Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

In these notes, Eclipsys Corporation and its subsidiaries are referred to as “the Company” or “Eclipsys.”

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In the Company’s opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by United States generally accepted accounting principles (“GAAP”).

Revenues, expenses, assets, and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be indicative of annual results. For a more complete discussion of the Company’s significant accounting policies and other information, this report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008 that was filed with the SEC on February 24, 2009.

In December 2007, the Financial Accounting Standards Board (“FASB”) revised the authoritative guidance for business combinations. The purchase method of accounting will continue to be required for all business combinations, but it significantly changes the accounting for other aspects of business combinations. Under the guidance, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It will change the accounting treatment for certain specific acquisition related items including: (1) expensing acquisition related costs as incurred; (2) valuing noncontrolling interests at fair value at the acquisition date; and (3) expensing restructuring costs associated with an acquired business. It also includes a substantial number of new disclosure requirements. This new guidance was adopted by the Company on January 1, 2009 and is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009.

In April 2008, the FASB revised the authoritative guidance related to the determination of the useful life of intangible assets by amending the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset and other United States generally accepted accounting principles. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance as of January 1, 2009 did not have an impact on the condensed consolidated financial statements.

In June 2008, the FASB issued revised authoritative guidance that addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of this guidance on January 1, 2009 did not materially affect earnings per share and was applied retrospectively to all periods presented (see Note C for details).

In April 2009, the FASB issued revised authoritative guidance that changes existing guidance for determining whether an impairment of debt securities is other than temporary. The new guidance requires other than temporary impairments to be separated into the amount representing the decrease in cash flows expected to be collected from a security (referred to as credit losses) which is recognized in earnings and the amount related to other factors which is recognized in other comprehensive income. This noncredit loss component of the impairment may only be classified in other comprehensive income if the holder of the security concludes that it does not intend to sell and, more likely than not, it will not be required to sell the security before it recovers its value. If these conditions are not met, the noncredit loss must also be recognized in earnings. When adopting the new guidance, an entity is required to record a cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other than temporary impairment from retained earnings to accumulated other comprehensive loss. The new guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this new guidance on April 1, 2009, and it did not have a material impact on the condensed consolidated financial statements.

In April 2009, the FASB issued new authoritative guidance related to estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The guidance also provides additional information related to circumstances that may indicate that a transaction is not orderly. This new guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted this guidance on April 1, 2009, and it did not have a material impact on the condensed consolidated financial statements.

In April 2009, the FASB amended the authoritative guidance related to the disclosures about fair value of financial instruments which requires publicly-traded companies to provide disclosures on the fair value of financial instruments in interim financial statements. Since this guidance only requires additional disclosures concerning the financial instruments, the adoption of it during the second quarter of 2009 did not have an impact on the condensed consolidated financial statements.

In May 2009, the FASB issued new authoritative guidance related to subsequent events, which establishes general standards of accounting for and disclosures of subsequent events that occur after the balance sheet date but prior to the issuance of financial statements. The guidance requires additional disclosure regarding the date through which subsequent events have been evaluated by the entity as well as, whether that date is the date the financial statements were issued. This guidance became effective for the Company’s financial statements as of June 30, 2009. The Company has evaluated subsequent events through November 4, 2009.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”), which is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. The Codification became effective for interim and annual reporting periods ending after September 15, 2009. All existing accounting standards are superseded. All other accounting literature not included in the Codification is nonauthoritative. Since the Codification did not change the substance of the accounting rules under GAAP, the Codification did not have a material impact on the condensed consolidated financial statements.

In October 2009, the FASB issued updated guidance that amends existing revenue recognition accounting pronouncements that have multiple element arrangements. This updated guidance provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This new approach is effective for fiscal years beginning after June 15, 2010 and may be applied retrospectively or prospectively for new or materially modified arrangements. In addition, early adoption is permitted. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial statements.

In October 2009, the FASB issued updated guidance related to certain arrangements that contain software elements, which amends revenue recognition to exclude tangible products that include software and non-software components that function together to deliver the product’s essential functionality. This updated guidance will be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Earlier application is permitted as of the beginning of a company’s fiscal year provided the company has not previously issued financial statements for any period within that year. An entity shall not elect early application of this update unless it also elects early application of the update related to multiple element arrangements. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial statements.

For all periods presented, basic and diluted earnings (loss) per common share (“EPS”) is presented using the two-class method, which requires that basic earnings (loss) per common share be calculated by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period.

Non-vested restricted stock granted prior to April 1, 2009 carries non-forfeitable dividend rights and is therefore a participating security. Non-vested restricted stock granted subsequent to March 31, 2009 carries forfeitable dividend rights and is, therefore, not considered a participating security. The two-class method of computing earnings per share is required for companies with participating shares. Under this method, net income is allocated to common stock and participating securities to the extent that each security may share in earnings, as if all of the earnings for the period had been distributed. The Company has accounted for non-vested restricted stock granted prior to April 1, 2009 as a participating security and has used the two class method of computing earnings per share as of January 1, 2009, with retroactive application to all prior periods presented. Because the Company does not pay dividends, earnings allocated to each participating security and share of common stock are equal. For the nine months ended September 30, 2009, the Company was in a net loss position and therefore did not allocate any loss to participating securities.

Diluted earnings per common share reflect the potential dilution from assumed conversion of all dilutive securities using the treasury stock method. When the effect of the outstanding equity securities is anti-dilutive, they are not included in the calculation of diluted earnings per common share. For the three months ended September 30, 2009 and 2008, 3,199,478 and 2,947,706 anti-dilutive shares were excluded from the calculation of diluted earnings per common share, respectively. For the nine months ended September 30, 2009 and 2008, 4,511,470 and 3, 510,089 anti-dilutive shares were excluded from the calculation of diluted earnings per common share, respectively.

