UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-24539

ECLIPSYS CORPORATION

(Exact name of registrant as specified in its charter)

1750 Clint Moore Road

Boca Raton, Florida

33487

(Address of principal executive offices)

(561)-322-4321

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value, and Preferred Stock Purchase Rights

      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 o

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

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

      The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2004 based upon the closing price of the Common Stock on the NASDAQ National Market for such date was $447,874,404.

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

DOCUMENTS INCORPORATED BY REFERENCE

      Certain portions of the Company’s definitive Proxy Statement to be used in connection with the 2005 annual meeting of stockholders will be incorporated by reference into Part III of this Form 10-K.

Part I

This report contains forward-looking statements. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the forgoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. The important factors discussed below under the caption “Certain Factors That May Affect Future Operating Results”, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

      Eclipsys is a healthcare information technology (HIT) company. We develop and license proprietary software and content to hospitals and other healthcare organizations, that is designed to help automate many of the key clinical, administrative and financial functions that they require. Our software is designed to improve patient care and patient satisfaction for our customers, and to enable them to reduce their operating costs and enhance their revenues. Among other things, our software enables physicians, nurses and other clinicians to check on a patient’s condition; order patient tests; review test results; monitor a patient’s medications; and provide alerts to changes in a patient’s condition. Our software also enables hospitals to admit patients; maintain patient records; create invoices for billing patients or insurance companies; control inventories; implement cost accounting; schedule doctor’s visits; determine the profitability of physicians and physician groups; understand the profitability of specific medical procedures; and perform numerous other functions. Our content, which is integrated with our software, provides guidelines on treatment methodologies for use by physicians, nurses and other clinicians.

      We also derive revenues from services that we provide related to our software. These services include software and hardware maintenance, outsourcing, remote hosting HIT applications, network services, training and consulting.

      We believe that one of the key differentiators of our software is its open and modular architecture. This enables our software to be installed one application at a time or all at once. Our software is designed to integrate easily with software developed by other vendors. This enables our customers to install our software without the disruption and expense of replacing their entire software systems to gain additional software functionality.

      We maintain a decentralized sales force to better serve our customers. We have nine North American sales regions through which we maintain direct, sustained contact with our customers. We market our software to small, stand-alone hospitals, large multi-entity healthcare systems, academic medical centers and community hospitals. We have one or more of our software applications installed in, or licensed to be installed at approximately 1,500 facilities. All 14 of the top-ranked U.S. hospitals named to the Honor Roll of “America’s Best Hospitals” in the August 2, 2004 issue of U.S. News & World Report use one or more of our solutions.

      Our Web site address is www.eclipsys.com. We make available free of charge, on or through our Web site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Recent Developments

      Since October 2003, when we announced the existence of response time issues with some components or our software, we have been working to implement our new product strategy. We have implemented a strategy that was designed to allow SunriseXA customers to continue their deployment of SunriseXA which would, at the same time, allow us to continue the development of our advanced SunriseXA solutions. This strategy was to replace the affected SunriseXA components with components from our SCM product, which is our prior

generation, core clinical product. The response time issues resulted in a product delivery delay for some of our advanced SunriseXA functionality. The announcement of these issues also impacted the implementation schedules for a number of our customers. As previously disclosed, this announcement had an adverse effect on our sales in 2004. In February 2004, we introduced SunriseXA Release 3.3, an interim version for those customers that had implemented earlier versions of our software. On June 30, 2004, we introduced Sunrise Clinical Manager Release 3.5 XA. This new release contained significant additional functionality for core clinical, ambulatory and emergency department settings, as well as enhancements to patient management functions. Additionally, the new release extends support for physicians through the inclusion of advanced functionality for clinical decision support, structured notes, medical necessity checking, prescription writing and medical management configuration.

      In November 2004, we announced the general availability of Sunrise ED Manager 3.6 XA and Sunrise Ambulatory Care Manager 3.6 XA.

      In March 2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting services and clinical content principally to improve and enhance the care process primarily related to the workflow of nurses and interdisciplinary healthcare professionals who provide the majority of hands-on care at the point of service. CPMRC’s evidence-based content and practice guidelines have been incorporated into the current release of our SunriseXA software.

      In December 2004, we acquired eSys Medical Inc., a radiology information systems company, to extend our diagnostic imaging offering. The eSys software is a richly featured radiology information system designed to facilitate administration, workflow optimization and best practices in hospitals and diagnostic imaging centers. It provides both on- and off-site system access for physicians, radiologists and transcribers. It is currently licensed by nearly 100 hospitals and outpatient imaging centers.

      Although we believe that we have made significant progress in implementing our product strategy and proving its technological feasibility, we continue to face a variety of risks and uncertainties in this regard, including those described under “Certain Factors That May Affect Future Operating Results”.

Challenges and Compliance Pressures in the Healthcare Industry

      Hospitals are under increased pressure to reduce medical errors and to increase operational efficiencies. We believe that our software and content helps customers to achieve these objectives. Several powerful organizations have lobbied for changes within the healthcare industry to enable hospitals to deliver better patient care, to increase patient satisfaction and to enhance overall hospital efficiency. Legislation is also requiring changes within the healthcare industry. We believe that these changes may increase the demand for our products.

      The Decade of Health Information Technology. On April 27, 2004, President George W. Bush issued an executive order that established the position of National Health Information Technology Coordinator within the Department of Health & Human Services, or HHS. The post, filled by David J. Brailer, MD, PhD, was created to provide leadership for the development and nationwide implementation of an interoperable health information technology infrastructure to improve the quality and efficiency of healthcare in the United States. The vision of this infrastructure is intended to:

      The executive order directed that the Coordinator should not assume or rely upon additional federal resources or spending to accomplish adoption of the interoperable health information technology.

      On July 21, 2004, HHS Secretary Tommy G. Thompson released the first outline of a 10-year plan to build the national electronic health information infrastructure. The report entitled, “The Decade of Health Information Technology: Delivering Consumer-centric and Information-rich Health Care,” concluded that federal leadership can facilitate efforts to be carried out by the private sector and laid out the broad steps needed to achieve widespread electronic health records or EHRs for Americans. This report was a response to the call by President Bush in 2004 to achieve EHRs for most Americans within a decade.

      Dr. Brailer has facilitated the creation of a private-sector Certification Commission for Health Information Technology, or CCHIT, consisting of 15 commissioners from across the healthcare industry. CCHIT intends to develop a set of private sector determined criteria for EHR functionality, interoperability, reliability and security, and will inspect EHR software products, starting with physician office systems to determine their performance against these criteria. CCHIT has announced that it expects to begin certification according to a minimal set of criteria in the summer of 2005, and that it also intends to publish a road map to guide the industry for the next three to five years.

      Institute of Medicine. In 1999, the Institute of Medicine, or IOM, issued a report titled, “To Err Is Human: Building a Safer Health System”. In it, the IOM called for the expanded use of information technology to reduce avoidable medical errors by 50 percent in the U.S. over the ensuing five-year period. According to that report, between 44,000 and 98,000 people died each year as a result of medical errors. The IOM concluded that more people were injured from preventable mistakes than from many other common illnesses or accidents. The IOM report identified medication and pharmacy errors as significant causes of deaths and adverse events. In 2003, the IOM released a separate report stating that medical errors may be reduced through widespread adoption of information technology, such as electronic medical records that can be connected through a national system linking all healthcare organizations.

      On November 4, 2003, the IOM issued another study, “Keeping Patients Safe: Transforming the Work Environment of Nurses,” which featured a new set of recommendations to improve key aspects of the work environment for nurses with a view to improving patient safety. Among other things, the report recommended that healthcare organizations should provide for staffing ‘elasticity’ or slack within each shift’s scheduling to accommodate unpredicted variations in patient volume and acuity and resulting workload.

      The Leapfrog Group. Following the release of the IOM report, the Leapfrog Group was formed. The Leapfrog Group is a consortium of more than 160 companies including Fortune 500 companies. Members of this consortium include large private and public healthcare purchasers representing more than 34 million healthcare consumers within the United States. Leapfrog Group members and their employees spend billions of dollars on healthcare annually. The Leapfrog Group is urging its members and their employees to base their healthcare purchases on principles that encourage hospitals to utilize stringent patient-safety measures such as computerized physician order entry systems, or CPOE. The adoption of CPOE is a leading Leapfrog Group recommendation for reducing medical errors.

      The IOM and The Leapfrog Group are leveraging their influence to encourage hospitals to use advanced clinical software to reduce adverse drug events and medical errors. Their influence, coupled with consumer demands, are spurring new government legislation. Twenty-four states have legislated mandatory reporting laws regarding healthcare quality and patient safety. California has passed legislation mandating the eventual adoption of information technology for hospitals to reduce avoidable medical errors.

      Health Insurance Portability and Accountability Act. Federal regulation applicable to healthcare providers and others includes the Health Insurance Portability and Accountability Act of 1996, or HIPAA.

HIPAA seeks to impose national health data standards on covered entities. Under HIPAA, a covered entity includes (i) healthcare providers that conduct electronic health transactions; (ii) healthcare clearinghouses that convert health data between HIPAA-compliant and non-compliant formats; and (iii) health plans. The HIPAA standards prescribe, among other things, transaction formats and code sets for electronic health transactions, in order to protect individual privacy by limiting the uses and disclosures of individually identifiable health information. HIPAA also requires covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form.

