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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from             to             

Commission file number 0-26816

IDX SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (802) 862-1022

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

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

The number of shares outstanding of the registrant’s common stock as of April 25, 2005 was 31,046,538.

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

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IDX SYSTEMS CORPORATION

FORM 10-Q

For the Period Ended March 31, 2005

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

IDX Systems Corporation

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

See Notes to the Condensed Consolidated Financial Statements (unaudited)

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IDX Systems Corporation

Condensed Consolidated Statements of Income

(in thousands, except for per share data)

(unaudited)

See Notes to the Condensed Consolidated Financial Statements (unaudited)

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IDX Systems Corporation

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See Notes to Condensed Consolidated Financial Statements (unaudited)

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Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1 – Significant Accounting Policies

Nature of Business and Basis of Presentation

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

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

Certain reclassifications of prior period data have been made to conform to the current reporting period.

Principles of Consolidation

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

Significant Estimates and Assumptions

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

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

Revenue Recognition

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

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

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

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

The Company recognizes revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. The allocated fair value of revenues pertaining to contractual maintenance obligations are classified as a current liability, since they are typically for the twelve-month period subsequent to the balance sheet date.

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

The Company’s arrangements with customers generally include acceptance provisions. However, these acceptance provisions are typically based on our standard acceptance provision, which provides the customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. This right generally expires 30 days after installation is completed. The product is deemed accepted unless the customer notifies the Company otherwise. Generally, the Company determines that these acceptance provisions are not substantive and historically have not been exercised, and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service level requirements. Certain of our system specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. Historically, the Company has not incurred substantial costs relating to this guarantee and the Company currently accrues for such costs as they are incurred. The Company reviews these costs on a regular basis as actual experience and other information becomes available; and should they become more substantial, the Company would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on its license arrangements. The Company has not accrued any costs related to these warranties in the accompanying consolidated financial statements.

At the time the Company enters into an arrangement, the Company assesses the probability of collection of the fee and the terms granted to the customer. The Company’s typical payment terms include a deposit and subsequent

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

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

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

The Company also enters into arrangements that involve the delivery or performance of multiple products and services that include the development and customization of software, implementation services, and licensed software and support services. For these contracts, the Company applies the consensus of EITF 00-21 to determine whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes. Accordingly, if the elements qualify as separate units of accounting, and fair value exists for the elements of the contract that are unrelated to the customization services, these elements are accounted for separately, and the related revenue is recognized as the products are delivered or the services are rendered. The Company has concluded that the following qualify for separate units of accounting under EITF 00-21: software licenses, including certain integrated third party software products and customization services; implementation and training services, some of which are provided by third parties; and software support and maintenance services, some of which are provided by third parties.

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

As of March 31, 2005, the Company had deferred revenue totaling $6.8 million related to system implementation and subscription fees. Prior to the year ended December 31, 2004, the revenues and deferred revenues associated with system implementation services were not material.

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

The Company records reimbursable out-of-pocket expenses in both maintenance and services revenues and as a direct cost of maintenance and services in accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred (“EITF 01-14”). EITF 01-14 requires reimbursable out-of-pocket expenses incurred to be characterized as revenue in the income statement. For the three months ended March 31, 2005 and 2004 reimbursable out-of-pocket expenses were $1.8 million and $1.9 million, respectively.

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

Software Development Costs

The Company accounts for the development cost of software intended for sale in accordance with SFAS No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (“SFAS 86”). Costs incurred in the research, design and development of software for sale to others are charged to expense until technological feasibility is established. Software development costs incurred after the establishment of technological feasibility and until the product is available for general release are capitalized, provided recoverability is reasonably assured. Technological feasibility is established upon the completion of a working model. Software development costs, when material, are stated at the lower of amortized cost or net realizable value. Net realizable value for each software product is assessed based on anticipated profitability applicable to revenues of the related product in future periods. Amortization of capitalized software costs begins when the related product is available for general release to customers and is provided for using the straight-line method over twelve to eighteen months or the product’s estimated economic life, if shorter. IDX has also capitalized software acquired in connection with certain acquisitions. Approximately $1.0 and $1.6 million of software development costs were capitalized during the three months ended March 31, 2005 and 2004, respectively. Amortization of software development costs was approximately $812,000 and $406,000 during the three months ended March 31, 2005 and 2004, respectively.