The computation of basic and diluted income (loss) per common share is as follows (in thousands, except per share data):

Accounts receivable, net of an allowance for doubtful accounts, consists of the following (in thousands):

As of September 30, 2009, the Company held approximately $91.6 million par value of investments in auction-rate securities (“ARS”) of which $36.1 million was purchased through UBS Financial Services (“UBS”) and $55.5 million was purchased through Goldman Sachs. As of September 30, 2009, the Company’s ARS purchased through UBS are comprised of $32.3 million triple-A rated pools of student loans and $3.8 million “A3” rated pools of student loans, and the Company’s ARS purchased through Goldman Sachs are comprised of $40.1 million triple-A rated pools of student loans and $15.4 million “B3” rated pools of student loans. These investments have long-term nominal maturities for which the interest rates are supposed to be reset through a Dutch auction each month. Prior to February 2008, monthly auctions historically provided a liquid market for these securities. However, in February 2008, the broker-dealers managing the Company’s ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of purchase orders. The Company’s ARS continued to fail to settle at auctions through the third quarter of 2009. The Company continues to earn interest on these investments at the contractual rate.

On November 12, 2008, the Company entered into a settlement agreement with UBS pursuant to which the Company (1) received the right (the “put option”) to sell the ARS, originally purchased through UBS, at par value, to UBS between June 30, 2010 and July 2, 2012 and (2) gave UBS the right to purchase the ARS, originally purchased through UBS, from the Company any time after the acceptance date of the settlement agreement as long as the Company receives the par value of the securities.

The Company has accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option. The Company has classified the related UBS purchased auction rate securities as trading securities. Although the underlying credit quality of UBS will impact the future value of the put option and could cause the put option to decrease in fair value and not offset the change in fair value of the UBS purchased ARS, the Company expects that the future changes in the fair value of the put option will over time generally offset the fair value movements in the related UBS purchased ARS.

The put option becomes exercisable on June 30, 2010. Although the Company currently anticipates that it will exercise the put option on the date it becomes exercisable, the Company is not required to do so. In addition, there is no guarantee that the Company will be able to recover the entire investment because the individual securities are illiquid and the Company is still subject to the credit risk that UBS may not be able to perform under the terms of the put option. Accordingly, the Company has classified the UBS portfolio as a non-current asset on its balance sheet as a component of long-term investments.

The Company has recorded a cumulative temporary loss on the ARS purchased through Goldman Sachs of $5.8 million, as of September 30, 2009, in accumulated other comprehensive loss, reflecting the decline in the fair value of these securities, as these securities remain classified as available for sale.

In August 2009, the Company received an unsolicited offer for one of its Goldman Sachs portfolio holdings with a par value of $24.7 million. The Company evaluated the offer and found it to be fair relative to the carrying value of the security. The Company sold this holding for $23.6 million in September 2009, resulting in a realized loss of $1.1 million which was reflected in earnings and a $1.7 million recovery of unrealized loss which was reflected in accumulated other comprehensive loss. The proceeds of this sale were used to repay long-term debt.

As of September 30, 2009, the Company has recorded these investments, including the put option, at their estimated fair value of $86.0 million. All of the ARS were at an unrealized loss position as of September 30, 2009. See Note I for further information regarding the valuation of the ARS.

The following table shows the gross unrealized losses of fair value of the Company’s investments classified as available for sale with unrealized losses that are not deemed to be other–than-temporarily impaired (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009. The table excludes ARS purchased through UBS, as these investments are classified as trading securities.

In evaluating its ARS purchased from Goldman Sachs for other than temporary impairment, as of September 30, 2009, the Company considered a number of qualitative factors such as: the loans are sufficiently collateralized; all of the underlying student loans in the Goldman Sachs’ portfolio are guaranteed by the Federal Family Education Loan Program (“FFELP”); there have been principal repayments of some of the securities to investors; the Company continues to earn interest on the securities at market rates; and there was continued evidence of improvement in the secondary market for ARS during the third quarter of 2009. Management believes these investments continue to be of high credit quality, currently does not intend to sell the securities, more likely than not will not be required to sell the securities before recovering its cost, and expects to recover the securities’ entire amortized cost basis. Accordingly, the Company has classified these securities as long-term investments in its condensed consolidated balance sheet. The Company has concluded that no other-than-temporary impairment losses, including any credit loss, occurred for the three and nine month periods ended September 30, 2009. The Company will continue to analyze its ARS purchased from Goldman Sachs each reporting period for impairment and it may be required to record an impairment charge in the condensed consolidated statement of operations if the decline in fair value of the Goldman Sachs purchased ARS are determined to be other-than-temporary.

The changes in the carrying amount of goodwill for the nine month period ended September 30, 2009 were as follows (in thousands):

The gross and net amounts for acquired technology, ongoing customer relationships and goodwill consist of the following (in thousands):

During the first quarter of 2009, the Company executed a workforce reduction which included terminating the employment of approximately 175 employees, including staff in its services and client solutions organizations to better align with current and projected business volumes, and other workforce reductions across various businesses and back office divisions. These reductions, together with severance costs resulting from the departure of an executive officer of approximately $0.6 million, resulted in a total charge of $5.4 million for severance related costs to the Company’s condensed consolidated statement of operations. As of September 30, 2009, $4.8 million of these costs have been paid by the Company and the remaining accrued liability is $0.6 million. Payments for these obligations will continue through early 2010.

In January 2006, the Company effected a restructuring of its operations which included a reduction in headcount of approximately 100 employees and the reorganization of the Company. In December 2006, the Company realigned certain management resources and consolidated some facilities to eliminate excess office space. These activities resulted in total restructuring charges of $14.7 million, which were incurred in the year ended December 31, 2006. Severance charges were $12.2 million, of which $2.8 million was for non-cash stock-based compensation. The excess office space consolidation resulted in charges of $2.5 million related to the closing of three of the Company’s facilities. A summary of the restructuring activity related to the Company’s 2006 initiatives for the nine month period ended September 30, 2009 was as follows (in thousands):

No further costs are expected to be incurred related to this restructuring activity.

