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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

For the fiscal year ended December 31, 2002

Commission File Number 000-29273

Quovadx, Inc.

Registrant’s telephone number, including area code:

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

      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 and 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 filings for the past 90 days.     Yes þ          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 the 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.     þ

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

      The aggregate market value of the voting and non-voting equity held by non-affiliates of the registrant as of June 30, 2002 was $188.8 million, based on the last sale price reported for such date on the NASDAQ National Market. This determination is not necessarily conclusive for other purposes.

      As of February 28, 2003, there were 30,196,425 shares of Common Stock of the registrant outstanding.

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QUOVADX, INC.

ANNUAL REPORT ON FORM 10-K

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FORWARD-LOOKING STATEMENTS

      All statements, trend analysis and other information contained in this Annual Report on Form 10-K (“Annual Report”) of Quovadx, Inc. (“Quovadx,” the “Company,” “we” or “us”) and the information incorporated by reference which are not historical in nature are forward-looking statements within the meaning of the Private-Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect” and “intend” and other similar expressions. All statements regarding the Company’s expected financial position and operating results, business strategy, financing plans and forecast trends relating to our industry are forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” as well as other risks and uncertainties referenced in this Annual Report.

PART I

Overview

      Quovadx provides software and services to enable companies to achieve competitive process advantage. QDX^TM Platform V is application development software that allows our customers to leverage the processes and data in existing legacy applications and databases while they develop new composite applications. The key to attaining a competitive process advantage is owning a software platform that provides software components that customers can easily modify to react to changing business processes. QDX^TM Platform V software speeds development and deployment of our customers’ process and integration applications to improve their business processes and to achieve competitive process advantage. In addition, Quovadx adds extensive professional service capabilities, including consulting, implementation, hosting, transaction services and operations management. We believe our model creates value for our customers by allowing them to automate and extend valuable business processes and transact business in real-time with their trading partners (customers, suppliers, business partners), while preserving the significant investments they have made in their legacy systems. We believe our key differentiator is proven by the complex business applications we have built on QDX^TM Platform V. We have nine of these applications called Adaptive Applications: QDX^TM HIPAA Express; the INSURENET® Solution; QDX^TM Case Management; QDX^TM Utilization Management; QDX^TM Disease Management; QDX^TM Quick Trials; QDX^TM Trading Partner Manager; QDX^TM Customer Focus; and the QDX^TM Payer Solution Suite. These applications demonstrate that QDX^TM Platform V is a complete toolset, capable of undertaking the most complex application integration and business process management problems. Our Adaptive Applications offer our customers an alternative to the high cost of developing a custom application and the inflexibility of implementing a packaged application. Adaptive Applications, built on QDX^TM Platform V, include 50% to 75% of the required “out-of-the-box” business process functionality that an enterprise needs. Our Adaptive Applications enable our customers to incorporate their best practices into the software to gain competitive process advantages and allow an organization to rapidly tailor and tune business processes in response to evolving requirements, regulations and policies. The result is a quickly deployable, customized solution.

      Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on or through our Internet website located at www.quovadx.com, as soon as reasonably practicable after they are filed with or furnished to the SEC.

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Our History

      We were incorporated in Delaware in March 1989 under the name Reilly Dike Dosher Corporation, Inc. In December 1996, we changed our name to MPower Solutions, Inc. In early 1998, we identified an emerging opportunity to utilize the Internet to connect healthcare participants together into a community structure. Beginning in mid-1998, we began to focus on Internet-based healthcare solutions. In April 1999, we changed our name to XCare.net, Inc. In 2000, we completed our initial public offering at an offering price to the public of $18.00 per share. In September 2001, we changed our name to Quovadx, Inc.

      Since the initial public offering, we have completed several acquisitions to expand our product suite and customer base. In November 2000, we acquired Integrated Media to expand into the media and entertainment market. In June 2001, we acquired Confer Software, to add their business process management to our suite of products. In August 2001, we acquired Healthcare.com, Inc. for their application interface tools. In December 2001, we acquired the UK-based Pixel Group to add to our application interface tools and to expand our international capabilities. On March 27, 2002, we purchased all of the outstanding capital stock of Outlaw Technologies, Inc. (“Outlaw”) to add a customer relationship management application to our suite of Adaptive Applications.