Deferred Contract Costs

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

The Company defers direct and incremental system implementation related hosted software arrangements in accordance with SFAS No. 91, Accounting for Non-Refundable Fees and Costs Associated with Originating or Acquiring Loans Initial Direct Costs of Leases. The costs deferred consist of employee compensation and benefits for those employees directly involved with performing system implementation, as well as other direct and incremental costs. The costs are amortized to costs of revenues ratably over a period of time from when the system implementation is completed and accepted by the customer over the remaining customer relationship life, which the Company has determined is the contractual life of the customer’s subscription agreement. All costs incurred in excess of the related revenues are expensed as incurred. The Company accrues costs in excess of contractual amounts when the loss is probable and estimable. As of March 31, 2005, there are no amounts accrued for anticipated losses under contractual arrangements.

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Accounting for Stock Based Compensation

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

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

The Company has entered into Executive Retention Agreements with certain key executives that provide, that if certain conditions exist subsequent to a change in control of the Company, the executives will receive both acceleration of vesting and extension of the exercise period on their stock-based awards. In accordance with APB No. 25, the Company has measured the intrinsic value of these individuals’ stock awards as of the modification date, which totaled approximately $37.0 million. If the acceleration of vesting and the extension of the exercise period occurs pursuant to the Executive Retention Agreements, the intrinsic value of any outstanding awards as of the date of separation will be recorded as compensation expense in the Company’s Consolidated Statements of Income. If the award vests and is exercised prior to the separation, the intrinsic value as of the date of modification is not recognized.

Concentrations of Credit Risks

Financial instruments that potentially subject the Company to concentration of credit risks are principally cash and cash equivalents, marketable securities, investments, accounts receivable and unbilled receivables. The Company invests its cash and cash equivalents with financial institutions with highly rated credit and monitors the amount of credit exposure to any one financial institution. The Company places its marketable securities in a variety of financial instruments and, by policy, limits the amount of credit exposure through diversification and by restricting its investments to highly rated debt and equity securities. Substantially all of the Company’s end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom and Canada.

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The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Although the Company is directly affected by the overall financial condition of the healthcare industry, management does not believe significant credit risk exists at March 31, 2005. The Company generally has not experienced any material losses related to receivables from individual customers or groups of customers in any specific industry or geographic area. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company’s losses related to collection of trade accounts receivables have consistently been within management’s expectations. Due to these factors, no additional credit risk beyond amounts provided for collection losses, which the Company re-evaluates on a monthly basis based on specific review of receivable aging and the period that any receivables are beyond the standard payment terms, is believed by management to be probable in the Company’s accounts receivable.

For the three months ended March 31, 2005, there was one customer who accounted for approximately 21.0% of consolidated revenues. This customer accounted for 24.2% and 14.5% of accounts receivable at March 31, 2005 and December 31, 2004, respectively. No other single customer accounted for more than 10% of IDX’s consolidated revenues for the three months ended March 31, 2004.

Foreign Currency Translation

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

New Accounting Standards

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

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

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

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

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on the Company’s result of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based

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payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1.0 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively.

Note 2 – Business Combinations and Divestitures

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

The following table, which is based upon an independent valuation and management estimates, summarizes the allocation of the minimum purchase price to the fair values of assets acquired and liabilities assumed at the date of acquisition.

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

Included in liabilities assumed is a provision for lease abandonment costs of approximately $173,000 relating to the leased facilities of PointDx (See Note 3).

Note 3 – Restructuring Costs and Other Charges

Restructuring costs

On September 28, 2001, the Company announced its plan to restructure and realign its large physician group practice businesses. The Company implemented a workforce reduction and restructuring program affecting approximately four percent of the Company’s employees. The restructuring program resulted in a charge to earnings of approximately $19.5 million during the fourth quarter of 2001, in connection with costs associated with employee

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severance arrangements of approximately $5.6 million, lease payment costs of approximately $5.2 million, equipment and leasehold improvement write-offs related to the leased facilities of $8.6 million and other restructuring costs, primarily related to professional and consulting fees related to the restructuring. Workforce related accruals, consisting principally of employee severance costs, were based on specific identification of employees to be terminated, along with their job classification and functions, and their location. Approximately 200 employees were terminated primarily in the Flowcast operating unit and certain corporate services functions. Substantially all workforce related actions were completed during the fourth quarter of 2001, with the exception of a minimal number of staff assigned to transition teams.