The Company measures its financial assets at fair value. The fair value framework requires the categorization of assets into three levels based upon the assumptions (inputs) used to determine the estimated fair value of the assets. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2009 (in thousands):

As of September 30, 2009, the Company has recorded the investments categorized as Level 1 at their estimated fair value of $108.8 million. These investments consist of money market funds which are valued daily by the fund companies. The valuation is based on the publicly reported net asset value of each fund.

As of September 30, 2009, the Company has recorded the investments categorized as Level 3 at their estimated fair value of $86.0 million. Due to events in the credit markets, quoted prices in active markets are not readily available for the ARS and put option at this time. The Company estimated the fair value of these ARS based on various factors using a trinomial discount model. The model considers possible cash flows and probabilities which are forecasted under a number of potential scenarios. Each scenario’s cash flow is multiplied by the probability of that scenario occurring. The major inputs are as follows: forecasted maximum interest rates, probability of passing auction or early redemption, probability of failing auction, probability of default at auction, severity of default, and the discount rate. The Company also considered the credit quality and duration of the securities. The Company accounted for

illiquidity by using a discount rate within the valuation, with an additional spread representing the additional rates of return investors would require for certain securities to hold those securities in an illiquid environment. The UBS put option was valued using a valuation approach for forward contracts in which one party agrees to sell a financial instrument to another party at a particular time for a particular price. In this approach, the present value of all expected future cash flows are subtracted from the current fair value of the security. The resulting value is calculated as a future value at an interest rate reflective of counterparty risk. There have not been any changes in the Company’s valuation model for ARS and the put option from December 31, 2008.

The assumptions that were used to determine the fair value estimates of the ARS and put option were highly subjective and therefore considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents $86.0 million or 44.1% of total assets measured at fair value. The estimate of the fair value of the ARS the Company holds could change significantly based on future market conditions.

The following table presents the Company’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs - Level 3 (in thousands):

The fair value of the Company’s bank debt approximates the carrying value of $60 million due to the nature of its long-term revolving line of credit financing arrangement with a variable interest rate and a maturity date of August 26, 2011.

Income tax provisions for interim periods are based on estimated annual income tax rates, adjusted to reflect the effects of any significant infrequent or unusual items which are required to be discretely recognized within the current interim period. The Company’s intention is to permanently reinvest its foreign earnings outside of the United States. As a result, the effective tax rates in the periods presented are largely based upon the forecasted pretax earnings mix and allocation of certain expenses in various taxing jurisdictions where the Company conducts its business that utilizes a broad range of statutory income tax rates.

The effective tax rate for the three months ended September 30, 2009 and 2008 were 4.5% and (981.6)%, respectively. The effective tax rate for the nine months ended September 30, 2009 and 2008 were 137.0 % and (389.6)%, respectively. The tax rates for these periods were based on the pretax earnings mix by jurisdiction of Eclipsys and its subsidiaries after considering any discrete items in the interim periods. The effective tax rates for the three and nine month periods ended September 30, 2009 have been impacted by changes in the Company’s estimated annual effective tax rate, due to a revision of projected annual pretax earnings, certain discrete items, the largest of which are a change in estimate of the Company’s expected research and development tax credits, provision to return true-ups related to the filing of certain tax returns, and the tax effect of share-based compensation shortfalls. The lower effective tax rate during the periods in 2008 was due primarily to the Company offsetting a portion of its taxable income during those periods with available net operating loss carryforwards that had a corresponding reduction in the associated valuation allowance.

On May 22, 2008, the Company’s former client McKenna sued the Company in Comal County, Texas District Court for $7.5 million plus treble damages, alleging breach of contract and intentionally or negligently misleading McKenna. The lawsuit stemmed from a contact between the Company and McKenna pursuant to which McKenna agreed to acquire software and services from the Company. McKenna terminated the agreement in April 2007, shortly before selling its hospital assets. During the third quarter of 2009, the Company and McKenna reached agreement to settle this claim for a payment by the Company in exchange for a release of all claims by McKenna. The settlement was finalized in the fourth quarter of 2009; half of the settlement payment was funded by the Company’s insurance carrier. The net impact of the settlement was not material to the Company’s financial statements.

The Company or one of its subsidiaries is a defendant, and/or may be contractually obligated to indemnify defendants, in two patent actions brought by Document Generation Corporation, one in the United States District Court for the Southern District of Illinois and one in the United States District Court for the Eastern District of Texas. These actions, which name multiple defendants each, are based upon U.S. patents that allegedly cover various aspects of the creation of patient medical records and related reports. Because each case is in a preliminary stage of litigation and the outcomes depend on questions of law or fact that are disputed or unclear, their impact on the Company’s results of operations cannot be predicted with confidence at this time. Each of the actions seeks damages for infringement, including treble damages. Plaintiffs also seek injunctive relief, attorneys’ fees and costs. The Company intends to contest these matters vigorously; however, because the outcomes of patent lawsuits are often uncertain and such lawsuits are typically expensive to litigate, such cases often settle. As such, the Company would consider settlement on reasonable terms, if appropriate agreements with the plaintiffs could be reached.

In addition to the foregoing, the Company and its subsidiaries are from time to time parties to other legal proceedings, lawsuits and other claims incident to their business activities. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of the Company’s business and claims by persons whose employment with us has been terminated. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, management is unable to ascertain the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these other matters as of September 30, 2009. However, based on management’s knowledge as of September 30, 2009, management believes that the final resolution of such other matters pending at the time of this report, individually and in the aggregate, will not have a material adverse effect upon the Company’s consolidated financial position, results of operations or cash flows.

During October 2009, the Company repaid an additional $10.0 million on the Credit Facility.

This report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about our company and our industry. These statements are not guarantees of future performance and actual outcomes may differ materially from what is expressed or forecasted. When used in this report, the words “may,” “will,” “should,” “predict,” “continue,” “plans,” “expects,” “anticipates,” “estimates,” “intends,” “believe,” “could,” and similar expressions are intended to identify forward-looking statements. These statements may include, but are not limited to, statements concerning our anticipated performance, including revenue, margin, cash flow, balance sheet and profit expectations; development and implementation of our software; duration, size, scope and revenue expectations associated with client contracts; business mix; sales and growth in our client base; market opportunities; industry conditions; and our accounting, including its effects and potential changes in accounting.