Market Overview

      A company is made up of a series of processes and workflows. These processes and workflows define the business and provide the enterprise with a unique ability to compete. By managing, monitoring and tuning these processes and workflows within an integrated environment, companies can overcome the challenge of connecting their people, their systems, their business processes and their partners to gain a competitive process advantage. Today’s market requires all parts of a company, both internal and external, be connected for operational efficiency. Most organizations are burdened with systems and applications that do not share information and do not communicate with each other resulting in inadequate information and organizational inefficiencies. Intra-departmental systems and software applications were designed to serve individual departmental needs, not the needs of the company as a whole.

      Companies now recognize that to gain a competitive process advantage, they must leverage all data in all the applications in their enterprise. Additionally, organizations need to extend their business processes outside of their enterprise and transact with their customers, partners and suppliers in real-time. Finally, companies must build their Information Technology (IT) architecture on a flexible, responsive foundation or platform. We believe this common pursuit of competitive process advantage creates a market for our products and services.

      The challenges facing businesses across every industry are:

	•	How to adapt business processes in a rapidly changing environment in order to keep or gain a competitive process advantage;
	•	How to leverage and unlock the value of data housed in isolated systems; and
	•	How to communicate in real-time with valued customers, suppliers and partners without wasting time and money.

      According to industry analysts, business process management software is delivering cost-reducing benefits via:

	•	Shorter time frames for completing processes;
	•	Fewer number of steps;
	•	Reduced error cycles;
	•	Automated administrative tasks; and
	•	Decreased number of workers required.

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Competition

      The integration and business process management software market is highly competitive. Competition, when coupled with the rapid evolution of technology and business practices, presents us with a challenging environment.

      Competitive factors affecting us include:

	•	Brand recognition and market awareness;
	•	Product and features, functionality and quality;
	•	Service offering levels and quality;
	•	Ease and timeliness of implementation;
	•	Adequate infrastructure;
	•	Technical and industry-specific domain expertise; and
	•	Financial resources.

      Any one of these factors may contribute to our loss of market share, reduced profit margins, increased operating expense or discounted offerings.

      Our integration products provided in QDX^TM Platform V compete with other software integration companies such as SeeBeyond Technology Corporation, Tibco Software, Inc., Vitria and webMethods. Our Adaptive Applications compete with certain offerings of these vendors as well as with products offered by vendors such as Landacorp, MedDecisions, Siebel and Oracle. The majority of these companies have greater financial and organizational resources than we do — putting us at a competitive disadvantage.

The Quovadx Solution

      Quovadx’s primary product is QDX^TM Platform V, which contains three components:

	•	Application Development Tools: To facilitate rapid and composite application development, QDXTM Platform V allows developers to call on a set of common tools, frameworks, engines, interfaces and other internal or external services and to leverage existing applications.
	•	Business Process Management Tools: The key to competitive process advantage is allowing companies to design, manage, monitor and tailor business processes as the business environment changes. Through QDXTM Platform V’s sophisticated business process management tools, companies can dynamically manage business processes, handle exceptions and respond to changing regulations.
	•	Integration Tools: One of the keys to streamlining business processes is to leverage all of the information in existing applications, including legacy applications. QDXTM Platform V provides integration tools that offer connectivity to any application, which prevents the errors associated with re-keying information and maintaining duplicative information.

      Adaptive Applications for Business Process Management. We believe our key differentiator is the innovative use of our QDX^TM Platform V to solve real business problems. We have developed packaged solutions, using QDX^TM Platform V, which we call Adaptive Applications. Our Adaptive Applications offer another option to buying off-the-shelf software and adapting business processes to meet the conditions of the software or to building rigid custom applications that are antiquated by or before implementation. Rapid flexibility is key and we believe our “adaptive” approach provides the majority of the solution while allowing an organization to customize the application as necessary to suit their business needs on a continual basis.