On June 1, 2004, the Company entered into an agreement to terminate its contractual commitments under the remaining lease. Such termination was, in part, related to the restructuring. The Company paid $1.5 million to terminate the lease, which was approximately $387,000 higher than the amount accrued at the date of termination.

Lease abandonment charges

In 1999, the Company entered into a lease commitment for new office space in Seattle under a lease that commenced in 2002. The Company continued to utilize its existing space and an active search for a sublessor was initiated and has been ongoing. In 2002, the Company consolidated its Seattle operations into the new office space and abandoned its then existing office space. Due to the depressed Seattle real estate market and the inability to obtain a sublessor, the Company recorded a lease abandonment charge of $9.2 million in its Information Systems and Services business segment in 2002. The lease abandonment charge is related to lease payments of approximately $7.9 million through the end of the lease term in 2005 and non-cash write-offs of certain leasehold improvements of approximately $1.3 million. The $1.9 million accrual remaining at March 31, 2005 will be paid during the remainder of 2005. While currently not anticipated, in the event that the Company is able to secure a sub-tenant to assume its prior lease in a future reporting period, the present value of the future sub-lease income would be recorded as a reduction in expenses under the lease abandonment caption in the consolidated financial statements in the period in which the sub-lease agreement is signed.

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

In December 2004, the Company formulated a plan to abandon the leased facilities in Winston-Salem, North Carolina related to the PointDx acquisition (See Note 2). The Company anticipates exiting the facilities no later than May 31, 2005. The lease abandonment liability represents lease payments of approximately $173,000 for the period April 1, 2005 through the end of the lease term in 2006. Upon finalization of the exit plan, goodwill will be increased or decreased by any changes to the liability, if any.

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The following table sets forth the significant components and activity in lease abandonment charges (in thousands):

Of the $2.5 million accrual balance at March 31, 2005, approximately $2.1million will be paid during the remainder of 2005 and $0.4 thereafter. Interest expense relating to lease abandonment charges for the three months ended March 31, 2005 and 2004 was $35,000 and $82,000, respectively.

Note 4 – Investments

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

At the time of sale, the Company accounted for its investment in Allscripts under the equity method of accounting. Under the equity method of accounting, the Company recognized its pro-rata share of Allscripts losses during the 2001 fiscal year resulting in the elimination of the carrying value of this investment. At March 31, 2005, the Company owned approximately 18.25% of the outstanding shares of common stock of Allscripts. Due to the fact that the Company’s equity interest in Allscripts has fallen below 20% and that the Company no longer significantly influences the financial or operating policies of Allscripts, the equity method was discontinued during the third quarter of 2004. The Company accounts for its investment in Allscripts as available-for-sale securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Under SFAS 115, available-for-sale investments, which have readily determinable fair values, are reported at fair value with unrealized gains and losses, net of taxes, reported in Other Comprehensive Income as part of shareholders’ equity. The fair market value of this stock is affected by the Company’s contractual restriction that it is allowed to sell only 25% of its initial Allscripts shares in any one year. Restricted stock does not meet the readily determinable fair value criterion under SFAS 115; however, any portion of the security holding that can be reasonably expected to qualify for sale within one year is not considered restricted.

At March 31, 2005, the estimated market value of the Company’s investment in 7,276,538 shares of Allscripts common stock was approximately $103.5 million, based on the last reported sales price per share on the NASDAQ National Market of $14.30 on that date. Of this amount, $79.6 million is reported in Marketable Securities, which represents the fair value at March 31, 2005 of 5,569,535 of Allscripts shares that can be sold within one year.

Certain information relative to the Company’s marketable securities at March 31, 2005 and December 31, 2004 is as follows (in thousands):

Unrealized gains and losses on marketable securities are recorded, net of any tax effect, as a separate component of stockholders equity. Gross realized gains of approximately $500,000 were recorded during the three months ended March 31, 2005 from investments based on the specific identification method. There were no gross realized gains during the three months ended March 31, 2004. There were no gross realized losses from the sale of available-for-sale securities during the three months ended March 31, 2005 and 2004.