      Under HIPAA, covered entities are required to utilize HIPAA-compliant products, software and services. The cost of achieving HIPAA compliance has affected companies throughout the healthcare industry, regardless of whether they are covered entities. We believe that the need for HIPAA-compliant products will continue to create demand for our software and services. We are not a covered entity under HIPAA, but many of our customers are. Accordingly, we have developed our software to be HIPAA-compliant.

      Joint Commission on Accreditation of Healthcare Organizations. The Joint Commission on the Accreditation of Healthcare Organizations, or JCAHO, is an independent non-profit organization that provides voluntary evaluation and accreditation for nearly more than 15,000 healthcare organizations in the United States. JCAHO periodically introduces new process improvement initiatives, standards and performance measurements that are used to assess hospitals. JCAHO has also established patient safety standards that require hospitals to initiate specific efforts to prevent medical errors and inform patients when they have been unknowingly harmed during treatment. Additionally, each year since 2002, JCAHO has approved annual National Patient Safety Goals that include specific recommendations for improving patient safety. Most of our customers seek to comply with JCAHO standards. We believe that our software and services aid our customers in meeting JCAHO standards.

      The Internet. We believe that growth in Internet usage will enable consumers to be more involved in their healthcare choices. Additionally, we expect that the Internet will provide increased availability of medical information to physicians, clinicians and healthcare workers. As consumers and physicians adopt Web-centric lifestyles, we believe that our products and services will become more appealing to a wider customer base and may increase demand for our software and services.

The Eclipsys Solution

      Eclipsys software, content and services are used primarily by physicians, nurses, administrators and other healthcare workers. We provide comprehensive functionality that enables hospitals and care providers to address many of their key clinical, financial and administrative needs.

      Among other things, our software is designed to:

The Eclipsys Strategy

      We have a “Vision of Health” for the future in which physicians, nurses, administrators, and other healthcare workers have the information they need — anytime, anywhere, on any device — to make informed decisions for their patients. In this vision, the entire healthcare enterprise — and over time, healthcare communities and regions — will be connected and therefore able to achieve greater efficiencies, lower costs and higher quality.

Our goal is to become the leading provider of software, content and services within the healthcare industry. In support of this goal, we have put in place a strategy that includes three elements:

      We have several tactics to support these strategies, including:

      Continued Market Expansion. We believe there is a significant opportunity to sell software, content and services to a wider target market. Our current target customers include large healthcare organizations, academic medical centers and small stand-alone hospitals. Only a limited number of current customers have enterprise-wide health information systems such as those we offer. Today, one or more of our products is installed at, or is licensed to be installed at approximately 1,500 facilities. We intend to continue aggressively marketing software, content and services to capitalize on the growth opportunities we believe exist within our marketplace.

      Flexible Contracting Model. We have adopted a contracting model that is designed to be attractive to customers. This payment model spreads the cost of software and related maintenance over the life of a customer contract. As a result, the customer can more closely align the cost of our products and services with the value the customer derives from them. We believe that this approach is critical within today’s capital-constrained healthcare industry.

Products

      Eclipsys’ products perform many of the core software and technology functions that hospitals require. Our software is available for implementation on site or through our remote-hosting services. Our software is

designed to work in a variety of healthcare settings and throughout a healthcare organization. The following table summarizes our principal software offerings:

      Sunrise Clinical Manager. Sunrise Clinical Manager, or SCM, is a computerized patient record system that provides patient information to physicians, nurses and clinicians at the point of decision-making. SCM allows a physician to enter orders quickly and efficiently, and provides evidence-based clinical decision support at the time of order entry. SCM’s core capabilities and related modules are designed for use in the ambulatory, acute care and emergency department settings, and include the following features among others:

      Sunrise Access Manager. Sunrise Access Manager, or SAM, enables healthcare providers to identify the patient at any time within a hospital and to collect and maintain patient information on an enterprise-wide basis. SAM’s single database structure permits simultaneous access to the patient record by authorized personnel from any access point within a hospital’s computer systems. SAM provides the following functionality:

      Sunrise Patient Financial Manager. Sunrise Patient Financial Manager, or SPFM, uses a single, integrated database for patient-accounting processes, including the automatic generation of patient billing and accounts receivable functions, a system of reimbursement management to monitor receivables, the automation of collection activities and contract compliance analysis, as well as follow-up processing and reporting functions. This product suite supports the growing trend toward the centralized business office for multiple entities; a trend that we believe generally improves compliance with managed care contracts. SPFM includes the following functions:

      Sunrise Decision Support Manager. Sunrise Decision Support Manager, or SDSM, creates a clinical and financial data repository by integrating data from throughout the enterprise. SDSM gathers information from within a hospital or hospital system. The data SDSM collects can then be analyzed to determine the patient-level costs of care and for identifying areas for improvement. This information allows a hospital to evaluate its cost structure, make changes in clinical processes to reduce costs and accurately price reimbursement contracts on a profitable basis. SDSM also analyzes and measures clinical process and outcomes data, and helps to identify the practice patterns that most consistently result in the highest quality care at the lowest cost. SDSM is an important component of our customers’ ability to measure and document improved clinical outcomes and return on investment. SDSM includes support for:

      Sunrise Discovery. Sunrise Discovery builds upon Sunrise Decision Support Manager. Sunrise Discovery provides clinical data using data-extraction techniques, including natural language processing, offering our customers a means to collect data from electronic documents. Sunrise Discovery offers an advanced architectural platform based on Microsoft technology that includes a sophisticated data model, a data warehouse, business intelligence tools, and a means to distribute clinical and financial data across the enterprise using Sunrise Discovery’s portal technology.

      Sunrise Record Manager. Sunrise Record Manager, or SRM, provides comprehensive clinical data management and enterprise-wide document and image-management functions. We believe that SRM

improves productivity, efficiency and accountability. SRM provides multiple users with convenient and concurrent access to information, wherever they are stationed throughout a hospital. SRM includes the following functionality:

      eLink. eLink provides tools to enable the integration of data from a customer’s existing systems. As integrated health networks emerge, the individual entities within the network will often have their own different information systems. The clinical and financial data in these disparate systems must be integrated to provide an enterprise-wide view. eLink includes tools to achieve this integration, primarily through the use of Web-based integration technologies.

      Eclipsys Diagnostic Imaging Solutions. Eclipsys Diagnostic Imaging Solutions provide comprehensive capabilities for improved and enhanced radiology services. We are working to combine the core components of Sunrise Clinical Manager with the comprehensive capabilities of Sunrise radiology information system, or RIS, and Sunrise picture archiving and communications system, or PACS to deliver an image-enabled clinical information system designed for the full organization. When this integration is complete, Sunrise RIS and Sunrise PACS will be designed to be used together, as separate standalone solutions, or as components of an enterprise-wide Sunrise Clinical Manager solution. Sunrise Diagnostic Imaging Solutions:

Sunrise on the XA Extended Architecture Initiative

      During 2004, we continued the initiative for Sunrise on the XA extended architecture that began several years ago. This initiative is focused on re-engineering and migrating the Sunrise suite of software to an architecture based on the Microsoft .NET Framework and other industry-standard technologies. We believe this approach allows our software to be more open and extensible, making it easier to integrate with a customer’s legacy and ancillary systems. This architecture also enables hospitals to continue to derive value from their existing technology investments, and to add other software products as functional needs and resources dictate.

      SunriseXA is built upon a single database model known as a Computer-based Patient Record, or CPR. The CPR can be used by all components within SunriseXA regardless of where in the hospital a physician, nurse or employee resides. SunriseXA is designed to prevent the isolation of information and duplication of

functionality that can occur with other information technology, or IT, systems. We believe that this approach will enable a faster, more cost-effective implementation of our software, simplify software maintenance and provide a lower total cost of ownership.

      As previously disclosed, in October 2003 we announced the existence of response time issues within some components of our SunriseXA software. At the same time, we announced a product strategy to deal with these issues in a manner that would allow customers to continue their deployment of SunriseXA. Since then, we have introduced Releases 3.3 and 3.5 of SunriseXA, which reflect what we believe is significant progress in implementing our product strategy.

      For further discussion regarding SunriseXA and the response-time issue see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Factors That May Affect Future Operating Results”.

Hardware and Related Offerings

      As part of our commitment to being a comprehensive software and services provider, we sell a variety of desktop, network and platform solutions including hardware, middleware and related services.

Services

      Drawing on the functionality and flexibility of our software products, we offer a range of professional services from which we earn revenues. Our services may be summarized as follows:

Marketing and Sales

      Our marketing and sales teams target small, stand-alone hospitals, large multi-entity healthcare systems and academic medical centers. We sell our products and services primarily in North America exclusively through our direct sales force. The management of our sales force is decentralized, with two senior executives having primary responsibility for sales and marketing within four areas. The areas, in turn, are broken down into a total of nine regions. Within each sales region, our sales force is organized into two separate groups. The first is focused on generating sales to new customers. The second is focused on additional sales to existing customers. Our direct sales force works closely with our implementation and product line specialists. We also have a team of experts with extensive experience with each of our specific software applications that support our sales force. Our sales personnel are compensated principally on a performance basis.