Actual results might differ materially from the results projected or implied by the forward-looking statements due to a number of risks and uncertainties, including those described in this report under the heading “Risk Factors” and in other filings we make from time to time with the SEC. Except as required by law, we assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Throughout this report we refer to Eclipsys Corporation and its consolidated subsidiaries as “Eclipsys,” “the Company,” “we,” “us,” and “our.”

This discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto, which are included elsewhere in this report.

Eclipsys is a provider of advanced integrated clinical, revenue cycle and performance management software and related professional services that help healthcare organizations and physicians improve clinical, financial, and operational outcomes. We develop and license proprietary software and content that is designed for use in connection with many of the key clinical, financial and operational functions that healthcare organizations require. Among other things, our software:

We also provide professional services related to our software. These services include software implementation and maintenance, outsourcing of information technology operations, remote hosting of our software and third-party healthcare information technology applications, technical and user training, and consulting.

With the exception of hardware revenues, we classify our revenues in one caption (systems and services) in our statement of operations because the amount of license revenue related to traditional software contracts is less than 10% of total revenues and the remaining revenue types included in this caption relate to bundled subscription arrangements and other services arrangements that have similar attribution patterns for revenue recognition. Our income statement items of revenue are as follows:

We market our software to healthcare providers of many different sizes and specialties, including community hospitals, large multi-entity healthcare systems, academic medical centers, outpatient clinics and physician practices. A number of the top-ranked U.S. hospitals named in U.S. News & World Report’s Honor Roll use one or more of our solutions.

We continue to focus on expanding sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. As of September 30, 2009, our India operations have expanded to include two offices and approximately 820 employees. We believe that India provides access to educated professionals to work on software research, development and support, as well as other functions, at an economically effective cost.

Our industry, healthcare information technology, is highly competitive and subject to numerous government regulations and industry standards. Sales of Eclipsys’ solutions can be affected significantly by many competitive factors, including the features and cost of our solutions as compared to the offerings of our competitors, our marketing effectiveness, and the success of our research and development of new and enhanced solutions. We anticipate that the healthcare information technology industry will continue to grow and be seen as a way to curb growing healthcare costs while also improving the quality of healthcare.

Recent disruptions in U.S. and international financial markets have adversely affected the availability of capital for some of our clients and potential clients, with commensurate effects on their decisions about healthcare information technology (“HIT”) spending. In addition, current economic conditions and recent financing programs from our competitors may increasingly motivate some clients and potential clients to prefer software subscription contracting to traditional licensing arrangements as a means to lower the amount of the upfront investment to purchase and implement HIT solutions. Given that periodic revenue from traditional license arrangements carries high margins and contributes significantly to overall profitability in the transaction period, this client contracting preference may negatively affect our profitability in the near term. In addition, the pricing environment for certain market segments is becoming increasingly difficult. Some competitors are becoming more aggressive on pricing as a way to gain or avoid losing market share. We believe this emerging market dynamic is the result of an increasing number of hospitals with older, less robust clinical systems beginning to evaluate replacement in light of the incentives being offered as a part of the American Reinvestment and Recovery Act of 2009 (“ARRA”), among other factors.

Economic factors have contributed to a difficult operating environment, and we have responded with various initiatives to reduce and control our expenses, including headcount reductions to better align with currently anticipated business conditions. However, the difficult economy, client financial challenges, and significant development requirements, combined with the positive effects of The HITECH Act (discussed below) have resulted in an unusual business environment that makes planning and forecasting challenging.

On February 17, 2009, ARRA was signed into law. This was an important event for Eclipsys and the HIT industry in general because a portion of ARRA known as The HITECH Act provides financial incentives for hospitals and doctors that are “meaningful EHR users,” which includes use of health information technology systems that are “certified” according to technical standards developed under the supervision of the Secretary of Health and Human Services. The HITECH Act also provides for financial penalties in the form of reduced Medicare reimbursement payments for hospitals and doctors that have not become “meaningful EHR users” by 2015. In addition, The HITECH Act (i) requires governmental agencies that implement, acquire or upgrade health information technology systems used for the exchange of individually identifiable health information between federal entities and agencies and with non-federal entities to utilize systems that are certified according to such standards, and (ii) requires governmental agencies to require in contracts with health care providers, health plans, and insurers that as the providers, health plans, and insurers implement, acquire or upgrade health information technology systems, they will use systems that are certified according to such standards. Although The HITECH Act says that private entities are not legally required to adopt or comply with the standards adopted by the Secretary of Health and Human Services, we believe that The HITECH Act’s requirements for Federal agencies and financial incentives for healthcare providers make compliance with these standards a de facto business requirement for us and our competitors.

The HITECH Act provides the potential for aggregate payments over a period of approximately four or five years beginning in 2011 of up to approximately $10 million to qualifying hospitals (based upon a formula that takes into account various factors including total discharges and Medicare and charity patient volumes) and $44,000 to qualifying physicians. These are significant sums for many of those qualified to receive them, particularly in what is otherwise a challenging economic environment, and have provided a strong incentive for many hospitals and doctors to consider implementing certified HIT systems. As a result, we have noticed increased interest in our offerings, and we are hopeful that as the regulations to be implemented pursuant to The HITECH Act evolve and the practical parameters of these programs come into focus, we will share in the expected increase in market activity.

In order to take advantage of this opportunity and preserve our competitiveness, we are committing to clients that we will timely meet the certification standards described above. This will require additional development investments, which could displace other important initiatives due to the short timeline before stimulus funds become available to meaningful EHR users. Failure timely to meet the certification standards will jeopardize our relationships with clients who are relying upon us to provide certified software and put us at a severe competitive disadvantage in the market to other vendors who have complied with the certification standards, which could have a significant adverse effect upon our business, financial condition and results of operations.