      Quovadx offers nine Adaptive Applications, built on QDX^TM Platform V, to meet specific business process needs. These applications include:

	•	QDXTM HIPAA Express enables companies to achieve Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) compliance.

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	•	The INSURENET® Solution allows healthcare provider organizations to verify patient insurance eligibility in real-time.
	•	QDXTM Case Management automatically assigns cases to a Case Manager based on predefined qualification criteria that ensures all qualified cases are appropriately referred for case management oversight.
	•	QDXTM Utilization Management gives healthcare payers the ability to define methods for automatically performing care authorization for inpatient treatment, outpatient services and specialty referrals.
	•	QDXTM Disease Management automates routine administrative tasks and the disease management process or plan of care.
	•	QDXTM Quick Trials helps sponsors complete clinical trials more quickly and less expensively.
	•	QDXTM Trading Partner Manager assists the business enterprise in streamlining the administration, management and maintenance of its business partner relationships, commonly referred to as trading partners.
	•	QDXTM CustomerFocus is a customer relationship management application that automates the tracking, routing, management and reporting of all customer interactions within a health plan.
	•	QDXTM Payer Solution Suite is a healthcare payer solution to meet almost every requirement large and small health plans and managed care organizations would need to operate efficiently and effectively.

      Professional Services. Our service offerings range from software implementation, to project-related consulting, to full IT outsourcing. We have developed a proprietary methodology, the eXtensible Development Discipline (eDD), a methodology used to address problem definition, strategic opportunity, and operational efficiency. This methodology produces a plan of action, or a strategy from which our architects design and build a solution and integrate the appropriate components. We offer three categories of professional services:

	•	Envisioning Services — to rapidly identify the technical architecture necessary to meet business needs and requirements.
	•	Development Services — beginning with analysis and design of complex systems through development and implementation of applications
	•	Integration Services — connecting the disparate systems and databases within an organization.

      We provide a wide range of services to manage all or part of an organization’s technical environment, including real-time or batch transactions, application maintenance and hosting support for online web functionality in our eCommerce operations center in Albuquerque, New Mexico.

      We offer our customers hosting services and we provide part of our technology in an Application Service Provider (“ASP”) environment that has advantages over traditional internal hosting by deploying, delivering and managing access to packaged applications on a subscription or rental basis.

Technology

      QDX Platform V. QDX Platform V offers a comprehensive solution for rapid application development and deployment, including Web Services applications, that enables organizations to perform seamless integration between enterprise systems and all commerce touch points — including customers, partners, and exchanges — within intranet, extranet and Internet environments. QDX^TM Platform V’s J2EE-compliant scalable architecture differentiates QDX^TM Platform V’s powerful run-time and visual development environment from other technologies.

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      QDX Platform V’s architecture contains a complete integration stack including:

	•	Presentation layer with Simple Object Access Protocol (“SOAP”) and an XML (“Extensible Mark-Up Language”)-based user interface:

	•	Dynamic branding and role-based personalization;
	•	XML/ XSL (“Extensible Stylesheet Language”) provided device-independence; and
	•	Screen rejuvenation for legacy systems.

	•	Business process layer to orchestrate the logic of the flow between the users and systems:

	•	XML Topic Mapping for content indexing and infrastructure;
	•	Distributed transactions across systems; and
	•	Separate business logic from adapters.

	•	Integration layer to connect and communicate to different Web Services or legacy systems:

	•	Industry standards-based EAI (“Enterprise Application Integration”) adapters;
	•	Leverage BPMS (“Business Process Management”) to separate data from logic; and
	•	XML messaging and HTTP/ S for inter- and intra-enterprise.

      To increase developer productivity, QUOVADX^TM technology uses XSP (“eXtensible Server Pages”) to provide a business process automation tag library, which reduces the programming skill requirements for developing web-based applications.