The Company also has certain other minority equity investments in non-publicly traded securities. These investments are generally carried at cost, which is only adjusted if an other-than-temporary impairment exists, as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. As of March 31, 2005 and December 31, 2004, the carrying value of these investments was approximately $9.3 million.

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Note 5 – Derivative Financial Instruments and Hedging Agreements

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

During the three months ended March 31, 2005 and 2004, the Company recorded net foreign currency exchange losses of $215,000 and $189,000, respectively.

At March 31, 2005, the Company had $15.0 million outstanding forward foreign exchange contracts to exchange British pounds for US dollars. Forward foreign exchange contracts matured within 91 days and had a book value that approximated fair value.

Note 6 – Goodwill and Intangible Assets

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

Consistent with prior years, the Company conducted its annual impairment test of goodwill during the second quarter of fiscal 2004. The fair value of the reporting units was estimated using the expected present value of future cash flows. The Company used an independent valuation and management’s estimates to determine goodwill acquired in 2004. The valuation was based upon expected future discounted operating cash flows as well as an analysis of recent sales or offerings of similar companies. Based on the applicable valuations, it was determined that no impairment of goodwill exists.

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

Acquired technology is amortized on a straight-line basis over its estimated useful life of seven years. The carrying values of acquired technology are reviewed if the facts and circumstances suggest that they may be impaired. The acquired technology represents currently marketable purchased software, which the Company currently intends to enhance and incorporate into the Company’s existing product prior to general release, which is currently anticipated to occur in 2006. The Company will commence amortization of the acquired technology upon general release of the product in which the acquired technology is incorporated.

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Estimated aggregate amortization expense for intangible assets is as follow:

Note 7 – Accounts Payable, Accrued Expenses and Other Liabilities

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

Note 8 – Deferred Revenues

Deferred revenues consists of the following:

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Note 9 – Contracts in Process

The components of uncompleted contracts are as follows:

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

Note 10 – Financing Arrangements

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

In December 2004, the Company entered into a $50.0 million Revolving Credit Facility with several banks. This agreement provides revolving credit for $50.0 million with additional minimum increments of $25.0 million available up to a maximum of $150.0 million. Interest on outstanding borrowings is based upon one of two options, which the Company selects at the time of the borrowing. The first option is the highest of the bank’s prime rate, the secondary market rate for three-month certificates of deposit plus 1.0%, and the federal funds effective rate plus 0.5%. The second option is the London Interbank Offered Rate (“LIBOR”) plus applicable margins ranging from 75.0 to 175.0 basis points as defined in the agreement and is available only for borrowings in excess of $2.0 million. In addition, the Company may, subject to availability, request Letters of Credit in an aggregate amount not to exceed $10.0 million. The Credit Agreement contains customary representations, warranties and covenants, including financial covenants. No amounts are pledged as collateral against the Revolving Credit Facility. The Revolving Credit Facility will expire on December 22, 2009. At March 31, 2005, the bank’s prime rate, the secondary market rate for three-month certificates of deposit, the federal fund effective rate and the LIBOR rate were 5.75%, 3.12%, 2.96% and 2.85%, respectively. At March 31, 2005 and December 31, 2004, no amounts were outstanding under the Revolving Credit Facility and the Company had no letters of credit outstanding.

Note 11 – Income Taxes

The Company’s first quarter 2005 and 2004 effective tax rates were 37.1% and 38.0%, respectively, which were lower than the Company’s statutory rate of 40.0%. For 2005, the lower effective rate was due to the utilization of state net operating losses and research and development credits to offset income taxes. The Company’s effective income tax rate for 2004 was lower than the statutory rate primarily due to our use of research and development credits to offset income taxes. The Company currently expects to realize recorded deferred tax assets as of March 31, 2005 of approximately $8.5 million. Management’s conclusion that such assets will be recovered is based upon its expectation that future earnings of the Company combined with tax planning strategies available to the Company will provide sufficient taxable income to realize recorded tax assets. Such tax strategies include estimates and involve judgment relating to unrealized gains on the Company’s investment in publicly traded common stock. While the realization of the Company’s net recorded deferred tax assets cannot be assured, to the extent that future taxable income against which these tax assets may be applied is not sufficient, some or all of the Company’s net recorded deferred tax assets would not be realizable.