The Certification Commission for Healthcare Information Technology (CCHIT^SM ) is a private non-profit organization formed to accelerate the adoption of robust, interoperable healthcare information technology throughout the United States by creating an efficient, credible, sustainable mechanism for the certification of healthcare IT products. CCHIT develops criteria for healthcare IT products based upon standards for such products established by various standards development organizations, and then tests products for adherence to the criteria. Products that pass the test are CCHIT “certified.” Certification for a product lasts for two years and must then be renewed, and the standards applicable to products evolve and become more demanding over time. CCHIT has published certification criteria for only a limited number of products to date but stated it intends to continue to add products to its certification list.

CCHIT certification is an important factor to many clients and potential clients in our target market and we believe that failure to have certified products and to demonstrate compliance plans for products that are not certified could put us at a competitive disadvantage. In addition, CCHIT criteria may be used as, and/or overlap with, standards for certification of HIT systems under The HITECH Act. Accordingly, we are devoting significant resources to conforming our software to current and anticipated CCHIT criteria as well as certification criteria under The HITECH Act, and this may mean that other important development initiatives are delayed or foregone. Some of our software has been certified by CCHIT, but important elements of our software have not yet been submitted for certification, and conforming to evolving CCHIT requirements will continue as an imperative for the foreseeable future. Failure to comply with evolving certification criteria could have a significant adverse effect on our business.

To help clients address their needs to operate more efficiently in today’s challenging environment, and to differentiate our capabilities, we continue to emphasize development and marketing of our performance management suite of solutions, consisting of Sunrise EPSi^™, Sunrise Patient Flow^™ and Sunrise Clinical Analytics^™ . These solutions help healthcare organizations streamline and automate manual processes required to gather, analyze and display enterprise-wide information. They also enable hospital senior and department level management to more easily identify areas requiring intervention and to improve clinical quality, regulatory compliance, cost-efficiency, resource utilization and patient satisfaction. We think an integrated performance management offering can be a competitive differentiator for us, but it requires investment to develop these independent applications into an integrated solution.

Some of our software is complex and highly configurable and many clients value our ability to adapt the software to their specific needs. However, this high degree of configurability can result in significant implementation costs, which can make our offering too expensive for some potential purchasers. Our ability to reach our goals for expansion into smaller clients and in the international market, and to sell to clients with budgetary constraints, depends upon our ability to develop less costly ways of implementing our complex software. We are currently selling a new “speed to value” implementation methodology that we have developed to address this issue.

We continue efforts of expanding sales of our solutions outside of North America, such as the Asia-Pacific region and the Middle East. We achieved some initial success with our sale of Sunrise Clinical Manager to SingHealth, the largest healthcare provider in Singapore. Our performance at SingHealth is being closely monitored in the region, and could prove to be a catalyst to help us drive

business in new international markets. These international initiatives are important to our ability to grow our business and require that we oversee development and client support capabilities in a high quality and cost-effective manner. We may face challenges building brand-name recognition and adapting our software solutions to new international markets.

Our third quarter performance was in-line with our expectations, and is reflective of our initiatives to control costs and drive improvements in our operating margins. While our total revenues declined by decreases in our professional services revenues and hardware revenues, we delivered year-over-year growth in our recurring revenues. We began to see some positive bookings in the third quarter related to activity from ARRA, which has contributed to growth in our backlog. We expect bookings activity from ARRA to continue to build in the fourth quarter and beyond, as clients and prospects start accelerating purchasing decisions required to achieve ‘meaningful use’ requirements.

Total revenues of $125.5 million in the third quarter 2009 were 5.2% lower than the third quarter of 2008, despite increases in ratable and periodic revenues from software, maintenance, outsourcing and remote hosting. The primary cause of the decline was continued softness in our professional services business, resulting from fewer large enterprise activations impacted by lower enterprise sales in the second half of 2008 and the first half of 2009. Softness in enterprise sales reflects the effect of economic pressures on our clients’ spending, and some clients are delaying capital investments until ARRA requirements are further defined. The HITECH Act appears to be starting to drive increased demand for enterprise solutions, and our professional services business should improve in 2010 compared to recent activity if we are successful in signing significant new enterprise transactions during the next few quarters.

Although overall revenues were down this quarter, we recorded $7.1 million of periodic software license revenues in the quarter representing an 8% increase compared to the third quarter in 2008. This revenue stream can fluctuate dramatically from quarter to quarter depending on whether we are able to record the license revenue at contract signing, which is dependent on each individual client’s contract terms. Therefore, it is difficult to project license revenues in future quarters.

Our earnings were in line with our expectations due to our cost reduction efforts as well as labor cost capitalization associated with our ongoing development of Sunrise XA 5.5, which is now expected to be released following the first quarter of 2010. We plan to continue to focus on operational efficiency and cost controls during 2010, and have engaged a consulting firm to assist us in that endeavor. Our third quarter results reflect $0.8 million in costs associated with this consulting engagement. We expect additional expenses in the fourth quarter; however, we also expect savings which will contribute to offset these consulting costs, and we expect savings from this initiative to increase in 2010. We are continuing to evaluate the total saving from these initiatives, and we expect the annual run rate of savings to significantly exceed the outside consulting costs incurred by the second quarter of 2010.

Pre-tax income for the third quarter was $4.1 million compared to $8.1 million in the third quarter of 2008. Results by quarter can vary due to many factors including the effects on demand of factors like The HITECH Act and other emerging changes in the market and regulatory environment for our clients; increasing price competition in certain market segments, as certain competitors attempt to retain market share; timing of license revenues; and capitalized software labor deferrals, which also can fluctuate based on project activity.

Our EPSi acquisition, completed early in 2008, has contributed significantly to our results, but our acquisitions of MediNotes (which formed the foundation of our Peak Practice business) and Premise (resulting in our Sunrise Patient Flow offering) later in 2008 have not yet performed to our expectations. Demand for the Patient Flow offering seems to have suffered somewhat as clients have focused more closely on software that will help them qualify for payments under The HITECH Act and recent lower trends in hospital census data. Demand for our new Peak Practice physician practice solution has not grown as quickly as we had hoped, although we do see some signs of improvement. We continue to invest in improving both the Patient Flow and Peak Practice offerings, consistent with the plans we made when we completed those acquisitions.