      In an environment where using EJB (“Enterprise JavaBeans”) is the common practice, the QDX^TM XSP engine will utilize the server’s EJB container for thread and JDBC (“Java Database Connectivity”) transaction management. This results in tight integration with existing EJB applications. For an environment where EJB is not used, QDX^TM Platform V can also be configured to use its own modules to provide similar functionalities.

      For protecting data as it is transmitted between systems, QDX^TM Platform V includes built-in standard Internet security, such as SSL (Secure Socket Layer) and X509. QDX^TM Platform V also includes security at the application framework level, including user authentication and access control. Users may also replace the native QDX security module with their own for integrating with third-party security products such as LDAP (“Lightweight Directory Access Protocol”) servers or SiteMinder®.

Customers

      We have sold products and services to over 3,000 customers in four primary market vertical segments: healthcare — payer market; healthcare — provider market; healthcare — pharmaceutical and biotech market; and media and entertainment market.

      Two of our customers accounted for 22% and 11% of revenue, respectively, for the year ended December 31, 2002.

Sales, Marketing and Strategic Alliances

      Our sales are conducted through direct sales representative, strategic alliances and distributors. As of December 31, 2002, our sales and marketing organization included 71 employees. Our sales force is divided into specific vertical markets that include technical and professional resources that primarily cover the 48 contiguous United States, Hawaii, Canada, the United Kingdom and Europe. We also have distribution relationships covering Australia, New Zealand and Asia. Our sales in the United Kingdom and Europe are performed by a combination of direct sales and distributors. The sales cycle varies depending on the size and scope of the engagement and can range from 90 to 360 days.

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      We focus our marketing efforts on brand awareness, educational and collateral development supporting our product and service offerings, creative visualization of our offerings, management of all joint marketing programs with alliance partnerships and out-reach through public relations, investor relations, and industry analyst relations. Our marketing activities include: advertising, direct mail campaigns, email campaigns, tradeshows, seminars, sponsorships, memberships, industry conferences, contributing industry opinions and articles, annual user group conference programs, continuing education and innovative solution award distribution.

      Over the past year, Quovadx has formed an Alliance Partner Program to expand the markets we are able to effectively address. Our partners include leading software vendors and service providers such as McKesson Information Solutions and GE Medical Systems Information Technologies. Our Alliance Partner Program is an integral part of our strategy to enhance, develop, and market innovative technology solutions and services, and consists of two programs: Referral Partners and Channel Solution Partners.

      The Alliance Partner Program allows us to strategically market our products along with complementary products and service offerings provided by other companies. These alliance partners enhance our marketing efforts by tightly integrating our products into more comprehensive solutions to the problems faced by our customers. Our Alliance Partner Program enhances our direct sales organization through Referral Partners and also develops indirect distribution channels for our products through Channel Solution Partners.

     • Referral Partners

      This program encourages consulting firms, systems integrators and other companies operating in the vertical markets we serve to cooperatively market their products and/or services along with the Quovadx solutions that end-users require. The Referral Partner Program provides competitive advantage to both organizations by allowing them to jointly present a more comprehensive offering to increase opportunities for product and service pull-through sales.

     • Channel Solution Partners

      This partner program is for Independent Software Vendors (“ISV”) and ASPs who host or deliver applications to end-users and desire to build their solutions on Quovadx’s platform or to enhance their solutions’ value and speed to market through integration technologies.

Research and Development

      At December 31, 2002, our research and development group included approximately 76 employees located in the United States and United Kingdom. We have made substantial investments in advanced new technology development and acquisitions. For the years ended December 31, 2002, 2001 and 2000, we incurred $7,209,000, $4,792,000 and $2,952,000, respectively, in research and development expenses. The Quovadx product suite consists of internally developed products and products acquired through the Company’s business acquisitions. We intend to continue to consider the licensing and acquisition of complementary software technologies and businesses where appropriate, integrate acquired technologies and products, and enhance the proprietary technology to increase our software product sales, process management services, and consulting services. Software products are directly derived from the Quovadx developed standard-based, but proprietary technology. We believe that continuing the development of the state-of-the-art technology is necessary to remain competitive in the marketplace.