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Note 12– Earnings Per Share

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

Options to acquire 159,238 and 177,009 shares for the three months ended March 31, 2005 and 2004, respectively, were excluded from the calculation of diluted earnings per share, as the effect would not have been dilutive.

Note 13 - Comprehensive Income

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

Note 14 – Commitments and Contingencies

Leases:

At March 31, 2005, minimum lease payments for certain facilities and equipment under noncancelable leases commitments and minimum sublease rental income to be received under noncancelable subleases were as follows:

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Of the $134.2 million in non-cancelable operating lease obligations, approximately $2.5 million is included in accrued expenses at March 31, 2005 relating to a lease abandonment charge. See Notes 3 and 7.

Total rent expense amounted to $4.3 million and $3.8 million during the three months ended March 31, 2005 and 2004, respectively. Total rent expense for the three months ended March 31, 2005 for our lease in the UK with UCLH amounted to $206,000.

The Company leases office space to Allscripts in Burlington, Vermont. Total rent received from Allscripts was approximately $86,000 and $90,000 for the three month periods ended March 31, 2005 and 2004, respectively.

Contingencies:

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

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

Many covered entities, including some of IDX’s customers, IDX’s eCommerce Services clearinghouse business, and trading partners of IDX’s clearinghouse business, were not fully compliant with the TCS Standards as of the October 16, 2003 deadline. However, IDX has deployed contingency plans to accept non-standard transactions. Because the entire healthcare system, including IDX’s eCommerce Services clearinghouse business and the business of IDX’s customers who use our information systems to generate claims data, has not operated at full capacity using the newly-mandated standard transactions, it is possible that currently undetected errors may cause rejection of claims, extended payment cycles, system implementation delays and cash flow reduction, with the attendant risk of liability and claims against IDX.

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

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

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

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Indemnification:

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

Other Commitments:

Under the agreement and plan of merger with PointDx, Inc., the Company has a commitment to pay $4.0 million in 2005 through an earn-out process, subject to reductions as defined under the terms of the agreement. In addition, the agreement contains a provision for the payment of a contingent consideration in the amount of $1.0 million, subject to reductions as defined under the terms of the agreement in the event that the Company sells a certain number of products incorporating PointDx technology prior to November 1, 2006. See Note 2.

Note 15 – Legal Proceedings

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

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

From June through November 2004, the U.S. Commerce Department, Office of Inspector General (“OIG”), conducted an audit of the SAGE Project. On March 11, 2005, OIG issued a final audit report recommending that NIST disallow certain costs and subsequently, the Company submitted its response contesting certain findings. NIST will issue an audit resolution determination, which could reject some or all of the recommendations in the final audit. If the audit resolution determination adopts the final audit report’s recommendations, the Company intends to contest it vigorously through the administrative appeals process and/or through judicial review in federal court.

The Company believes the employee has likely filed an action under the Federal False Claims Act under seal in the Federal District Court for the Western District of Washington with respect to his claims, sometimes referred to as a “qui tam” complaint. The Company has no information regarding the specific allegations in the qui tam complaint. Further, the Company has no information concerning the actual amount of money at issue in the qui tam complaint. The Company has not yet been served with legal process detailing the allegations. Prompted by the employee’s allegations, the Civil Division of the U.S. Attorney’s office in Seattle, Washington, in conjunction with the U.S. Commerce Department, OIG, is investigating whether the Company made false statements in connection with the application for the project award from NIST. The government has informed the Company that it has essentially concluded its investigative work, and is determining whether to proceed with a False Claim Act lawsuit.

In May 2003, the employee filed a complaint against the Company with the Federal District Court for the Western District of Washington, entitled Mauricio A. Leon, M.D. v. IDX Systems Corporation (case no. CV03-1158P) asserting that the Company had knowledge that the employee engaged in “protected activity” and retaliated against the employee in violation of the Federal False Claims Act. In addition, among other causes of action, the employee alleged that the Company had violated the Americans with Disabilities Act and its Washington State counterpart in part through retaliation against the employee for exercising the employee’s rights under the federal and state

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discrimination laws. The employee requested relief including, but not limited to, an injunction against the Company enjoining and restraining the Company from the alleged harassment and discrimination, wages, damages, attorneys’ fees, interest and costs. In addition, the employee’s complaint alleges that the Company submitted false statements to the government to obtain the grant and to obtain reimbursement from the government for project costs.