Consistent with the first half of 2009, we continued to have strong cash collections during the third quarter which held our days sales outstanding at 76 days compared to 75 days in the second quarter of 2009. Operating cash flows were $70.2 million for the first nine months in 2009 compared to operating cash flows of $41.5 million in the first nine months of 2008 due to improved collections as a result of management’s continued focus on cash collections and due to incentive compensation payments made in 2008 under the 2007 incentive plan. We did not pay bonuses in 2009 under the 2008 incentive plan. We utilized these additional cash flows and $23.9 million of proceeds from ARS sales and redemptions to repay $45.0 million of long-term debt during the third quarter of 2009. We also paid an additional $10.0 million of debt in October resulting in a balance on our Credit Facility of $50.0 million as of October 30, 2009.

Key financial and operating data for Eclipsys Corporation and subsidiaries are as follows (in thousands, except per share amounts):

Total revenues decreased by $6.9 million, or 5.2%, for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008 and decreased $3.4 million, or 0.9%, for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The portion of total revenues contributed by our 2008 acquisitions increased $4.6 million and $14.8 million for the three and nine month periods ended September 30, 2009, respectively, as compared to the same periods in 2008.

Systems and services revenues decreased $4.1 million, or 3.2%, for the three months ended September 30, 2009 as compared with the same period of 2008 and increased $6.3 million, or 1.7% for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The overall decrease for the three month period ended September 30, 2009 resulted from a decrease of $8.6 million in professional services revenues and a decrease of $0.2 million in periodic revenues, partially offset by an increase of $4.7 million in revenues recognized on a ratable basis. The overall increase for the nine months ended September 30, 2009 resulted from an increase of $18.5 million in revenues recognized on a ratable basis partially offset by a decrease of $11.3 million in professional services revenues and a decrease of $0.9 million in periodic revenues.

In any period, some software revenues can be considered one-time in nature for that period, and we do not recognize these revenues on a ratable basis. These revenues include traditional license fees associated with new contracts signed in the period, including add-on licenses to existing clients and new client transactions, as well as revenues from contract backlog that had not previously been recognized pending contract performance that occurred or was completed during the period, and certain other activities during the period associated with client relationships. In the aggregate, these periodic revenues can contribute significantly to earnings in the period because relatively little in-period costs are associated with such revenues. We expect these periodic revenues to continue to fluctuate as a result of significant variations in the type and magnitude of sales and other contract and client activity in any period, and these variations make it difficult to predict the nature and amount of these periodic revenues. The portion of periodic revenues contributed by our 2008 acquisitions increased $1.1 million and $3.0 million for the three and nine month periods ended September 30, 2009, respectively, as compared to the same periods in 2008.

Hardware revenues decreased by $2.8 million, or 58.4%, for the three month period ended September 30, 2009, as compared to the three month period ended September 30, 2008 and $9.7 million, or 61.0%, for the nine month period ended September 30, 2009, compared to the nine month period ended September 30, 2008. The decrease in hardware revenue is primarily attributable to net new customers signing remote hosting contracts as opposed to buying hardware and due to fewer enterprise deals sold in the second half of 2008 resulting in decreased hardware requirements, sold and delivered subsequent to the signing of large enterprise deals. In addition, some existing customers are migrating to our remote hosting services which results in decreased hardware sales to existing clients.

Our costs of systems and services decreased $6.7 million, or 9.2%, for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008 and decreased $8.4 million, or 4.0%, for the nine month period ended September 30, 2009 as compared to the nine month period ended September 30, 2008. The decreases in both periods reflect:

Costs of hardware decreased $3.8 million or 69.4% for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008. Our costs of hardware decreased $8.1 million, or 60.6%, for the nine month period ended September 30, 2009 as compared to the same period in 2008. This decrease was directly attributable to decreased hardware revenues in the respective periods. Hardware revenue is recorded when the hardware is delivered. The amount of hardware revenue in any quarter is dependent on shipments based on our active implementations. Costs of hardware decreases also reflect a $1.7 million adjustment in the third quarter 2008 related to certain third-party embedded software costs, which were previously deferred.

Our sales and marketing expenses increased $1.4 million, or 7.1%, for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008, and $7.9 million, or 12.5%, for the nine month period ended September 30, 2009 compared to the same period in 2008.

The increase in sales and marketing expenses for the three month period ended September 30, 2009 as compared to the same period in 2008 included $1.7 million of higher labor related costs impacted by higher annual incentive compensation of $1.6 million due to year-to-date 2009 operating results in line with incentive plan targets versus performance below incentive plan targets for the 2008 period. The labor related increase was also impacted by a $1.9 million increase due to our 2008 acquisitions which was substantially offset by 2009 headcount reductions in our core business, which excludes 2008 acquisitions.

The $7.9 million increase in sales and marketing expenses in the nine month period ended September 30, 2009 were impacted by $9.5 million of labor related increases which included $4.2 million of severance and stock based compensation expense in the second quarter of 2009 associated with the resignation of our former Chief Executive Officer (“CEO”). Total expense related to the CEO resignation was $5.6 million, of which $4.2 million was recorded as sales and marketing expense and $1.4 million was recorded as general and administrative expense. Other increases in labor related amounts were higher annual incentive compensation of $1.8 million due to year-to-date 2009 operating results in line with incentive plan targets versus performance below incentive plan targets for the 2008 period, and $3.7 million increase due to our 2008 acquisitions partially offset by headcount reductions in 2009. These labor increases were partially offset by reductions in travel related expenses in our sales organization for the nine month period ended September 30, 2009 as compared to the same period in 2008.