      We recently hired a chief marketing officer and consolidated our marketing group to better leverage our marketing resources and tighten our focus. Our marketing group develops targeted campaigns designed to increase demand for our products and services, as well as increase corporate awareness and brand identity for our company. In addition to advertising, direct mail, public relations and Internet marketing, our marketing group produces a wide range of collateral and sales support training and materials.

Research and Development

      We believe that our future success depends on our ability to maintain and enhance our product lines and develop new products. We seek to maintain technological competitiveness and respond to our customers’ expanding needs. We are currently developing our software based on Microsoft’s .NET Framework and other industry standards. We are also creating new functionality for our existing software. Since the announcement of our SunriseXA response time issues in October 2003, we have made significant changes within our research and development department. During 2004, we continued to enhance our staff and our processes within the research and development department. Among other things, we have decreased our reliance on outside vendors that have historically aided our internal personnel in software development. In addition, we have expanded our senior management team within the research and development organization. This team has adopted a new software development methodology, Microsoft’s Solutions Framework. This new methodology allows us, among other things, to gauge the quality and performance of our software development efforts in 24-hour increments. As part of these new processes, we have also involved customers in our software design process, enabling them in some cases to have direct and regular access to the development staff, including its senior leadership.

Competition

      We face intense competition in the marketplace. We are confronted by rapidly changing technology, evolving user needs and the frequent introduction of new products to meet the needs of our current and future customers. Our principal competitors include Cerner Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, McKesson Corporation, QuadraMed Corporation and Siemens AG. Other competitors include providers of practice management, general decision support and database systems, as well as segment-specific applications and healthcare technology consultants.

      Several of our competitors are better established, benefit from greater name recognition and have significantly more financial, technical and marketing resources than we do. We also anticipate that competition will further increase as a result of continued consolidation in both the information technology and healthcare industries. The principal factors that impact competition within our market include product functionality, performance, flexibility and features, use of open industry standards, quality of customer service and support, company reputation, price and total cost of ownership.

Employees

      As of December 31, 2004, we had 1,983 employees. Our success depends on our continued ability to attract and retain highly skilled and qualified personnel. Competition for such personnel is intense in our industry, particularly for software developers, service consultants and sales and marketing personnel. We

cannot be assured that we will continue to attract and retain qualified personnel. Our employees are not represented by any labor unions. We consider our relations with our employees to be good.

Financial Information About Geographic Areas

      Revenues from U.S. operations totaled $293.1 million in 2004, $244.3 million in 2003 and $209.8 million in 2002. Revenues from outside the United States totaled $16.0 million in 2004, $10.4 million in 2003 and $8.3 million in 2002. Long-lived assets totaled $85.2 million in the United States in 2004, $73.6 million in 2003 and $53.1 million in 2002. Long-lived assets totaled $2.1 million in other countries in 2004, $100,000 in 2003 and $200,000 in 2002.

Certain Factors That May Affect Future Operating Results

      There are a number of important factors that could affect our business and future operating results, including without limitation, the factors set forth below. The information contained in this report should be read in light of such factors. Any of the following factors could harm our business and future operating results.

      In October 2003, we announced the existence of certain response time issues within some components of SunriseXA, the newest version of our Sunrise family of products. We concluded that the root cause of the issue was in the technical design of SunriseXA, which did not adequately support the throughput required in the highly interactive patient care environment. After substantial analysis, we pursued and continue to pursue a strategy that we believe addresses these issues. Our strategy was to replace the affected SunriseXA components with certain components from our SCM product, which is our prior generation, core clinical product. Although we believe that the release of Sunrise Clinical Manager 3.5 XA in June 2004 was a significant milestone in the implementation of our product strategy, we continue to face a variety of risks and uncertainties in this regard including among others, the following:

      These issues could harm our relationships with customers generally and our reputation in the marketplace. This announcement has had an adverse effect on our 2004 sales. Additionally, it is possible that this issue may continue to make sales more challenging for the affected SunriseXA applications.

      Our product strategy is substantially dependent upon Microsoft’s .Net Framework and other Microsoft technologies. The .Net Framework, in particular, is a relatively new and evolving technology. If Microsoft were to cease actively supporting .Net or other technologies, fail to update and enhance them to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these

technologies or make them unavailable to us, we could be required to invest significant resources in re-engineering our products. This could lead to lost or delayed sales, unanticipated development expenses and harm to our reputation, and would cause our financial results and business to suffer.

      We have experienced long sales and implementation cycles. How and when to implement, replace, expand or substantially modify an information system, or modify or add business processes, are major decisions for hospitals, our target customer market. Furthermore, our software is expensive and generally requires significant capital expenditures by our customers. The sales cycle for our software ranges from 6 to 18 months or more from initial contact to contract execution. Historically, our implementation cycle has ranged from 6 to 36 months from contract execution to completion of implementation. During the sales and implementation cycles, we will expend substantial time, effort and financial resources preparing contract proposals, negotiating the contract and implementing the software. We may not realize any revenues to offset these expenditures and, if we do, accounting principles may not allow us to recognize the revenues during corresponding periods. This could harm our future operating results. Additionally, any decision by our customers to delay purchasing or implementing our products may adversely affect our revenues.

      The healthcare industry faces significant financial constraints. For example, the shift to managed healthcare in the 1990s put pressure on healthcare organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically reduced Medicare reimbursement to healthcare organizations. Our software often involves a significant financial commitment by our customers. Our ability to grow our business is largely dependent on our customers’ information technology budgets. To the extent healthcare information technology spending declines or increases more slowly than we anticipate, demand for our products would be adversely affected.

      We had a net loss of $(32.6) million for the year ended December 31, 2004. We also had net losses of $(56.0) million in 2003, $(29.8) million in 2002, $(34.0) million in 2000, $(9.4) million in 1999, and $(35.3) million in 1998. In 2001, we had net income of $4.4 million, although we had a loss from operations of $(1.6) million. We may continue to incur net losses and cannot predict when, or if, we will be profitable in the future.

      We have experienced significant variations in revenues and operating results from quarter to quarter. Our operating results may continue to fluctuate due to a number of factors, including:

      It is difficult to predict the timing of revenues that we receive from product sales, because the sales cycle can vary depending upon several factors. These include the size and terms of the transaction, the changing business plans of the customer, the effectiveness of the customer’s management, general economic conditions and the regulatory environment. In addition, the timing of our revenue recognition could vary considerably depending upon the extent to which our customers elect to license our products under arrangements where revenues are recognized monthly. Generally, less revenue is recognized under these arrangements during the first 12 to 24 months compared to our more traditional licensing arrangements. We also continue to offer contracts using our more traditional licensing arrangements. Because a significant percentage of our expenses are relatively fixed, a variation in the timing of sales and implementations could cause significant variations in operating results from quarter to quarter. We believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful. Stockholders should not rely on these comparisons as indicators of future performance.

      We recognize a significant portion of our revenues from customers monthly over the terms of their agreements, which are typically 7 years and can be up to 10 years. As a result, much of the revenues that we report each quarter are attributable to agreements executed during prior quarters. Consequently, a decline in sales, client renewals, or market acceptance of our products in one quarter, will not necessarily be reflected in lower revenues in that quarter, and may negatively affect our revenues and profitability in future quarters. In addition, we may be unable to adjust our cost structure to reflect these reduced revenues. This monthly revenue recognition also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as revenues from new customers must be recognized over the applicable agreement term.

      We operate in a market that is intensely competitive. Our principal competitors include Cerner Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems Corporation, McKesson Corporation, QuadraMed and Siemens AG. We also face competition from providers of practice management systems, general decision support, database systems and other segment-specific applications, as well as from healthcare IT consultants. A number of existing and potential competitors are more established than we are, and have greater name recognition and financial, technical and marketing resources than we do. We expect that competition will continue to increase, which could harm our business.

      Many hospitals have consolidated to create larger healthcare enterprises with greater market power. If this consolidation continues, it could erode our customer base and reduce the size of our target market. In addition, the resulting enterprises could have greater bargaining power, which may lead to erosion of the prices for our products.

      The U.S. Food and Drug Administration, or FDA, is likely to become increasingly active in regulating computer software or content intended for use in the healthcare setting. The FDA has increasingly focused on the regulation of computer products and computer-assisted products as medical devices under the Food, Drug, and Cosmetic Act, or the FDC Act. If the FDA chooses to regulate any of our products, or third party products that we resell, as medical devices, it could impose extensive requirements upon us, including the following:

      If we fail to comply with applicable requirements, the FDA could respond by imposing fines, injunctions or civil penalties, requiring recalls or product corrections, suspending production, refusing to grant pre-market clearance or approval of products, withdrawing clearances and approvals, and initiating criminal prosecution. Any final FDA policy governing computer products or content, once issued, may increase the cost and time to market of new or existing products or may prevent us from marketing our products.

      The demand for health care information systems is affected by state and federal laws and regulations that govern the collection, use, transmission and other disclosures of electronic health information. These laws and regulations may change rapidly and may be unclear or difficult to apply.

      Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA imposes national health data standards on (i) healthcare providers that conduct electronic health transactions; (ii) healthcare clearinghouses that convert health data between HIPAA-compliant and non-compliant formats; and (iii) health plans. Collectively, these groups are known as covered entities. The HIPAA standards prescribe transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form. Though we are not a covered entity, most of our customers are and require that our software and services adhere to HIPAA standards.