On September 30, 2004, the U.S. District Court issued an order dismissing all of the employee’s claims. The dismissal was based on the Court’s finding that the employee acted in bad faith in destroying evidence that he had a duty to preserve. The Court also awarded the Company $65,000 as sanctions, reflecting the cost of investigating and litigating the destruction of evidence. As a result of the District Court’s dismissal order, the Company has requested the District Court to tax costs (e.g., litigation copying costs, deposition costs and the like) against the employee in the amount of $51,259. The Court has not yet ruled on this request for costs. The employee has appealed the dismissal. The employee’s appeal has been stayed pending the District Court’s ruling on the Company’s request for costs, and, as discussed below, the Company’s motion to enjoin the employee and the Department of Labor from further processing the employee’s complaint before that agency.

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

On October 14, 2004, the Company requested the U.S. District Court that dismissed the employee’s retaliation claims under the Federal False Claims Act, as noted above, to enter an order enjoining the employee and OSHA from further processing the employee’s retaliation claim filed with the Department of Labor. OSHA has opposed the motion. The Court denied this motion to enjoin the employee and OSHA on February 15, 2005 and the Company filed a motion for reconsideration, which was also denied. The Company has appealed this finding. If the appeal is denied, OSHA will likely issue the results of its investigation. If the finding is adverse to the Company, the Company will contest such finding vigorously.

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

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

Note 16 – Segment and Geographic Information

Segment Information

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

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

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Geographic Information

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

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

During the three months ended March 31, 2005 there was one customer who accounted for approximately 21.0% of consolidated revenues. No single customer accounted for more than 10% of our consolidated revenues for the comparable period in 2004.

Note 17—Related Party Transactions

As a result of the sale of Channelhealth to Allscripts, the Company currently owns approximately 18.25% of the common stock of Allscripts at March 31, 2005. As part of a 10-year strategic alliance agreement beginning on January 9, 2001, Allscripts is obligated to pay IDX a percentage of Allscripts’ revenue related to the Company’s customers. The Company recorded revenues of approximately $528,000 and $413,000 during the three months ended March 31, 2005 and 2004, respectively. The Company also leases office space to Allscripts in Burlington, Vermont. Total rent received from Allscripts was approximately $86,000 and $90,000 during the three months ended March 31, 2005 and 2004, respectively.

The Company currently owns 562,069 shares of Series D convertible preferred stock in Stentor, Inc. (“Stentor”), which constitutes approximately 4% ownership on an as-converted basis. The Company currently has a Distribution and Development agreement with Stentor, Inc. that allows the Company and Stentor. to mutually distribute each other’s products to new and existing customers that may be merged into the collective MIMS system. The Company and Stentor pay each other one-time up-front initiation royalties based on execution of new customer agreements and ongoing sustaining royalties on a quarterly basis over the life of the customer agreements based on total new managed radiology studies for a given period. Royalty revenue included in system sales for the three months ended March 31, 2005 and 2004 was $740,000 and $604,000, respectively. Royalty expense included in cost of system sales was $1.9 million and $1.0 million for the three months ended March 31, 2005 and 2004, respectively.

Commencing in April 2004, the Company began leasing office facilities in the UK from a customer, the University College of London Hospital (“UCLH”). The lease term is for ten years and provides for annual base rent of £483,150 ($912,187 using the exchange rate of 1.888 at March 31, 2005), plus the Company’s share of taxes and maintenance costs. The lease includes a provision for annual increases for maintenance, subject to a cap, in accordance with the UK Retail Price Index. In addition, the lease contains a provision for an increase in the annual base rent in the fifth year of the term of the lease.