Our research and development expenses decreased $1.0 million, or 7.0%, for the three month period ended September 30, 2009 as compared to the same period in 2008, and decreased $6.5 million, or 13.9%, for the nine month period ended September 30, 2009 compared to the same period in 2008. The decreases for the three and nine month periods ended September 30, 2009 compared to the comparable periods in the prior year primarily reflect higher internal labor cost capitalization associated with Sunrise XA 5.5 during 2009 and to a lesser extent capitalized labor in the first quarter of 2009 supporting Patient Flow release 5.0, an acquired product in our Premise acquisition. The increase in capitalized labor of $2.8 million in the three month period and $10.3 million in the nine month period decreased research and development expenses. These decreases were partially offset by increases in labor costs. Total labor related research and development expense increased $1.9 million in the three month period and $5.1 million in the nine month period.

These labor increases reflect incremental expense due to our 2008 acquisitions of $1.6 million and $4.8 million in the three and nine month periods, respectively. Research and development labor in our core business, which excludes our 2008 acquisitions, was generally flat in 2009 compared to 2008 as we increased overall headcount, but lowered average wage rates due to continued migration of work to India.

Our gross research and development spending, which consists of research and development expenses and capitalized software development costs, was $63.3 million in the nine months ended September 30, 2009, an increase of $3.8 million compared to $59.5 million in the nine months ended September 30, 2008.

In summary, research and development expense for the three months and nine months ended September 30 was as follows (in thousands):


	For The Three Months Ended						For The Nine Months Ended
	September 30, 2009		September 30, 2008		Change (%)		September 30, 2009		September 30, 2008		Change (%)
Research and development expenses	$	13,204	$	14,195	-7.0	%	$	40,568	$	47,102	-13.9	%
Capitalized software and development costs	$	8,076	$	5,281	52.9	%	$	22,728	$	12,417	83.0	%

Gross research and development expenditures	$	21,280	$	19,476	9.3	%	$	63,296	$	59,519	6.3	%

Amortization of capitalized software development costs	$	3,948	$	4,665	-15.4	%	$	11,546	$	13,824	-16.5	%

Labor capitalization for Sunrise XA 5.5 was higher than anticipated in 2009 primarily due to continued efforts to meet ARRA requirements. We currently expect this platform to go live late in the first quarter of 2010; therefore we expect the trend of additional capitalization to continue in the fourth quarter of 2009.

Our general and administrative expenses increased $2.6 million, or 31.3%, for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008 and $8.3 million, or 31.1%, for the nine month period ended September 30, 2009 compared to the same period in 2008.

The $2.6 million increase for the three months ended September 30, 2009 as compared to the same period in 2008 reflects higher labor costs of $2.3 million, higher legal fees of $0.8 million, higher professional fees of $1.1 million, partially offset by lower bad debt expense of $0.8 million and various other expense reductions in the business totaling $0.8 million. The increase in labor costs of $2.3 million included higher accrued annual incentive compensation of $1.9 million due to year-to-date 2009 operating results in line with incentive plan targets versus performance below incentive plan targets for the 2008 period. The legal expense increased because our legal expense in the third quarter 2008 was reduced by insurance recoveries. Higher professional fees reflect the impact of an efficiency consulting project we initiated in the latter part of the second quarter of 2009.

The increase of $8.3 million of general and administrative expenses in the nine month period ended September 30, 2009 compared to the corresponding period in 2008 was due to increased labor related expenses of $5.2 million, higher legal fees of $0.5 million, and higher professional fees of $1.2 million. The increase in labor costs included $1.4 million of severance and stock based compensation expense in the second quarter of 2009 associated with the resignation of our former CEO as previously discussed, $1.4 million of severance activity in 2009 and higher annual incentive compensation of $2.6 million due to year-to-date 2009 operating results in line with incentive plan targets versus performance below incentive plan targets for the 2008 period. Higher professional fees were impacted by the previously noted efficiency consulting project in 2009 while legal fees reflect increased litigation case activity in 2009. Remaining general and administrative expenses increases include other miscellaneous expenses and higher foreign currency expense in 2009.

During the first quarter 2009, we executed a workforce reduction which included terminating the employment of approximately 175 employees. We reduced staff in our services and client solutions organizations to better align with current and projected business volumes, and we also made other workforce reductions across various businesses and back office divisions. These reductions, together with severance costs resulting from the departure of an executive officer of approximately $0.6 million, resulted in a total charge of $5.4 million for severance related costs.

Approximately $0.9 million of the purchase price of our acquisition of EPSi was allocated to in-process research and development and was charged to our income statement in the first quarter of 2008. The $0.9 million acquired in-process research and development was valued using the Multi-Period Excess Earnings Method. The material assumptions underlying the purchase price allocation were as follows: projected revenue assumptions, decay rate, cost assumptions, operating expense assumptions, charge assumptions for the use of contributory assets, and discount rate assumptions. At the time of acquisition, the technology was still in the research and development phase and had not yet been completed to a point of an existing or current product offering. At the time of acquisition, the projected cost to complete the project was $0.2 million. The in-process technology was incorporated within an EPSi product module that was released in January 2009.

Depreciation and amortization expense increased $2.8 million, or 55.1%, for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008 and $8.5 million, or 54.2%, for the nine month period ended September 30, 2009 as compared to the nine month period ended September 30, 2008. The increase in depreciation and amortization is attributable primarily to amortization related to intangible assets acquired in our acquisition of EPSi in February 2008, MediNotes in October 2008, and Premise in December 2008 and to a lesser extent an increased asset base to support our growing operations.

We recorded a $0.8 million and a $2.0 million gain for the three and nine month periods ended September 30, 2009 resulting from the completion of earn out post-closing milestones associated with the fourth quarter 2007 sale of our Clinical Practice Model Resource Center (CPMRC) business. We also recorded a $0.7 million and $4.2 million gain on the sale of assets for the three and nine month periods ended September 30, 2008 for the same CPMRC earn out activity.