Intellectual Property

      Our success and ability to compete depend in part on our proprietary technology. We seek to protect our software, documentation and other written materials primarily through a combination of trade secrets, trademark and copyright laws, confidentiality procedures and contractual provisions. In addition, we seek to avoid disclosure of our trade secrets, by, among other things, requiring those persons with access to our

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      Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. While we are unable to determine the extent to which piracy of our products exists, software piracy can be expected to be a persistent problem, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Furthermore, third parties might independently develop competing technologies that are substantially equivalent or superior to our technologies. Any of these developments could seriously harm our business.

Government Regulation

      The healthcare industry, where we currently do most of our business, is highly regulated and is subject to changing political, regulatory and other influences. These factors affect the purchasing practices and operation of healthcare organizations. Federal and state legislatures and agencies periodically consider programs to reform or revise the United States healthcare system. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We are unable to predict future proposals with any certainty or to predict the effect they would have on our business.

      Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, Congress mandated a package of interlocking administrative simplification rules to establish standards and requirements for electronic transmission of certain health information. Five of these rules were published in proposed form in 1998, with four of the five now published in final form. As discussed below, these rules apply to certain of our operations as well as the operations of many of our customers. We designed the QDX™ Platform V and our applications, services and product offerings to enable compliance with the proposed regulations. However, compliance with the final rules could be costly and could require changes in our systems. In addition, the success of our compliance efforts may be dependent on the success of healthcare participants in dealing with the standards.

      Confidentiality of patient records and the circumstances under which these records may be released are subject to substantial regulation under the HIPAA Standards for Privacy of Individually Identifiable Health Information, and other state laws and regulations. These laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance is principally the responsibility of the hospital, physician or other healthcare provider, such laws and regulations will apply to the portions of our business that process healthcare transactions and provide technical services to participants in the healthcare industry. Other state and federal laws and regulations govern the electronic transmission of healthcare information and common healthcare transactions such as health claims, health plan enrollment, payment and benefit eligibility. These laws are applicable to that portion of our business involving the processing of healthcare transactions among physicians, payers, patient and other healthcare industry participants. We are designing our products and services to enable compliance with HIPAA and applicable corresponding state laws and regulations. Compliance with these laws and regulations will be costly and could require complex changes in our systems and services. Additionally, the success of our compliance efforts may be dependent on the success of healthcare participants in dealing with the laws, regulations and standards.

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      The HIPAA Standards for Electronic Transactions Rule establishes format standards for eight of the most common healthcare transactions, using technical standards, promulgated by recognized standards publishing organizations. These transactions include health claim, enrollment, payment and eligibility. Under the new standards, any party transmitting or receiving any of these health transactions electronically will send and receive data in a single format, rather than the large number of different data formats currently used.

      The transaction standards apply to that portion of our business involving the processing of healthcare transactions among physicians, payers, patients and other healthcare industry participants. The transaction standards also are applicable to many of our customers and to our relationships with those customers. We have designed and certified our systems to meet the standards, but changes in the standards could require costly modifications to some of our systems, products and services.

      Other state and federal statutes and regulations governing transmission of healthcare information may affect our operations. These laws, though, are complex and changing, and the courts and other governmental authorities may take positions that are inconsistent with our practices.

      We currently process health claims between payers and providers and therefore may be subject to the federal False Claims Act and other state and federal laws that govern the submission of claims for medical expense reimbursement. These laws generally prohibit an individual or entity from knowingly presenting or causing to be presented any claim for payment from Medicare, Medicaid or other third party payers that is false or fraudulent, or is for an item or service that was not provided as claimed. These laws also provide civil and criminal penalties for noncompliance. We have designed our current transaction services and will design any future services to place responsibility for compliance with these laws on provider customers. However, we cannot guarantee that state and federal agencies will regard billing errors processed by us as inadvertent and not in violation of these laws. In addition, changes in current healthcare financing and reimbursement systems could cause us to make unplanned modifications of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants.

      Certain of the administrative services we provide to health plans, payers and providers, including our third-party administration and utilization review operations, are regulated by the statutes and regulations of various states and require that we obtain appropriate licensure or registration.

