Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts in thousands)

Overview

Allscripts Healthcare Solutions is a leading provider of clinical software and information solutions for physicians. Our key offerings fall into three business segments. Our software and services segment is comprised primarily of our TouchWorks™ software business. TouchWorks is a modular electronic medical record (mEMR™) designed to enhance physician productivity using a wireless handheld device, Tablet PC, or desktop workstation to automate the most common physician activities. Our information services segment is comprised primarily of our Physicians Interactive™ (PI) business. PI links physicians with pharmaceutical companies and medical suppliers using interactive education sessions to provide product information to the physician. Finally, our prepackaged medications segment is comprised of our Allscripts Direct™ business. Allscripts Direct provides point-of-care medication, and medical supply management solutions for physicians.

We provide three key product and service offerings, each of which focus on the physician. Allscripts Direct provides medication management solutions for physicians. TouchWorks provides software that automates the most common physician activities. Physicians Interactive provides interactive educational opportunities for the physician. We believe that TouchWorks and Physicians Interactive represent our largest potential for growth.

We currently organize our business around the three aforementioned segments: prepackaged medications; software and related services; and information services. The prepackaged medications segment derives its revenue from the repackaging, sale, and distribution of medications and medical supplies. The software and related services derives its revenue from the sale and service of software that provides point-of-care decision support solutions and the resale of related hardware. The information services segment primarily derives its revenue from the sale of interactive physician education sessions.

The composition of our revenue is as follows (unaudited) for the quarter ended:

Cost of revenue for the prepackaged medications segment consists primarily of the cost of the prepackaged medications, the salaries, bonuses and benefits for the repackaging personnel, shipping costs, repackaging facility and other costs. Cost of revenue for the software and related services segment consists primarily of the salaries, bonuses and benefits of our billable professionals, third party software costs, hardware cost, capitalized software amortization and other direct engagement costs. Cost of revenue for the information services segment consists primarily of salaries, bonuses and benefits of our program management and program development personnel, costs to recruit physicians and other program management costs.

Selling, general and administrative expenses consist primarily of salaries, bonuses and benefits for management and support personnel, facilities costs, depreciation and amortization, general operating expenses, non-capitalized product development expenses, and selling and marketing expenses. Selling, general and administrative expenses for each segment consist of expenses directly related to that segment.

Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended June 30, 2002

Prepackaged Medications

Prepackaged medications revenue decreased by 10.5%, or $1,310, from $12,480 for the three months ended June 30, 2002 to $11,170 for the same period in 2003. Prepackaged medications revenue decreased by 6.7%, or $1,671, from $24,959 for the six months ended June 30, 2002 to $23,288 for the same period in 2003. The decrease in both periods reflects a decrease in the volume of prepackaged medications sold related to the termination of several less-profitable customer relationships, the bankruptcy of a large customer, and lower revenue from occupational health customers, which tend to be more sensitive to general economic trends.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
(Dollar amounts in thousands)

Gross profit for prepackaged medications for the three months ended June 30, 2003 increased by 3.7%, or $88, from $2,378 in 2002 to $2,466 in 2003. Gross profit for prepackaged medications for the six months ended June 30, 2003 increased by 10.9%, or $506, from $4,629 in 2002 to $5,135 in 2003. Gross profit as a percentage of revenue for the three months ended June 30, 2003 was 22.1% compared with 19.1% for the same period in 2002. Gross profit as a percentage of revenue for the six months ended June 30, 2003 was 22.0% compared with 18.5% for the same period in 2002. The increase in both gross profit and gross profit as a percentage of revenue in both periods was primarily due to more favorable buying arrangements with suppliers as well as the elimination of less-profitable customer relationships.

Operating expenses for prepackaged medications for the three months ended June 30, 2003 increased by 2.1%, or $9, from $439 in 2002 to $448 in 2003. Operating expenses for prepackaged medications for the six months ended June 30, 2003 increased by 10.9%, or $95, from $871 in 2002 to $966 in 2003. The increase for the six months ended June 30, 2003 was primarily due to increased sales and service expenditures.

Software and Related Services

Software and related services revenue for the three months ended June 30, 2003 increased by 20.0%, or $1,002, from $5,018 in 2002 to $6,020 in 2003. Software and related services revenue for the six months ended June 30, 2003 increased by 24.9%, or $2,359, from $9,457 in 2002 to $11,816 in 2003. The increases reflect an increase in the implementation of our integrated content and clinical workflow products.