Note 18 – Subsequent Event

On April 27, 2005 the Company entered into an agreement to acquire substantially all the assets of RealTimeImage, Ltd. (“RTI”), a privately held developer of web-based medical specialty imaging solutions with offices in Tel Aviv, Israel and San Bruno, California for approximately $15.5 million. The acquisition is part of the Company’s strategy to enhance its product and market competitiveness through acquiring leading edge technology and expertise. The RTI acquired technology is integrated into IDX’s Imagecast for Cardiology solution. The acquisition is currently expected to close in the second quarter of 2005 and will be financed with cash on hand. This transaction will be accounted for using the purchase method of accounting. The Company has not yet completed the allocation of the purchase price, as appraisals associated with the valuation are not yet complete.

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

You should read the following discussion together with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Item contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under “Forward-Looking Information and Factors Affecting Future Performance” commencing on page 35, as well as those otherwise discussed in this section and elsewhere in this Quarterly Report on Form 10-Q. Unless otherwise specified or the context requires otherwise, the terms “we”, “us”, “our” and the “Company” refer to IDX Systems Corporation and its subsidiaries. There are a number of important factors that could cause results to differ materially from those indicated by these forward-looking statements, including among others, statements regarding the health care industry, statements regarding our products, product development and information technology, statements regarding future revenue or other financial trends, statements regarding future acquisitions, strategic alliances, or other agreements, including our agreements in the UK, and statements regarding our intellectual property. If any risk or uncertainty identified in the following factors actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline.

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

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

INTRODUCTION

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

We generate revenues from system sales and from maintenance and service fees for the implementation and support of system sales. Our system sales are comprised of a combination of IDX software licensed under the IDX^® Flowcast^™, IDX^® Groupcast^™, IDX^® Carecast^™ System, and IDX^® Imagecast^™ brands to primarily end-user customers, as well as bundled third party hardware and software. IDX patient access, financial and business intelligence products for hospitals, integrated delivery networks and group practices are packaged under Flowcast and Groupcast. Clinical solutions are generally packaged as the Carecast Clinical Enterprise System, which require more configurations and have a longer install period than our business performance solutions. Specialty care products, which include IDX’s radiology and imaging products, are marketed under Imagecast. Our maintenance and service fees consist of software maintenance fees, installation fees, development fees, professional and technical service fees, consulting fees and other miscellaneous fees. Maintenance and service fees also include outsourcing services and our IDX eCommerce Services business, which offers web-based electronic data interchange (“EDI”) claims, remittance and statement services. Costs relating to system sales consist primarily of external costs for bundled third party hardware and software purchases. Costs relating to maintenance and service fees consist primarily of employee costs and related infrastructure costs incurred in providing installation services, post-installation support and training and consulting services.

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

Overview

Total revenues increased 39.5% to $143.1 million during the three months ended March 31, 2005 from $102.6 million for the same period in 2004. System sales increased by 14.6% and maintenance and service fees increased

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by 51.6%, driven largely by revenues generated from our subcontract arrangement with British Telecommunications PLC (“BT”). Total operating expenses increased 30.5% resulting in operating income of $12.4 million or an operating margin of 8.7% for the three months ended March 31, 2005 as compared to an operating margin of 2.4% for the same period in 2004. For the three months ended March 31, 2005, we reported income of $8.6 million, or $0.27 diluted earnings per share, and at March 31, 2005, cash and marketable securities totaled $209.4 million.

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

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates and judgments on our experience, our current knowledge, including terms of existing contracts, and our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

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

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

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

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

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

We recognize revenues from maintenance services ratably over the term of the maintenance contract period based on VSOE of fair value. VSOE of fair value is based upon the amount charged for maintenance when purchased separately, which is typically the contract’s renewal rate. Maintenance services are typically stated separately in an arrangement. We classify the allocated fair value of revenues pertaining to contractual maintenance obligations as a current liability, since they are typically for the twelve-month period subsequent to the balance sheet date.

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

Our arrangements with customers generally include acceptance provisions. However, these acceptance provisions are typically based on our standard acceptance provision, which provides the customer with a right to a refund if the arrangement is terminated because the product did not meet our published specifications. This right generally expires 30 days after installation is completed. The product is deemed accepted unless the customer notifies us otherwise. Generally, we determine that these acceptance provisions are not substantive and historically have not been exercised, and therefore should be accounted for as a warranty in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. In addition, certain system and service offerings contain other mutually agreed upon specifications or service level requirements. Certain of our system specifications include a 99.9% uptime guarantee and/or subsecond response time. The length of these guarantees typically ranges from one to three years. Historically, we have not incurred substantial costs relating to this guarantee and we currently accrue for such costs as they are incurred. We review these costs on a regular basis as actual experience and other information becomes available; and should they become more substantial, we would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on our license arrangements. We have not accrued any costs related to these warranties in our consolidated financial statements.