      There are several HIPAA compliance deadlines for covered entities. The final compliance deadline for the transaction and code set standards was October 16, 2003. The compliance deadline for the privacy standards was April  14, 2003 for most covered entities. The compliance deadline for the security standards for most covered entities is April 20, 2005. Any failure or perception of failure of our products or services to meet HIPAA standards could adversely affect demand for our products and services and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers.

      States may adopt privacy standards that are more stringent than the federal HIPAA privacy standards. This may lead to different restrictions for handling individually identifiable health information. As a result, our customers may demand information technology solutions and services that are adaptable to reflect different and changing regulatory requirements. In the future, federal or state governmental authorities may impose

additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules, as finally approved, may have on our business. However, the demand for our products and services may decrease if we are not able to develop and offer products and services that can address the regulatory challenges and compliance obligations facing our customers.

      We provide products and embedded content that, assist in clinical decision-making, suggest treatment methodologies, provide access to patient medical histories and assist in creating patient treatment plans. If our software fails to provide accurate and timely information, or if treatment methodologies utilizing our content or practice guidelines is determined to be faulty, customers could assert liability claims against us. Litigation with respect to liability claims, regardless of its outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit by contract our liability for damages arising from negligence, errors or mistakes. In addition, we require that our customers approve all system rules and protocols. Despite these precautions, the limitations of liability set forth in our contracts may not be enforceable or may not otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors or omissions. However, this coverage may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims against us. In addition, the insurer might disclaim coverage as to any future claim. One or more large claims could exceed our available insurance coverage.

      Highly complex software products such as ours often contain undetected errors or failures when first introduced or as updates and new versions are released. It is particularly challenging for us to test our products because it is difficult to simulate the wide variety of computing environments or treatment methodologies that our customers may deploy or rely upon. Despite testing, from time to time we have discovered defects or errors in our products. Defects, errors or difficulties could cause delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or customer satisfaction with our products. In addition, despite testing by us and by current and potential customers, errors may be found after commencement of commercial shipments, resulting in loss of or delay in market acceptance.

      An important element of our business strategy has been expansion through acquisitions. Since 1997, we have completed eleven acquisitions.

Any future acquisitions would involve a number of risks, including the following:

      Our success depends, in significant part, upon the continued services of our key technical, marketing, sales and management personnel, and on our ability to continue to attract, motivate and retain highly qualified employees. Competition for these employees is intense. In addition, the process of recruiting personnel with the combination of skills and attributes required to execute our business strategy can be difficult, time-consuming and expensive. We believe that our ability to implement our strategic goals depends to a considerable degree on our senior management team. The loss of any member of that team could hurt our business.

      The market for our products and services is characterized by rapidly changing technologies, evolving industry standards and new product introductions and enhancements that may render existing products obsolete or less competitive. As a result, our position in the healthcare information technology market could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend in part upon our ability to enhance our existing products and services, particularly our ability to continue to release our products onto the .NET Framework under the SunriseXA initiative, and to develop and introduce new products and services to meet changing customer requirements. The process of developing products and services such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future as new technologies are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, demand for our products could suffer.

      We depend upon licenses for some of the technology used in our products from a number of third-party vendors, including Computer Corporation of America, Computer Associates, Oracle Corporation and Microsoft. Most of these licenses expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. We may not be able to continue using the technology made available to us under these licenses on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments until we obtain equivalent technology, which could hurt our business. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, particularly with regard to Microsoft, we may not be able to modify or adapt our own products.

      We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products, reverse engineer our products or otherwise obtain and use information that we regard as proprietary. In some limited instances, customers can access source-code versions of our software, subject to contractual limitations on the permitted use of the source code. Furthermore, it may be possible for our competitors to copy or gain access to our content. Although our license agreements with these customers attempt to prevent

misuse of the source code or trade secrets, the possession of our source code or trade secrets by third parties increases the ease and likelihood of potential misappropriation of our products. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights. In addition, infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us. Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources. The assertion of infringement claims could also result in injunctions preventing us from distributing products. If any claims or actions are asserted against us, we might be required to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all.

      Our board of directors has the authority to issue up to 4,900,000 shares of preferred stock. The board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. The issuance of shares of preferred stock may discourage, delay or prevent a merger or acquisition of our company. The issuance of preferred stock may result in the loss of voting control to other stockholders. We have no current plans to issue any shares of preferred stock. In August 2000, our board of directors adopted a shareholder rights plan under which we issued preferred stock purchase rights that would adversely affect the economic and voting interests of a person or group that seeks to acquire us or a 15% or more interest in our common stock without negotiations with our board of directors.

      Our charter documents contain additional anti-takeover devices including:

      Section 203 of the Delaware corporate statute may inhibit potential bids to acquire our company. We are subject to the anti-takeover provisions of the Delaware corporate statute, which regulate corporate acquisitions. Delaware law will prevent us from engaging, under specified circumstances, in a business combination with any interested stockholder for three years following the date that the interested stockholder became an interested stockholder, unless our board of directors or a supermajority of our uninterested stockholders agree. For purposes of Delaware law, a business combination includes a merger or consolidation involving us and the interested stockholder, and the sale of more than 10% of our assets. In general, Delaware law defines an interested stockholder as any holder beneficially owning 15% or more of the outstanding voting stock of a corporation and any entity or person affiliated with or controlling or controlled by the holder.

      These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our common stock. As a result, these provisions may prevent the market price of our common stock from increasing substantially in response to actual or rumored takeover attempts. These provisions may also prevent changes in our management.

Executive Officers of the Registrant

      As of March 2, 2005 our executive officers were as follows:

      Paul L. Ruflin has served as our president and chief executive officer since July 2002. Prior to joining us, Mr. Ruflin was chief operating officer of Cap Gemini Ernst & Young, North America, or CGE&Y. During his more than 24 years at CGE&Y, Mr. Ruflin also served in several other leadership capacities, including director of CGE&Y’s health managed care consulting practice.

      John A. Adams has served as our executive vice president and chief administrative officer since December 2004. Prior to joining us, Mr. Adams was chief financial officer of Exult, Inc., a business process outsourcing company from June 2003 to December 2004. Before that, Mr. Adams was vice president and chief financial officer of AT&T’s Business Services division from November 2000 to June 2003.

      John Gomez has served as our executive vice president of product development and delivery and chief technology and strategy officer since December 2004. He held the title of senior vice president and chief technology officer from August 2003, when he first joined our Company, to December 2004. From October 2001 to January 2003, Mr. Gomez was a senior vice president and chief technology officer at WebMD Corporation. Prior to that, from February 2000 to October 2001 Mr. Gomez served as chief technology officer and senior vice president of strategic business development at Brill Media Holdings, an e-commerce and media publication company. From April 1997 through January 2000 Mr. Gomez was employed by Microsoft Corporation.

      Russ J. Rudish has served as our executive vice president of sales, marketing and customer solutions since December 2004. Prior to that, Mr. Rudish served as our executive vice president of services since joining us in November 2003. Prior to joining us, Mr. Rudish spent over 20 years at Ernst & Young LLP, before it sold its consulting practice to CGE&Y in May 2000. From April 2002 until September 2003, Mr. Rudish served as the national practice leader of CGE&Y’s Health Provider Consulting Practice. In addition, from August 2000 to April 2002, Mr. Rudish served as regional director, northeast, for CGE&Y’s Health Provider Consulting Practice.

      Robert J. Colletti has served as our senior vice president and chief financial officer since August 2001. From June to August 2001, Mr. Colletti served as senior vice president of finance and chief accounting officer. From January 1997 to June 2001, Mr. Colletti served as our vice president of finance. Mr. Colletti joined Eclipsys in January 1997 as part of our acquisition of ALLTEL Healthcare Information Services, Inc.

      Our corporate offices are located in Boca Raton, Florida under a lease that expires in February 2008. In addition, we maintain leased office space in Phoenix, Arizona; Newport Beach, California; San Jose, California; Santa Rosa, California; Atlanta, Georgia; Westchester, Illinois; Overland Park, Kansas; Rockville, Maryland; Boston, Massachusetts; Grand Rapids, Michigan; Mountain Lakes, New Jersey; Albany, New York; Uniondale, New York; Malvern, Pennsylvania; San Antonio, Texas; Montreal, Canada, Toronto,

Canada and Richmond (a suburb of Vancouver), Canada. These leases expire at various times through September 2013.

      We are involved in litigation incidental to our business from time to time. In the opinion of management, after consultation with legal counsel, the ultimate outcome of such litigation will not have a material adverse effect on our financial position, results of operations or cash flows.

      No matters were submitted to a vote of our stockholders during the fourth quarter of 2004.

Part II

Price Range of Common Stock

      Our common stock has been publicly traded on the Nasdaq National Market under the symbol “ECLP” since our initial public offering on August 6, 1998. The following table shows the high and low sales prices of our common stock as reported by the Nasdaq National Market for the periods indicated.

Holders of Record

      On March 4, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $15.77 per share. Also as of March 4, 2005, we had approximately 197 stockholders of record.

Dividends

      We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation of our business.