Gross profit for software and related services increased by 207.0%, or $1,745, from $843 in the second quarter of 2002 to $2,588 in the second quarter of 2003. Gross profit for software and related services increased by 252.5%, or $3,479, from $1,378 in the first half of 2002 to $4,857 in the first half of 2003. Gross profit as a percentage of revenue increased to 43.0% in the second quarter of 2003 from 16.8% in the same period in 2002. Gross profit as a percentage of revenue increased to 41.1% in the first half of 2003 from 14.6% in the same period in 2002. The increase in both gross profit and gross profit as a percentage of revenue resulted from the increase in revenue combined with the simultaneous reduction of our costs of implementation, training, and support by realizing improved efficiencies in those processes.

Operating expenses for software and related services for the three months ended June 30, 2003 increased by 6.1%, or $241, from $3,939 in 2002 to $4,180 in 2003. The increase in operating expenses was primarily the result of higher marketing expenditures in 2003 as compared to 2002, as more of the 2002 expenses were offset by vendor sponsorships. In addition, during the three months ended June 30, 2003, we capitalized $432 of software development costs in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," compared to $638 during the same period in 2002.

Operating expenses for software and related services for the six months ended June 30, 2003 decreased by 8.6%, or $780, from $9,115 in 2002 to $8,335 in 2003. The decrease in operating expenses was primarily the result of workforce reductions that took place in the first half of 2002 aimed at improving efficiencies in light of acquisitions made during 2001 and 2000, and our decision to focus sales and service efforts on larger physician practices, offset by higher marketing expenditures in 2003 as compared to 2002, as the 2002 expenses were subsidized by vendor sponsorships. During the six months ended June 30, 2003 and 2002, we capitalized $657 and $744, respectively of software development costs pursuant to SFAS No. 86.

Information Services

Information services revenue decreased by 4.5%, or $116, from $2,596 in the second quarter of 2002 to $2,480 in 2003. Information services revenue increased by 3.3%, or $145, from $4,451 in the first half of 2002 to $4,596 in 2003. The increase in information services revenue in both periods reflects an increase in the number of interactive physician education programs sold and completed.

Gross profit for information services for the three months ended June 30, 2003 decreased 16.4%, or $286, from $1,749 in 2002 to $1,463 in 2003. Gross profit for information services for the six months ended June 30, 2003 decreased 2.6%, or $72, from $2,785 in 2002 to $2,713 in 2003. Gross profit as a percentage of revenue decreased to 59.0% for the second quarter of 2003 from 67.4% in the same period in 2002. Gross profit as a percentage of revenue decreased to 59.0% for the first half of 2003 from 62.6% in the same period in 2002. The decreases of gross profit and gross profit as a percentage of revenue in both periods were due to a lower mix of higher-margin project development revenue in 2003.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
(Dollar amounts in thousands)

Operating expenses for information services for the three months ended June 30, 2003 decreased by 1.4%, or $10, from $723 in 2002 to $713 in 2003. Operating expenses for information services for the six months ended June 30, 2003 decreased by 6.7%, or $95, from $1,416 in 2002 to $1,321 in 2003. The decrease was primarily due to reduced marketing efforts in emerging markets, offset by increased spending in sales and development in our Physicians Interactive unit.

Unallocated Corporate Expenses

Unallocated corporate expenses for the three months ended June 30, 2003 decreased by 22.0%, or $1,013, from $4,610 in 2002 to $3,597 in 2003. Unallocated corporate expenses for the six months ended June 30, 2003 decreased by 21.1%, or $1,870, from $8,872 in 2002 to $7,002 in 2003. The decrease in both periods was a result of workforce reductions that were aimed at improving efficiencies in light of acquisitions made during 2001 and 2000, lower facility-related costs in 2003, and a lower provision for doubtful accounts in 2003 due to a decrease in overall accounts receivable.

Interest and Other Income

Interest and other income for the three months ended June 30, 2003 was $350 as compared to $779 for the same period in the prior year. Interest and other income for the six months ended June 30, 2003 was $742 as compared to $1,496 for the same period in the prior year. The decrease is primarily due to lower interest income related to a lower average cash and marketable securities balance and a decrease in the average interest rates earned on our investments during 2003.

Liquidity and Capital Resources

At June 30, 2003, our principal sources of liquidity consisted of $17,974 of cash and cash equivalents and $49,017 of marketable securities for a total of $66,991 in cash, cash equivalents and marketable securities. At June 30, 2003, we had working capital of $29,680 and an accumulated deficit of $557,716.

Net cash provided by operating activities was $2,988 for the six months ended June 30, 2003. Accounts receivable decreased by $3,657 during the six months ended June 30, 2003, due to strong collections. Accounts payable increased by $1,317 during the six months ended June 30, 2003, as a result of timing related to payments to large suppliers and leveraging favorable payment terms. Accrued compensation decreased by $1,218 during the six months ended June 30, 2003, as a result of the payment of 2002 annual compensation commitments. The net loss for the first half of 2003 was $4,177, which was partially offset by non-cash charges of $2,824. All other operating activities contributed $585 to the cash provided by operations.