      Various states have passed laws regarding the prompt payment of medical claims by health plans. If a claim is brought against us and we are found to have violated a law regarding the prompt processing of claims for payment, we may incur civil or other penalties.

      There is increasing scrutiny by law enforcement authorities, the U.S. Department of Health and Human Services Office of Inspector General, the courts, and the U.S. Congress of agreements between healthcare providers and suppliers or other contractors which have a potential to increase utilization of government healthcare resources. In particular, scrutiny has been placed on the coding of claims for payment and contracted billing arrangements. Investigators have demonstrated a willingness to look beyond the formalities of business arrangements to determine the underlying purposes of payments between healthcare participants. Although, to our knowledge, we are not the subject of any investigation, we cannot tell whether we or our customers will be the targets of governmental investigations in the future or how any investigation would affect our business prospects.

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Employees

      As of December 31, 2002, we had a total of 455 employees, of whom 270 are engaged in professional services and customer support functions, 71 in sales and marketing, 38 in management, finance and administration and 76 in research and development. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

      Our future performance depends in part upon the continued employment of our key personnel, none of whom is bound by an employment agreement requiring service for any defined period of time. Our future success also depends on our continued ability to attract, integrate, retain and motivate highly qualified sales, technical and managerial personnel. Competition for such qualified personnel is intense. If our executive officers and key personnel do not remain with us in the future, we may experience difficulty in attracting and retaining qualified personnel.

      Our principal executive and corporate offices are located in Englewood, Colorado, where we lease approximately 17,490 square feet of office space. The lease on this facility expires in 2005. We also lease 138,512 square feet of office space, primarily for operations and research and development, in various locations in the United States and the United Kingdom under agreements that expire at dates ranging from 2003 through 2007. As of December 31, 2002, the Company occupied 84% of the office space it leased. We believe that our current facilities will be sufficient to meet our needs for at least the next twelve months.

      On November 14, 2001, a shareholder class action complaint was filed in the United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed an amended complaint. The amended complaint asserts that the prospectus from the Company’s February 10, 2000 initial public offering (“IPO”) failed to disclose certain alleged improper actions by various underwriters for the offering in the allocation of the IPO shares. The amended complaint alleges claims against certain underwriters, the Company and certain officers and directors under the Securities Act of 1933 and the Securities Exchange Act of 1934 (Bartula v. XCare.net, Inc., et al, Case No.01-CV-10075). Similar complaints have been filed concerning more than 300 other IPO’s; all of these cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92. In a negotiated agreement, individual defendants, including all of the individuals named in the complaint filed against the Company, were dismissed without prejudice, subject to a tolling agreement. Issuer and underwriter defendants in these cases filed motions to dismiss and on February 19, 2003, the Court issued an opinion and order on those motions that dismissed selected claims against certain defendants, including the Rule 10b-5 fraud claims against the Company, leaving only the Section 11 strict liability claims under the Securities Act of 1933 against the Company. The Company believes it has meritorious defenses. We do not believe that the outcome of this action will have a material adverse effect on our financial position, results of operations or liquidity; however, litigation is inherently uncertain and we can make no assurance as to the ultimate outcome or effect.

      The Company, and its wholly owned subsidiary Healthcare.com Corporation, are currently litigating a dispute with Hawaii Employees Retirement System (HERS) regarding a contract entered into in October 1999 between HERS and Thermo Information Solutions, subsequently assigned to Healthcare.com. On June 19, 2002, after exhausting its administrative remedies under Hawaii state law, Healthcare.com filed a complaint against HERS in the Circuit Court of the First Circuit, State of Hawaii. The complaint asserts that HERS is in breach of its obligations under the contract, and demands that HERS pay to the Company a sum to be determined at trial. On June 21, 2002, HERS filed a complaint in the same state court, asserting that Quovadx, Inc. and Healthcare.com have breached their performance obligations under the contract, and seeking damages in an amount to be determined at trial. The two lawsuits have been consolidated, discovery was initiated in July 2002, and no trial date has been set. In February 2003, the Company and HERS agreed to suspend the litigation pending the outcome of settlement discussions. If those discussions are not successful,