Private Placements

      In December 2004, we acquired eSys Medical Systems Inc., or eSys, a radiology information system company headquartered in Montreal, Canada pursuant to a stock purchase agreement. Pursuant to the stock purchase agreement, we paid the former eSys stockholders $2.3 million in cash at closing. In addition, we agreed to pay the former eSys stockholders additional earn-out consideration, upon the achievement of certain earn-out and software development milestones over a period of up to five years, including up to an aggregate of $6.9 million payable in shares of our common stock. Each of the former eSys stockholders are accredited

investors, as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended or the Securities Act. Any shares issued as earn-out consideration are exempt from registration pursuant to Rule 506 of Regulation D under the Securities Act. The number of shares of our common stock issued as earn-out consideration will be determined based upon the average closing prices of our common stock on the NASDAQ National Market for the calendar quarter immediately preceding the payment of the earn-out consideration.

      In March 2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting services and clinical content principally to improve and enhance the care process primarily related to the workflow of nurses and interdisciplinary healthcare professionals who provide the majority of hands-on care at the point of service. CPMRC’s evidence-based content and practice guidelines have been incorporated into the current release of our SunriseXA software. We paid $2.5 million in cash and issued 184,202 shares of common stock for CPMRC, for a total consideration of $5.0 million. The prior owner of CPMRC, who is an accredited investor as defined in Rule 501 of Regulation D under the Securities Act, may earn an additional $12.5 million over the next 5-year period based on future operating results, payable in cash and shares of our common stock. The number of shares of our common stock issued as earn-out consideration will be determined based upon the average of the last reported sale prices of our common stock on the NASDAQ National Market for the five consecutive trading days ending on the trading day that is one day prior to the date on which the earn-out consideration is paid. The shares issued and issuable in this transaction are exempt from registration pursuant to Rule 506 of Regulation D under the Securities Act.

Issuer Purchases of Equity Securities

Shares Available Under Equity Compensation Plans

      Information regarding securities authorized for issuance under equity compensation plans is provided under Item 12 — Security Ownership of Certain Beneficial Owners and Management elsewhere in this document.

      You should read the following selected financial data in conjunction with our consolidated financial statements and the related notes thereto, along with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, that is included elsewhere in this document. Our statement of operations data for the years ended December 31, 2004, 2003 and 2002 and the balance sheet data at December 31, 2004 and 2003 are derived from, and are qualified by reference to, our audited consolidated financial statements, which appear elsewhere in this document. Our statement of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data at December 31, 2002, 2001 and 2000 set forth below, are derived from, and are qualified by reference to, our audited consolidated financial statements which

are not included in this document. Historical results are not necessarily indicative of results that you may expect for any future period.

      This report contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the

foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements. The important factors discussed in Item 1 above under the caption “Certain Factors That May Affect Future Operating Results,” among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

      The following should be read in conjunction with our consolidated financial statements, including the notes thereto, which are included elsewhere in this document.

      Eclipsys is a healthcare information technology company. We develop and license our proprietary software and content to hospitals. Our software allows hospitals to automate many of the key clinical, administrative and financial functions that they require. Our software is designed to improve patient care and patient satisfaction for our customers, and allow them to reduce their operating costs and enhance their revenues. Our content provides practice guidelines for use in hospitals.

      We were founded in December 1995 to commercialize an integrated clinical and financial information software system for use by hospitals. Historically, hospitals have operated in a paper environment. This has resulted in patient safety concerns, including avoidable medical errors, duplicative and unnecessary procedures, inefficient use of limited resources, and a limited ability to track, bill and collect for services rendered. Our software is designed to address these issues by turning data into information that can be easily used, accessed by or provided to the right person, at the right time, in the right place. This enables hospital employees to redesign business processes, deliver higher quality care at lower cost, and receive expedited payment for services rendered. Our software also helps to improve collaboration among physicians, nurses and other healthcare workers across all venues of care.

      We initially grew through a series of strategic acquisitions which were substantially completed in 1999. Our acquisitions were focused on acquiring strong customer bases and advanced software pertaining to the healthcare industry.

      In addition to these acquisitions, in 1996 we licensed certain intellectual property on an exclusive basis from Partners HealthCare System, Inc., or Partners. This intellectual property related to clinical workflows including order management and clinical decision support. The Partners technology has been incorporated within our product offerings.

      In March 2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting services and clinical content designed principally to improve and enhance the care process primarily related to the workflow of nurses and interdisciplinary healthcare professionals who provide the majority of hands-on care at the point of service. CPMRC’s evidence-based content and practice guidelines have been incorporated into the current release of our SunriseXA software. We paid $2.5 million in cash and issued 184,202 shares of common stock for CPMRC, for a total consideration of $5.0 million. Additionally, the prior owner of CPMRC may earn up to an additional $12.5 million, payable in our common stock and cash over the next 5 years based on future operating results.

      In December of 2004, we acquired eSys Medical Inc. (eSys). eSys develops and markets radiology information systems (RIS). We believe eSys’ RIS will enhance our diagnostic imaging solution and extend our clinical workflow solutions in radiology. Using our solutions, clinicians will be able to view patient medical records, diagnostic images and reports in real time. We believe the acquisition will increase sales opportunities for our Picture Archiving Communications System (PACS) and RIS systems through integration with both our and other clinical systems. In 2004, we paid $2.3 million in cash consideration for the eSys acquisition. Under the terms of the transaction, the prior owners of eSys may earn up to an additional $2.5 million of future consideration. This consideration may be earned during the next eighteen months related to certain

milestones in connection with future development efforts of the acquired technology. This future consideration, if earned, will be paid in cash (25%) and our common stock (75%). Additionally, the agreement contains an earn out provision in which the prior owners can earn up to an additional $5 million in future consideration based on sales of the acquired technology over the next five years.

      Since June 1999, we have primarily focused on re-expressing the intellectual property that we acquired through acquisitions on a common platform to provide integrated software to our customers. In 1999, we announced the general availability of SCM, the first version of our Sunrise^tm suite of software products. SCM provides advanced knowledge-based clinical decision-support capabilities including computerized physician order entry.

      In 2001, we announced our SunriseXA^tm strategy. This strategy was to migrate our Sunrise suite of products to an open architecture and platform. SunriseXA’s architecture is built on Microsoft’s .NET Framework, Microsoft SQL Server and the Microsoft Windows family of operating systems. In 2002 and 2003, we announced the general availability of certain components of our SunriseXA product offerings.

      In October 2003, we identified and announced certain response time issues within components of SunriseXA. Although some of our SunriseXA software components had been implemented in and were working at some customer sites, we determined that the software did not produce acceptable response times for the complex, high-volume hospital environments. To address the issue, we implemented a strategy that was designed to allow SunriseXA customers to continue their deployment of SunriseXA which would, at the same time, allow us to continue the development of advanced SunriseXA solutions. This strategy was to replace the affected SunriseXA components with components from our SCM product, which is our prior generation, core clinical product. The response time issue resulted in a product delivery delay for some of our advanced SunriseXA functionality. The announcement of these issues also impacted the implementation schedules for a number of our customers. As previously disclosed, this announcement had an adverse effect on our sales for 2004.

      In connection with this issue, we recorded a $1.2 million write-down of capitalized software development costs to net realizable value for some SunriseXA components in the third quarter of 2003. The write-down was included in the costs of systems and services revenues. Also, we believe that the correction of the response time issue is covered by the warranties that we provide to our customers. We intend to continue to remediate the problem for our customers. Accordingly, we have recorded provisions related to warranty costs of $4.6 million as of December 31, 2004. These provisions reflect our estimate of warranty-related costs that includes among other things, implementation and third-party costs for affected customers. Warranty costs are charged to costs of systems and services revenues when they are probable and reasonably estimable. Through December 31, 2004, we had expended approximately $2.5 million in warranty costs related to remediation of the response time issue. As of December 31, 2004 the warranty reserve balance was $2.1 million. Professional services revenues have been, and we believe will continue to be negatively affected as we utilize resources to fulfill these obligations.

      In June 2004, we released Sunrise Clinical Manager 3.5 XA. The general availability of this release fulfilled a key deliverable expected by our customers in connection with the SunriseXA response time issue. This release was consistent with our strategy and contained enhanced functionality as planned. Sunrise Clinical Manager 3.5 XA was live at several sites as of December 31, 2004.

      During 2001, our management made two strategic decisions that significantly impacted our operating results. First, we substantially increased our gross research and development spending, which includes research and development expenses and capitalized software development costs. This decision was made to enable us to bring components of our SunriseXA product line to market more rapidly. Second, we invested heavily in sales and marketing to enhance market awareness surrounding Eclipsys and its products and services. We did this to capitalize on perceived market demand for our products and services. Additionally, in 2002, we moved

aggressively to change our contracting model, offering our customers payment terms which are more evenly distributed over the term of the contract compared to our historical licensing model, in which software license fees were paid in advance. We did this to meet the needs of our customers, by matching the timing of their payments to the value that we deliver to them. We believe that this new contracting model makes purchase decisions easier for our customers.

      The change in our contracting model has had a material affect on our business. Most notably, our revenues, gross margins, and cash flows have been affected by our adoption of this approach. Because the payments from our customers for software license fees are more evenly distributed over the term of the contract, our revenue recognized over a longer period of time compared to our historical licensing model, while a significant portion of our operating expenses remain relatively fixed. For example, in 2003, our gross margins, operating margins, and cash flow from operating activities were negatively impacted from lower upfront software payments. However, we believe that this contracting model will provide for more predictable revenues on a year over year basis. We believe that over time, this impact of our contracting model on our margins will diminish, and our margins will trend back towards historical levels.