Net cash used in investing activities was $2,188 for the six months ended June 30, 2003. Cash used in investing activities resulted primarily from net purchases of marketable securities of $1,133. In addition, we capitalized software and website development costs of $713. Also, capital expenditures were $342 for the six months ended June 30, 2003 as a result of capital outlays to support the future growth of our business. Currently, we have no material commitments for capital expenditures, although we anticipate ongoing capital expenditures in the range of $250 to $500 per quarter in the ordinary course of business.

The following table summarizes our contractual obligations at June 30, 2003, and the effect such obligations are expected to have on our liquidity and cash in future periods:

On July 16, 2003, Allscripts announced an agreement to acquire Advanced Imaging Concepts, Inc. (AIC), a leading provider of document imaging, scanning and management software for healthcare providers. Pursuant to the agreement, Allscripts agreed to acquire all outstanding shares of AIC common stock and common stock equivalents for $18,000, payable in cash and by the assumption of a portion of outstanding AIC stock options. The transaction closed on August 1, 2003. We expect to use approximately $17,000 of cash to complete this transaction.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
(Dollar amounts in thousands)

On July 16, 2003, Allscripts also announced an agreement to acquire assets of RxCentric Inc., a leading provider of technology-enabled sales and marketing solutions for the pharmaceutical industry. Pursuant to the agreement, Allscripts agreed to acquire substantially all of the assets of RxCentric for $4,500 in cash and assumed liabilities and additional contingent consideration of up to $1,750 if certain performance targets are met during the year following the close. The transaction closed on August 8, 2003. We expect to use approximately $1,750 of cash to complete this transaction.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet the anticipated cash needs of our current business for at least the next twelve months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. We will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, which might impact our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that financing will be available in the amounts or on terms acceptable to us, if at all.

A full discussion of all critical accounting policies is included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year ended December 31, 2002.

Safe Harbor For Forward-Looking Statements

This report, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements," and statements we or our representatives make may contain forward-looking statements that involve risks and uncertainties. We develop forward-looking statements by combining currently available information with our beliefs and assumptions. These statements often contain words like believe, expect, anticipate, intend, contemplate, seek, plan, estimate or similar expressions. Forward-looking statements do not guarantee future performance. Recognize these statements for what they are and do not rely upon them as facts.

Forward-looking statements involve risks, uncertainties and assumptions, including, but not limited to, those discussed in this report. We make these statements under the protection afforded them by Section 21E of the Securities Exchange Act of 1934. Because we cannot predict all of the risks and uncertainties that may affect us, or control the ones we do predict, our actual results may be materially different from the results we express in our forward-looking statements. Unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For a more complete discussion of the risks, uncertainties and assumptions that may affect us, see the "Management's Discussion and Analysis of Financial Condition and Result of Operations - Risk Factors" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2003, we did not own any derivative instruments, but we were exposed to market risks, primarily due to changes in U.S. interest rates. As of June 30, 2003, we had cash, cash equivalents and marketable securities in financial instruments of $66,991. Maturities range from less than one month to approximately 29 years, but average less than two years. Declines in interest rates over time will reduce our interest income from our investments. Based upon our balance of cash, cash equivalents and marketable securities as of June 30, 2003, a decrease in interest rates of 1.0% would cause a corresponding decrease in our annual interest income of approximately $670.

Item 4. Controls and Procedures

As of June 30, 2003, our management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on their review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective in ensuring that all material information relating to us and our consolidated subsidiaries required to be included in our periodic filings with the Securities and Exchange Commission has been made known to them in a timely manner and that no changes are required at this time.

In connection with the evaluation by management, including our Chief Executive Officer and Chief Financial Officer, pursuant to Exchange Act Rule 13a-15(d), no changes during the quarter ended June 30, 2003 were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

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

At Allscripts' Annual Meeting of Stockholders held on June 12, 2003, the stockholders (1) elected Philip D. Green and Bernard Goldstein as directors of the Company to hold office until the 2006 annual meeting of stockholders (subject to the election and qualification of their successors or their earlier death, resignation or removal); and (2) ratified the appointment of KPMG LLP as the Company's independent accountants. The votes were as follows:

ITEM 6. Exhibits and Reports on Form 8-K

(A) Exhibits -- See Index to Exhibits.

(B) Reports on Form 8-K.

On April 24, 2003, we filed a report on Form 8-K under Items 9 and 12 in connection with the announcement of our first quarter 2003 earnings.

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                                                         ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.
  (Registrant)

                        By:      /s/ William J. Davis
                                      William J. Davis
                                              Chief Financial Officer
                                              (Duly Authorized Officer and
                                               Principal Financial Officer)

Date: August 14, 2003

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INDEX TO EXHIBITS

14

INDEX TO EXHIBITS (continued)

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