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      Munshee.com, LLC (“Munshee”) commenced an action in the Supreme Court of the State of New York, County of New York on or about September 27, 2002, against Quovadx, Inc., f/k/a XCare.net, Inc. and Lorine Sweeney. Munshee purported to allege claims of breach of contract and fraud against Quovadx, Inc. (“Quovadx”) and a claim of fraud against Ms. Sweeney, a director and the President and CEO of Quovadx, relating to a professional services agreement entered into as of September 9, 1999, as amended, between Munshee and XCare.net, Inc. Munshee sought to recover restitution or compensatory damages of $966,000, plus unspecified additional damages, including punitive damages, and interest, costs and expenses. Quovadx and Sweeney filed a motion seeking to dismiss the claims or stay the action and compel arbitration. On January 2, 2003, the Court dismissed the claims without prejudice. Should claims be reasserted in any forum, Quovadx and Ms. Sweeney intend to vigorously contest Munshee’s claims; however litigation is inherently uncertain and we can make no assurance as to the outcome or effect.

      The Company is engaged from time to time in routine litigation that arises in the ordinary course of our business.

      During the fourth quarter of 2002, no matters were submitted to a vote of our security holders.

PART II

      On September 24, 2001, the Company changed its corporate name from XCare.net, Inc. to Quovadx, Inc. On October 1, 2001, the ticker symbol under which the Company’s common stock is listed for trading on the NASDAQ National Market was changed from “XCAR” to “QVDX”.

      The following table sets forth, for the period indicated, the range of high and low closing sales prices per share of Common Stock, as reported on the NASDAQ National Market.

      On March 21, 2003, the last reported sale price of the common stock was $2.03 per share, and the number of registered holders of record of the common stock was approximately 575. Because many of the Company’s shares of common stock are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of stockholders represented by these record holders.

      We have not declared or paid any cash dividends on our common stock or other securities since January 1996 when we were an S corporation. We currently anticipate that we will retain all of our future earnings for

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      The consolidated statements of operations data below for the years ended December 31, 2002, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002 and 2001, are derived from and are qualified by reference to the Company’s consolidated financial statements which are included elsewhere in this Annual Report. The consolidated statements of operations data for the years ended December 31, 1999 and 1998 and the consolidated balance sheet data as of December 31, 2000, 1999 and 1998 are derived from the Company’s consolidated financial statements, which are not included in this Annual Report, but can be derived from other filings with the Securities and Exchange Commission.

      In reviewing the above data, you should consider the following:

	•	In 1999, we completed a sale of Series B convertible preferred stock with net proceeds totaling $13.7 million.
	•	Our registration statement on Form S-1 covering our initial public offering (the “Offering”) of 5,750,000 shares of common stock (including the underwriter’s over-allotment option of 750,000 shares of common stock) at $18.00 per share was declared effective on February 9, 2000. The net proceeds to us from the sale of shares of our common stock in the offering after deducting expenses of $2.1 million and underwriting discounts and commissions of $7.2 million, were $94.2 million.

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	•	In October 2000, the Company entered into a Software License and Services Agreement (the “Agreement”) with MedUnite, Inc. (“MedUnite”) to provide software development services related to a pilot program. In connection with the Agreement, the Company issued to MedUnite warrants to purchase 1,350,000 shares of Quovadx’s common stock at an exercise price of $4.06. The warrants were immediately vested, exercisable and non-forfeitable for a period of eighteen months from the date of grant. The fair value of the warrants was calculated to be $3.1 million and was determined using the Black-Scholes option pricing model utilizing a volatility factor of 120%, risk-free interest rate of 6.0% and an expected life of 18 months. The amounts billed and billable to MedUnite up to the date that the first pilot was delivered (March 2001) were reduced by the fair value attributed to the warrants. For the year ended December 31, 2000, the Company allocated $2.2 million of the warrant charge to billings and amounts billable. The remaining