      We consumed cash in 2003 and 2004, primarily because cash collections under our new contracting method from new contract signings were not sufficient to offset our higher operating expenses. To fund these initiatives, we used a portion of our cash on hand.

      During the fourth quarter of 2004, we experienced a slow down in sales transactions as a result of increasing competition within our sector. We expect that competition may continue to intensify, which could result in delayed sales, pricing pressures, a decrease in profitability on new contracts or a loss of future business. In the event that we continue to encounter intensified competition, we may experience a decline in the financial performance of our business. Our success in 2005 will depend largely upon our execution in closing new sales transactions during the first half of 2005. Additionally, we have a significant number of customers scheduled to go live on one or more modules of our software applications throughout 2005. The successful implementation of these customers will be critical to our success in 2005. Finally, we are scheduled to release two new versions of our Sunrise Clinical Manager XA software in 2005 that will contain significant incremental functionality. If we experience delays or difficulties in completing these releases, our business will suffer.

Critical Accounting Policies

      We believe there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management’s judgments and estimates. On an ongoing basis, management evaluates and adjusts its estimates and judgments, if necessary. These significant accounting policies relate to revenue recognition, allowance for doubtful accounts, capitalized software development costs and our warranty reserve. Please refer to Note 2 of the audited consolidated financial statements for further discussion of our accounting policies.

      We generally contract under multiple element arrangements, which include software license fees, hardware and services including consulting, implementation, and software maintenance, for periods of 3 to 10 years. We evaluate revenue recognition on a contract-by-contract basis as the terms of each arrangement vary. The evaluation of our contractual arrangements often requires judgments and estimates that affect the timing of revenue recognized in our statements of operations. Specifically, we may be required to make judgments about:

      We recognize revenues in accordance with the provisions of Statement of Position, or SOP, No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, Staff Accounting Bulletin, or SAB, 104, “Revenue Recognition” and Emerging Issues Task Force, or EITF 00-21, “Revenue Arrangements with Multiple Deliverables.” SOP 97-2 and SAB 104, as amended, require among other matters, that there be a signed contract evidencing an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable.

      Many of our contracts with our customers are multiple element arrangements which may provide for multiple software products including the rights to future products we may offer within the software suites the customer purchases or rights to software versions that support different hardware or operating platforms, and that do not qualify as exchange rights. We refer to these arrangements as subscription contracts. Additionally, we sometimes enter into multiple element arrangements that do not include these rights to future products or platform protection rights. We refer to these arrangements as traditional software contracts. Finally, we offer many of our products and services on a stand-alone bases. Revenue under each of these arrangements is recognized as follows:

      Our subscription contracts typically include the following deliverables:

      Software license fees are recognized ratably over the term of the contract, commencing upon the delivery of the software provided that (1) there is evidence of an arrangement, (2) the fee is fixed or determinable and (3) collection of our fee is considered probable. The value of the software is determined using the residual method pursuant to Statement of Position or SOP 98-9, “Modification of SOP 97-2, With Respect to Certain Transactions” or SOP 98-9. These contracts contain the rights to unspecified future products within the product suite purchased and/or unspecified platform transfer rights that do not qualify for exchange accounting. Accordingly, these arrangements are accounted for pursuant to paragraphs 48 and 49 of SOP 97-2 “Software Revenue Recognition” or SOP 97-2. Under certain arrangements, we capitalize related direct costs consisting of third party software costs and direct software implementation costs. These costs are amortized over the term of the arrangement.

      In the case of maintenance revenues, vendor-specific objective evidence, or VSOE of fair value is based on substantive renewal prices, and the revenues are recognized ratably over the maintenance period.

      In the case of professional services revenues, where VSOE is based on prices from stand-alone sale transactions, and the revenues are recognized as services are performed pursuant to paragraph 65 of SOP 97-2.

      Third party hardware revenues are recognized upon delivery, pursuant to SAB 104.

      Remote hosting services, where VSOE is based upon consistent pricing charged to customers based on volumes and performance requirements on a stand-alone basis and substantive renewal terms, and the revenues are recognized ratably over the contract term as the services are performed. Our remote hosting arrangements generally require us to perform one-time set-up activities and include a one-time set-up fee. This one-time set-up fee is generally paid by the customer at contract execution. We have determined that these set-up activities do not constitute a separate unit of accounting, and accordingly the related set-up fees are recognized ratably over the term of the contract.

      We consider the applicability of EITF 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored On Another Entity’s Hardware,” to our remote hosting services arrangements on a contract-by-contract basis. If we determine that the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty, and can feasibly run the software on its own hardware or enter into another arrangement with a third party to host the software, a software element covered by SOP 97-2 exists. When a software element exists in a remote hosting services arrangement, we recognize the license, professional services and remote hosting services revenues pursuant to SOP 97-2, whereby the fair value of the remote hosting service is recognized as revenue ratably over the term of the remote hosting contract. If we determine that a software element covered by SOP 97-2 is not present in a remote hosting services arrangement; we recognize revenue for the remote hosting services arrangement, ratably over the term of the remote hosting contract pursuant to SAB 104.

      We enter into traditional multiple-element arrangements that include the following elements:

Revenue for each of the elements is recognized as follows:

      Software license fees are recognized upon delivery of the software provided that (1) there is evidence of an arrangement, (2) the fee is fixed or determinable and (3) collection of our fee is considered probable. For those arrangements in which the fee is not considered fixed or determinable, the software license revenue is recognized as the payments become due. For arrangements where VSOE only exists for the undelivered elements, we account for the delivered elements (software license revenue) using the residual method in accordance with SOP 98-9.

      In addition to the software license fees, these contracts may also contain maintenance, professional services and hardware or remote hosting services. VSOE and revenue recognition for these elements is determined using the same methodology as noted above for subscription contracts.

      We enter into certain multiple element arrangements containing milestone provisions in which the professional services are considered essential to the functionality of the software. Under these arrangements, software license fees and professional service revenues are recognized using the percentage-of-completion method over the implementation period which generally ranges from 12 to 24 months. Under the percentage-of-completion method, revenue and profit are recognized throughout the term of the implementation based upon estimates of total labor hours incurred and revenues to be generated over the term of the implementation. Changes in estimates of total labor hours and the related effect on the timing of revenues and profits are recognized in the period in which they are determinable. Accordingly, changes in these estimates could occur and have a material effect on our operating results in the period of change.

      We also market certain products and services on a stand-alone basis. These products and services include the following:

Revenue related to these products and services are recognized as follows:

      Software license fees and maintenance are marketed on a stand-alone basis may be licensed either under traditional contracts or under subscription arrangements. Software license fees under traditional contracts are recognized pursuant to SOP 97-2 upon delivery of the software, persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectibility is probable. Under subscription agreements for stand-alone products, software license fees are recognized ratably over the term of the contract. With respect to maintenance, VSOE is determined based on substantive renewal prices contained in the contracts. Maintenance is recognized ratably over the term of the contract.

      Professional services represent incremental services marketed to customers including implementation and consulting services. Professional services revenues, where VSOE is based on prices from stand-alone transactions are recognized as services are performed.

      Hardware is recognized upon delivery pursuant to SAB 104.

      Network service arrangements include the assessment, assembly and delivery of a wireless network which may include wireless carts or other wireless equipment to the customer. Our network services arrangements are sold to a customer for a fixed fee. All services are performed prior to the delivery of the equipment. These contracts are typically 60 to 90 days in length and are recognized pursuant to SAB 104, upon the delivery of the network to the customer.

      Remote hosting contracts that are sold on a stand alone basis are recognized ratably over the contract term pursuant to SAB 104. Our remote hosting arrangements generally require us to perform one-time set-up activities and include a one-time set-up fee. This one-time set-up fee is generally paid by the customer at contract execution. We have determined that these set-up activities do not constitute a separate unit of accounting, and accordingly we recognize the related set-up fees ratably over the term of the contract.

      We provide outsourcing services to our customers. Under these arrangements we assume all responsibilities for a healthcare organization’s IT operations using our employees. Our outsourcing services include facilities management, network outsourcing and transition management. These arrangements typically range from five to ten years in duration. Revenues from these arrangements are recognized when services are performed.

      If other judgments or assumptions were used in the evaluation of our revenue arrangements, the timing and amounts of revenue recognized may have been significantly different.

      In evaluating the collectibility of our accounts receivable, we assess a number of factors, including a specific customer’s ability to meet its financial obligations to us, as well as general factors such as the length of time the receivables are past due and historical collection experience. Based on these assessments, we record a reserve for specific account balances as well as a reserve based on our historical experience for bad debt to reduce the related receivables to the amount we ultimately expect to collect from customers. If circumstances related to specific customers change, or economic conditions deteriorate such that our past collection experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels provided for in the consolidated financial statements.