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

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

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

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

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

As of March 31, 2005, we had deferred revenue totaling $6.8 million related to system implementation and subscription fees. Prior to the year ended December 31, 2004, the revenues associated with system implementation services were not material.

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

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

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

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Allowance for Doubtful Accounts and Credits – We maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. Substantially all of the Company’s end-users are large integrated healthcare delivery enterprises principally located in the United States, the United Kingdom and Canada. We perform ongoing credit evaluations of the financial condition of our customers and generally do not require collateral. Although we are directly affected by the overall financial condition of the healthcare industry, we do not believe significant credit risk exists at March 31, 2005. We generally have not experienced any material losses related to receivables from individual customers or groups of customers in any specific industry or geographic area. We maintain an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. Our losses related to collection of trade accounts receivables have consistently been within management’s expectations. Due to these factors, no additional credit risk beyond amounts provided for collection losses, which we re-evaluate on a monthly basis based on specific review of age of our receivable and the period that any receivables are beyond the standard payment terms, is believed by us to be probable.

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

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

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

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

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

The American Jobs Creation Act of 2004 (the “Act”) introduced a special one-time dividend received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. The President signed the Act into law on October 22, 2004. Even in light of the Act, the Company did not provide for U.S. income taxes on earnings of the Company’s subsidiaries outside of the U.S. The Company’s current intention is to reinvest the total amount of the Company’s approximately $2.3 million of unremitted earnings permanently or repatriate the earnings only when tax-effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.

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Accounting for Contingencies – We are currently involved in certain legal proceedings, which, if unfavorably determined, could have a material adverse effect on our operating results and financial condition. In connection with our assessment of these legal proceedings, we must determine if an unfavorable outcome is probable and evaluate the costs for resolution of these matters, if reasonably estimable. We have developed these determinations and related estimates in consultation with outside counsel handling our defense in these matters, and through an analysis of potential results assuming a combination of litigation and defense strategies. See Part II, Item 1, “Legal Proceedings” and Note 14 of Notes to Consolidated Financial Statements included in this Quarterly Report on 10-Q.

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

NEW ACCOUNTING STANDARDS

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

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

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

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

As permitted by SFAS 123, we currently account for share-based payments to employees using APB No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on the our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $1.0 million and $2.7 million for the three months ended March 31, 2005 and 2004, respectively.

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RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004

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

Total Revenues

Total revenues consist of system sales and maintenance and service fees. Our system sales consist of our software licensed to primarily end-user customers, along with third party hardware and software, and royalty income. Revenue recognized under system sales is dependant upon the timing of many variables such as the signing of the contract, the delivery of the hardware and software components, and the achievement of milestones through our implementation efforts. Under certain royalty and revenue-sharing arrangements, we recognize royalty revenue from sales by third parties that incorporate technology licensed from IDX, or we share in revenues received by third parties from IDX customers. Maintenance and service fees represent services to implement and support our system sales. More specifically, our maintenance and service fees consist of software maintenance fees, installation fees, professional and technical service fees, training fees, outsourcing services, and other miscellaneous fees.

During the three months ended March 31, 2005 as compared to the same period in 2004, total revenues increased 39.5% driven principally by increases in maintenance and service fees, which increased 51.6% due primarily to our development efforts in the UK. This increase resulted in maintenance and service fees representing a larger portion of our total revenues. We currently anticipate this trend to continue due to increases in our development work in the UK. Moreover, as we market more comprehensive clinical systems, the time and effort required to implement these systems is typically more extensive and these additional implementation costs result in increased maintenance and service fee revenue for us.

System Sales

System sales increased 14.6% during the three months ended March 31, 2005 as compared to the same period last year, primarily attributable to increases in software license and subscription revenues of $3.1 million, hardware and third party software sales of $1.2 million. The increase is due primarily to new sales to existing customers during the first quarter of 2005 as compared to the first quarter of 2004.

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Maintenance and Service Fees

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