. These motions are now fully submitted.

     While management believes that we have meritorious defenses in the foregoing pending matter and we intend to pursue our positions vigorously, litigation is inherently subject to many uncertainties. Thus, the outcome of this matter is uncertain and could be adverse to us. Depending on the amount and timing of an unfavorable resolution of the contingencies, it is possible that our financial position, future results of operations or cash flows could be materially affected in a particular reporting period(s).

     In September 2004, a lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and Amicas, Inc. was filed in the United States District Court for the Southern District of California. The complaint alleged that VitalWorks and Amicas infringed the plaintiff’s patent through the manufacture, use, importation, sale and/or offer for sale of automated medical imaging and archival systems. The plaintiff sought monetary damages, treble damages and a permanent injunction. On November 3, 2004, we served our answer. On January 26, 2005, the parties entered into a Settlement, Release and License agreement; and on February 4, 2005, a stipulation of dismissal, dismissing the lawsuit with prejudice, was entered. In connection with this agreement, we paid the plaintiff $0.5 million in 2005.

     As permitted under Delaware law, we have agreements under which we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, with respect to certain events or occurrences after March 6, 2001, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. Given the insurance coverage in effect, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2005.

     We generally include intellectual property indemnification provisions in our software license agreements. Pursuant to these provisions, we hold harmless and agree to defend the indemnified party, generally our business partners and customers, in connection with certain patent, copyright, trademark and trade secret infringement claims by third parties with respect to our products. The term of the indemnification provisions varies and may be perpetual. In the event an infringement claim against us or an indemnified party is made, generally we, in our sole discretion, agree to do one of the following: (i) procure for the indemnified party the right to continue use of the software, (ii) provide a modification to the software so that its use becomes noninfringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund all or the residual value of the software license fees paid by the indemnified party for the infringing software. We believe the estimated fair value of these intellectual property indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2005.

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AMICAS, Inc.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     We believe we are not subject to material foreign currency exchange rate fluctuations, as most of our sales and expenses are domestic and therefore are denominated in the U.S. dollar. We do not hold derivative securities and have not entered into contracts embedded with derivative instruments, such as foreign currency and interest rate swaps, options, forwards, futures, collars, and warrants, either to hedge existing risks or for speculative purposes.

     As March 31, 2005, the Company held approximately $88.6 million in cash and cash equivalents, consisting primarily of money market funds and three month treasury bills. Cash equivalents are classified as available for sale and carried at fair value, which approximates cost. A hypothetical 10% increase in interest rates would not have a material impact on the fair market value of these instruments due to their short maturity of three months.

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AMICAS, Inc.

Item 4. Controls and Procedures

     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a 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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

     Management’s report on internal controls over financial reporting as of December 31, 2004, was included in our Annual Report on Form 10-K for the year-end December 31, 2004. In the report, management concluded that there was a material weakness in our internal control over financial reporting. The management report described the material weaknesses as a material weakness in the Company’s internal control over the financial report with respect to accounting for income taxes as of December 31, 2004. To remediate this deficiency in our internal control over financial reporting with respect to accounting for income taxes, in the first quarter of 2005, we engaged an accounting firm to periodically review our accounting for income taxes prior to providing such information to our independent auditors.

     Other than the change described above, there has been no change in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

     From time to time, in the normal course of business, various claims are made against us. Except for the proceeding described below, there are no material proceedings to which we are a party, and management is unaware of any material contemplated actions against us.

     On April 19, 2001, a lawsuit styled David and Susan Jones v. InfoCure Corporation (now known as AMICAS, Inc.), et al., was filed in Boone County Superior Court in Indiana and the case was subsequently transferred to the Northern District Court of Georgia. The complaint alleged state securities law violations, breach of contract, and fraud claims against the defendants. The complaint did not specify the amount of damages sought by plaintiffs, but sought rescission of a transaction that the plaintiffs valued at $5 million, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. In October 2001, the plaintiffs’ request for a preliminary injunction to preserve their remedy of rescission was denied and part of their complaint was dismissed. The plaintiffs’ subsequent appeal of this decision was denied. Thereafter, plaintiffs retained new counsel and served an amended complaint that added additional former officers and directors as defendants, dropped the claim for rescission, and asserted new state securities law violations. After disqualification of plaintiffs’ second counsel in May 2003, plaintiffs retained new counsel and, in July 2003, served a second amended complaint upon us which added, among other things, a claim

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AMICAS, Inc.

for Georgia RICO violations. In August 2003, we filed with the Court a partial motion to dismiss the second amended complaint which motion was granted in part and denied in part on January 9, 2004. On February 6, 2004, we served an answer to the second amended complaint. The discovery process is now complete. On December 20, 2004, the defendants filed a motion for summary judgment and the plaintiffs filed a motion for partial summary judgment. These motions are now fully submitted.

     While management believes that we have meritorious defenses in the foregoing pending matter and we intend to pursue our positions vigorously, litigation is inherently subject to many uncertainties. Thus, the outcome of this matter is uncertain and could be adverse to us. Depending on the amount and timing of an unfavorable resolution of the contingencies, it is possible that our financial position, future results of operations or cash flows could be materially affected in a particular reporting period(s).

     In September 2004, a lawsuit styled DR Systems, Inc. v. VitalWorks Inc. and Amicas, Inc. was filed in the United States District Court for the Southern District of California. The complaint alleged that VitalWorks and Amicas infringed the plaintiff’s patent through the manufacture, use, importation, sale and/or offer for sale of automated medical imaging and archival systems. The plaintiff sought monetary damages, treble damages and a permanent injunction. On November 3, 2004, we served our answer. On January 26, 2005, the parties entered into a Settlement, Release and License agreement; and on February 4, 2005, a stipulation of dismissal, dismissing the lawsuit with prejudice, was entered. In connection with this agreement, we paid the plaintiff $0.5 million in 2005.

     As permitted under Delaware law, we have agreements under which we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, with respect to certain events or occurrences after March 6, 2001, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. Given the insurance coverage in effect, we believe the estimated fair value of these indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2005.

     We generally include intellectual property indemnification provisions in our software license agreements. Pursuant to these provisions, we hold harmless and agree to defend the indemnified party, generally our business partners and customers, in connection with certain patent, copyright, trademark and trade secret infringement claims by third parties with respect to our products. The term of the indemnification provisions varies and may be perpetual. In the event an infringement claim against us or an indemnified party is made, generally we, in our sole discretion, agree to do one of the following: (i) procure for the indemnified party the right to continue use of the software, (ii) provide a modification to the software so that its use becomes noninfringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund all or the residual value of the software license fees paid by the indemnified party for the infringing software. We believe the estimated fair value of these intellectual property indemnification agreements is minimal. We have no liabilities recorded for these agreements as of March 31, 2005.

ITEM 5. OTHER INFORMATION

     On May 6, 2005, we announced that our Board of Directors has authorized the repurchase of up to $15 million of our common stock from time to time in open market or privately negotiated transactions. The timing and amount of any share repurchases will be determined by our management based on its evaluation of market conditions and other factors. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when we might otherwise be precluded from doing so under insider trading laws. The repurchase program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with its stock plans or other corporate purposes. The repurchase program will be funded using our working capital.

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Item 6. Exhibits

(a) Exhibits

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 10th day of May, 2005.

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