      We capitalize software development costs in accordance with FASB Statement No. 86 “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.” We capitalize software development costs incurred subsequent to establishing technological feasibility of the software being developed. These costs include salaries, benefits, consulting and other directly related costs incurred in connection with coding and testing software products. Capitalization ceases when the products are generally released for sale to customers, at which time amortization of the capitalized costs begins. At each balance sheet date, we perform a detailed assessment of our capitalized software development costs which includes a review of, among other factors, projected revenues, customer demand requirements, product lifecycle, changes in software and hardware technologies, and product development plans. Based on this analysis we record adjustments, when appropriate, to reflect the net realizable value of our capitalized software development costs. The estimates of expected future revenues generated by the software, the remaining economic life of the software, or both, could change, materially affecting the carrying value of capitalized software development costs, as well as our consolidated operating results in the period of change.

      On October 20, 2003, we announced response time issues with some components of SunriseXA, the newest version of our Sunrise suite of products. To address the issue, we announced a strategy to allow our SunriseXA customers to continue their deployment of SunriseXA, while enabling us to continue the development of our advanced SunriseXA components. Our strategy was to replace the affected SunriseXA components with certain components from our SCM product. As a result, in 2003 we recorded a $1.2 million write-down of capitalized software development costs for certain SunriseXA components to net realizable value. The write-down is included in the costs of systems and services revenues.

      The agreements that we use to license our software include a limited warranty. The warranty provides that our software, in its unaltered form, will perform substantially in accordance with the related documentation. Through September 30, 2003, we did not incur any material warranty costs related to our products. Due to the response time issues that we identified in October 2003, we recorded provisions related to warranty costs of $4.6 million through December 31, 2004. Warranty costs are charged to costs of systems and services revenues when they are probable and reasonably estimable. In determining this warranty reserve, we used significant judgments and estimates for the additional professional service hours and third party costs that will be necessary to remedy this issue on a customer-by-customer basis. The timing and amount of our warranty reserve could have been different if we had used other judgments or assumptions in our evaluation.

Results of Operations

      We derive revenues from licensing our software and the delivery of services including software and hardware maintenance; professional services (including implementation, integration, training and consulting); remote hosting services; outsourcing services; network services; and the sale of computer hardware. Our products and services are generally sold to customers under contracts that range in duration from 3 to 10 years.

      The principal costs of systems and services revenues are salaries, benefits and related overhead costs for implementation, maintenance, remote hosting and outsourcing personnel. Other significant costs are the amortization of capitalized software development costs, acquired technology and a network services intangible asset. Capitalized software development costs are generally amortized over three years on a straight-line basis commencing upon general release of the related product, or are based on the ratio that current revenues bear to total anticipated revenues for the applicable product. Acquired technology is amortized over three to five years based upon the estimated economic life of the underlying asset. Cost of revenues related to hardware sales includes our cost to acquire the hardware from the manufacturer.

      During the third quarter of 2003, we recorded a write-down of capitalized software costs to net realizable value of certain components of our SunriseXA software in the amount of $1.2 million. This related to the SunriseXA response time issue discussed above. Additionally, through December 31, 2004, we recorded a warranty provision of $4.6 million related to anticipated costs of our SunriseXA response time issue. This warranty provision reflects an estimate of implementation and third party costs for certain customers. The warranty provision was included in the costs of systems and services revenues.

      Sales and marketing expenses consist primarily of salaries, benefits, commissions, and related overhead costs. Other costs include expenditures for marketing programs and events, public relations, trade shows, advertising, and related communications.

      Research and development expenses consist primarily of salaries, benefits and related overhead, as well as consultants for the design, development and testing of new products. We capitalize certain software development costs subsequent to attaining technological feasibility. These costs are amortized as an element of the costs of systems and services revenues.

      General and administrative expenses consist primarily of salaries, benefits and related overhead costs for administration, executive, finance, legal, human resources, purchasing and internal systems personnel, as well as accounting and legal fees and expenses.

      We depreciate the costs of our tangible capital assets on a straight-line basis over the estimated economic lives of the assets, which generally range from 3 to 7 years, and may reach 10 years for outsourcing contracts. Acquisition-related intangible assets, which primarily consisted of the value of ongoing customer relationships, acquired technology and goodwill, have been amortized based upon their estimated economic lives at the time of the acquisition, and vary among acquisitions. In accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, our amortization of goodwill ceased as of January 1, 2002, leaving a recorded balance of $454,000 for goodwill as of December 31, 2001. On at least an annual basis, we conduct an impairment review of our remaining goodwill balance. As of December 31, 2004, there was no impairment of the remaining goodwill balance.

      As of December 31, 2004, we had net operating loss carryforwards for federal income tax purposes of $286.8 million. The carryforwards expire in varying amounts through 2024 and are subject to certain restrictions. We did not record a benefit for the resulting net deferred tax asset at December 31, 2002, 2003 or 2004, because we believed it was more likely than not that we would not realize our net deferred tax asset. Accordingly, we have recorded a valuation allowance against our total net deferred tax asset.

Statement of Operations

Year Ended December 31, 2004 compared to December 31, 2003

      Total revenues for the year ended December 31, 2004 increased $54.4 million or 21.4% to $309.1 million, from $254.7 million in 2003.

      Systems and services revenues increased $48.2 million or 20.6% to $282.1 million for the year ended December 31, 2004 compared to $234.0 million in 2003. The increase in systems and services revenues was primarily a result of an increase in monthly generated revenues related to software, maintenance, outsourcing and remote hosting. These revenues increased $31.0 million to $198.0 million in 2004. Additionally, professional services revenues which include implementation and consulting services increased $8.4 million or 17.8% from $47.1 million in 2003 to $55.5 million in 2004. Also, revenue related to software and networking services increased $8.7 million or 43.9% to $28.6 million in 2004 compared to $19.9 million in 2003.

      The increase in monthly generated revenues related to software, maintenance, outsourcing and remote hosting and professional services was primarily driven by higher sales volume in 2003 and 2004. The higher sales volume was related to an ongoing initiative in which we expanded our sales and marketing functions. The higher sales volume was related to success in the market place in connection with sales of our advanced clinical systems and combined software and outsourcing transactions. The sales of advanced clinical systems were related to ongoing industry wide initiatives to adopt and implement these systems. In connection with the higher sales volume, we began to market multiple element arrangements that are recognized on a monthly basis. This initiative which was implemented in 2002, has resulted in lower cash flows during the past two years as these contracts provide for payment terms that provide for lower cash flows during the early portion of the respective contracts. The growth in professional services was a result of significant incremental activity in

2004 tied to customer implementations. Activities increased in 2004 as numerous customers went live on one or more software applications. This activity is expected to continue at these heightened levels in 2005 as numerous customers are scheduled to activate or upgrade their software applications. The increase in software license revenues and network services revenues was primarily a result of higher network services revenues which increased by $6.3 million in 2004. Network services revenues increased from $8.9 million in 2003 to $15.2 million in 2004. This increase was a result of an initiative we implemented to expand our network services offering to our customer base.

      As part of our future growth and continued expansion of our solutions offering, we have implemented a strategy to market combined outsourcing and software contracts. We signed several large contracts in this area in 2004. We are continuing this program in 2005. In the event that we experience a change in revenue mix whereby a higher portion of contracts are combined outsourcing and software contracts, our overall gross margin percentage would likely decline. However, given the significantly larger size of typical combined outsourcing and software contracts, we expect the overall contribution of these contracts to our profitability would be positive. Additionally, we expect 2005 cash flows to be negatively affected as we make up-front expenditures on these new outsourcing contracts. These expenditures will primarily affect the first half of 2005.

      Hardware revenues increased approximately $6.2 million, or 30.1% to $26.9 million for the year ended December 31, 2004 compared to $20.7 million in 2003. Hardware increased as a significant number of customers made purchases as they progressed on their respective installations in 2004 following our release of Sunrise Clinical Manager 3.5 XA in June 2004.

      We expect hardware and network service transactions will fluctuate in future periods due a variety of factors, including competition within the hardware industry, the status of the customer implementations and future sales volumes related to hardware and network services.

      Cost of systems and services increased approximately $25.1 million or 17.5% to $168.4 million, for the year ended December 31, 2004 compared to $143.3 million in 2003. The gross margin percentage on systems and services revenues was 40.3% in 2004 compared to 38.8% in 2003. The increase in costs of systems and services revenues in 2004 was related to the following:

      Cost of hardware revenues increased $5.7 million to $22.9 million or 33.0% in 2004 compared to $17.3 million in 2003. The increase in these costs was directly related to the higher hardware volumes discussed above. The gross margin percentage on hardware revenue decreased to 14.8% in 2004 compared to 16.7% in 2003. The decrease was a result of pricing pressures in 2004 in the hardware sector of our business. It is expected that fluctuations in revenue and margin will continue to occur in future periods.

      Research and development expenses were $58.1 million in 2004 compared to $58.1 million in 2003. Gross research and development spending which consists of research and development expense and capitalized software development costs decreased $3.1 million to $73.3 million in 2004 compared to $76.4 in 2003. The decrease in overall spending was driven by an improvement in internal processes within the research and development organization and a shifting of resources from third party consultants to internal resources. In summary research and development expenses were as follows:

      The decrease in capitalized software development costs was primarily related to the decrease in costs associated with a shift from third party resources to internal resources in 2004. The increase in amortization of capitalized software development costs was a result of the release of Sunrise Clinical Manager 3.5 XA in June 2004. These costs are included as a component of the costs of systems and services revenues.

      General and administrative expenses increased approximately $2.0 million or 14.8% to $15.5 million in 2004 compared to $13.5 million in 2003. The increase was primarily related to higher legal costs, higher accounting and professional fees associated with the implementation of Section 404 of the Sarbanes-Oxley Act and expense associated with a stock option repurchase which was executed in the fourth quarter of 2004.

      Depreciation and amortization increased $2.8 million or 26.6% to $13.3 million in 2004 compared to $10.5 million in 2003. The increase was a result of on-going investment to improve our infrastructure in our research and development area and continued investments in our Technology Solutions Center related to higher volumes of remote hosting services. As a result of these initiatives, we expect depreciation and amortization to continue to increase in future periods.

      Interest income decreased $800,000 to $1.6 million in 2004 compared to $2.4 million in 2003. The decrease was primarily related to lower cash and cash equivalent balances in 2004.

      As a result of these factors, we had a net loss of $32.6 million for the year ended December 31, 2004, compared to a net loss of $56.0 million for the year ended December 31, 2003.

Statement of Operations

Year Ended December 31, 2003 compared to Year Ended December 31, 2002

      Total revenues for the year ended December 31, 2003 increased $36.6 million, or 16.8%, to $254.7 million, from $218.1 million for 2002. Systems and services revenues increased $30.8 million, or 15.1%, to $234.0 million, for the year ended December 31, 2003, from $203.2 million for 2002. The increase in systems and services revenues in 2003 was primarily a result of increases in revenue generated from arrangements, which generally provide for revenue recognition on a monthly basis. These revenues include license fees, remote hosting services, software and hardware maintenance fees, and outsourcing services. The overall increase in revenues is a result of higher volumes of new contracts. The new contracts consisted of a significantly higher proportion of contracts executed for which revenues are recognized on a monthly basis. We expect these contracts will continue to represent a significant, and potentially growing, proportion of our new contracts. However, because these contracts are characterized by payments being spread over a longer period of time compared to traditional licensing arrangements, we expect cash flows will continue to be negatively impacted in the near future. Additionally, professional services and third party revenues increased as a result of a higher volume of new contracts.

      Hardware revenues increased approximately $5.9 million, or 39.4%, to $20.7 million, for the year ended December 31, 2003, from $14.9 million for 2002. The increase in hardware revenues in 2003 was primarily due to increased shipments during the third and fourth quarters of 2003 for business contracted during the second, third, and fourth quarters. We expect hardware revenue to continue to fluctuate in future periods.

      Cost of systems and services revenues increased approximately $24.2 million, or 20.4%, to $143.3 million, for the year ended December 31, 2003, compared to $119.0 million for 2002. Gross margins on systems and

services revenues were 38.8% for the year ended December 31, 2003 compared to 41.4% for 2002. The increase in cost of systems and services revenues was related to several factors, including:

      These increases were partially offset by lower amortization of acquired technology, and due to some assets becoming fully amortized during 2002 and the first quarter of 2003.

      Cost of hardware revenues increased $5.0 million, or 40.6%, to $17.3 million, for the year ended December 31, 2003, compared to $12.3 million for 2002. The increase in cost of hardware revenues for 2003 was primarily attributable to the increase in hardware revenues discussed above. Gross margin on hardware revenues was relatively consistent at 16.7% in 2003 and 17.4% in 2002.

      Sales and marketing expenses increased $17.2 million, or 32.4%, to $70.4 million, for the year ended December 31, 2003, from $53.2 million for 2002. The increase in sales and marketing expenses was related to increased payroll and related costs due to our initiative to significantly expand the size of our sales and marketing organization, including approximately $2.8 million higher commissions resulting from increased sales volume. We expect that sales and marketing will continue at these higher expense levels in the future.

      Research and development expenses increased $11.9 million, or 25.8% to $58.1 million, for the year ended December 31, 2003, compared to $46.2 million for 2002. Gross spending on research and development, consisting of research and development expenses and capitalized software development costs, increased approximately $21.1 million primarily due to our initiative to accelerate the migration of our products onto the Microsoft .NET platform. In 2003, under this initiative, we increased the number of employees in our research and development organization, and increased the use of outside consultants. The percentage of research and development expenditures capitalized for the year ended December 31, 2003 was 23.8%, or $18.2 million, compared to 16.0%, or $8.8 million, for 2002. The percentage of research and development costs capitalized increased as a result of the incremental expenses incurred during the second, third and fourth quarters of 2003 for coding and testing of two releases of SunriseXA products that were technologically feasible, one of which was generally released during the third quarter. As discussed above, amortization of capitalized software development costs, which is included in costs of systems and services revenues, increased by approximately $1.9 million, to $8.2 million for the year ended December 31, 2003, compared to $6.3 million for 2002.

      General and administrative expenses increased approximately $1.1 million, or 8.8% to $13.5 million, for the year ended December 31, 2003, compared to $12.4 million for 2002. The increase in general and administrative expenses was primarily due to higher insurance premiums and legal costs.

      Depreciation and amortization increased $2.0 million, or 23.0%, to $10.5 million, for the year ended December 31, 2003, from $8.5 million for 2002. The increase was primarily the result of investments in computer hardware and software to expand our research and development infrastructure and to increase capacity at our Technology Solutions Center to address the higher volume of remote hosting services. As a result of continuing investments, we expect depreciation and amortization to continue to increase in the future.

      Interest income decreased $1.6 million to $2.4 million for the year ended December 31, 2003, from $4.0 million for 2002. This decrease in interest income was primarily due to a decline in yields, related to changes in general economic conditions. A decline in the average combined balance in cash and cash equivalents and marketable securities during the third and fourth quarters of 2003 also contributed to the decrease in interest income.

      As a result of these factors, we had a net loss of $56.0 million for the year ended December 31, 2003, compared to a net loss of $29.8 million for the year ended December 31, 2002.

Liquidity and Capital Resources

      During 2004, operating activities used $3.2 million of cash, primarily as a result of the impact of our new contract arrangements. Investing activities used $36.1 million of cash, consisting of $15.2 million of capitalized software development costs, $15.3 million for the procurement of property and equipment and $5.5 million for the acquisition of CPRMC in March 2004 and eSys in December 2004. The property and equipment expenditures were primarily related to activities at our Technology Solutions Center for the expansion of our remote hosting function and activities in our research and development area. Financing activities provided $9.6 million from the exercise of stock options and proceeds from the employee stock purchase plan.

      As of December 31, 2004, our principal source of liquidity was our cash and cash equivalents balance of $122.0 million.

      Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales and the timing and level of research and development activities. As of December 31, 2004, we did not have any material commitments for capital expenditures. We believe that our available cash and cash equivalents and anticipated cash generated from our future operations will be sufficient to meet our operating requirements at least through 2005.

      Our future liquidity requirements will depend on a number of factors, including the timing and level of our new sales volumes, the cost of our development efforts related to SunriseXA, the success and market acceptance of our future product releases, and other related items. As of December 31, 2004, we did not have any material commitments for capital expenditures. We believe that our current cash and marketable securities balances, combined with anticipated cash collections from our customers will be adequate to meet our liquidity requirements through 2005.

Contracts and Commitments

      The following table provides information related to our contractual cash obligations under various financial and commercial agreements as of December 31, 2004:

      The unconditional purchase obligations consist of minimum purchase commitments for telecommunication services, computer equipment, maintenance, consulting, airplane charters and other commitments. The contract for airplane charters is discussed in further detail in Note 10 to the consolidated financial statements, “Related Party Transactions” included herein.

      We do not currently use derivative financial instruments. We generally buy investments with maturities of 90 days or less. Based upon the nature of our investments, we do not expect any material loss from our investments.

      Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these

factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. A hypothetical 10% increase or decrease in interest rates, however, would not have a material adverse effect on our financial condition.

      The following table illustrates potential fluctuation in annualized interest income based upon hypothetical values for blended interest rates and cash and marketable securities account balances. This sensitivity analysis is not a forecast of future interest income:

      We account for cash equivalents and marketable securities in accordance with SFAS No. 115. “Accounting for Certain Investments in Debt and Equity Securities.” Cash equivalents are short-term highly liquid investments with original maturity dates of three months or less. Cash equivalents are carried at cost, which approximates fair market value.

      We do not currently enter into foreign currency hedge transactions. Through December 31, 2004, foreign currency fluctuations have not had a material impact on our financial position or results of operations.

Index to Consolidated Financial Statements:

      Financial Statements:

Report of Independent Registered Public Certified Accounting Firm

To the Board of Directors and Stockholders of Eclipsys Corporation:

      We have completed an integrated audit of Eclipsys Corporation’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

      In our opinion, the consolidated financial statements and financial statement schedule listed in the index appearing under Item 8, present fairly, in all material respects, the financial position of Eclipsys Corporation and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

      Also, in our opinion, management’s assessment, included in “Management’s Report on Internal Control Over Financial Reporting”, under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial

statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Atlanta, Georgia

March 15, 2005

ECLIPSYS CORPORATION

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

ECLIPSYS CORPORATION

Consolidated Statements of Operations

The accompanying notes are an integral part of these consolidated financial statements.

ECLIPSYS CORPORATION

Consolidated Statements of Cash Flows

The accompanying notes are an integral part of these consolidated financial statements.

ECLIPSYS CORPORATION

Consolidated Statement of Changes in Stockholders’ Equity