We recorded an unrealized gain of $0.1 million and $1.2 million reflecting an increase in the fair value of our ARS purchased through UBS for the three and nine month periods ended September 30, 2009. In addition, we recorded an unrealized gain of $0.1 million for the three month period ended September 30, 2009 and unrealized loss of $0.5 million reflecting changes in the fair value of our UBS put option for the nine month period ended September 30, 2009. Our ARS purchased through UBS, prior to receiving our UBS put option, were classified as available-for-sale securities through third quarter of 2008, and therefore changes in the fair value were recorded in accumulated other comprehensive loss on the balance sheet during that time. These gains were offset by a realized loss of $1.1 million on the sale of one of our Goldman Sachs portfolio holdings, which was previously reflected in accumulated other comprehensive loss and had no prior impact on the condensed consolidated statement of operations.

Interest income decreased $0.8 million, or 72.1%, for the three month period ended September 30, 2009 as compared to the three month period ended September 30, 2008 and $3.0 million, or 61.6%, for the nine month period ended September 30, 2009 compared to the same period in 2008. The decrease was primarily attributable to lower interest rates on cash and investments in 2009 as compared to 2008.

Interest expense increased $0.2 million and $1.6 million for the three and nine month periods ended September 30, 2009 as compared to the corresponding periods in 2008. The increase in interest expense for the nine month period ended September 30, 2009 compared to the corresponding period in 2008 reflects higher average outstanding debt balances due to the timing of our 2008 acquisitions. During these periods, we incurred interest on borrowings outstanding under the $125.0 million long-term revolving line of credit financing arrangement we entered into in August 2008 (the “Credit Facility”). The interest rate applicable to the borrowed amount is based, at our option, on the prime rate, one-month LIBOR rate, three-month LIBOR rate, six-month LIBOR rate or 12-month LIBOR rate at the initial debt draw date and interest rate contract end date plus an applicable margin. The applicable margin, which is based on our leverage ratio, was 2.0% as of September 30, 2009. The leverage ratio, as defined in the Credit Facility, is the ratio of (i) funded debt to (ii) earnings before interest, taxes, depreciation and amortization plus or minus certain other adjustments, for the four consecutive fiscal quarters as of the last day of each current fiscal quarter. The effective interest rates on the Credit Facility for the three and nine month periods ended September 30, 2009 was 2.5% and 3.2%, respectively.

During the three and nine month periods ended September 30, 2008, we incurred interest expense on borrowings under the $45.0 million short-term financing arrangement we entered into in February 2008 and repaid in May 2008, as well as the $50.0 million short-term financing arrangement that we entered into in May 2008 and repaid in August 2008.

For the three months and nine months ended September 30, 2009, we recorded income tax expense of $0.2 million and $4.0 million as compared to income tax benefit of ($79.3) million and ($76.5) million for the three and nine months ended September 30, 2008. The difference in the expense year over year is primarily due to the benefit recorded due to the release of our valuation allowance on our U.S. deferred tax assets in the third quarter of 2008.

Cash and cash equivalents at September 30, 2009 were $122.1 million representing a $13.8 million increase from December 31, 2008. During the nine month period ended September 30, 2009, operating activities provided $70.2 million of cash compared to $41.5 million for the same period in 2008. This change was primarily due to improved collections during 2009. Cash flow from operating activities reflects income generated from operations of $56.5 million, after adjusting for non-cash items of $57.6 million, which included depreciation and amortization, stock compensation, provision for bad debts, non-cash deferred tax provision, gain on sale of assets, loss on investments, net, and other reconciling items. Cash flow from operating activities after non-cash items, described above, decreased $4.7 million for the nine month period ended September 30, 2009 as compared to the same period in 2008 impacted by lower revenues.

Based on the reconciliation of net income (loss) to operating cash flow, net changes in operating assets and liabilities contributed $13.7 million to cash provided by operating activities. This primarily comprises the following changes in working capital from December 31, 2008:

Investing activities used $17.1 million of cash which included $3.0 million related to prior year acquisitions, $17.7 million of capital expenditures and $22.6 million for investment in software development, partially offset by $2.1 million received as additional earn out on the December 2007 disposition of our CPMRC business and proceeds of $24.1 million primarily from the sale of one of our ARS positions, redemption of other ARS holdings, and an investment that matured in the first quarter of 2009.

Financing activities used cash of $38.8 million as a result of our long-term debt pay down, net of stock option exercise proceeds and employee stock purchases and employee stock purchases. We received $5.6 million from stock option exercises and $0.7 million

from employees related to purchases under our employee stock purchase plan. We also repaid $45.0 million of long-term debt on our Credit Facility and we paid an additional $10 million of long term debt in October 2009 resulting in a balance on the Credit Facility of $50 million as of October 30, 2009.

Our future cash requirements will depend on a number of factors including, among other things, the timing and level of our new sales volumes, the cost of our development efforts, the success and market acceptance of our future product releases, and other related items. As of September 30, 2009, our principal source of liquidity is our cash and cash equivalents balances of $122.1 million. We also have $63.1 million available for borrowings under the $125.0 million Credit Facility. In October we used $10 million of the cash balance to pay additional principal on the Credit Facility. All loans under the Credit Facility may be prepaid at any time and are due and payable on August 26, 2011 subject to mandatory prepayment obligations upon material asset sales, as described in the Credit Facility. As we build up cash and cash equivalents, we will continue to evaluate further principal payments on the Credit Facility.

We believe that our current cash and cash equivalents combined with our anticipated cash flows from operations and available borrowings under our Credit Facility will be sufficient to fund our current operations and capital requirements for the next twelve months. We will also have the option beginning June 30, 2010 to redeem the par value of our UBS investments totaling $36.1 million.

As of September 30, 2009, we held approximately $91.6 million par value of investments in auction-rate securities (“ARS”) of which $36.1 million was purchased through UBS Financial Services (“UBS”) and $55.5 million was purchased through Goldman Sachs. As of September 30, 2009, our ARS purchased through UBS are comprised of $32.3 million triple-A rated pools of student loans and $3.8 million “A3” rated pools of student loans, and our ARS purchased through Goldman Sachs are comprised of $40.1 million triple-A rated pools of student loans and $15.4 million “B3” rated pools of student loans. These investments have long-term nominal maturities for which the interest rates are supposed to be reset through a Dutch auction each month. Prior to February 2008, monthly auctions historically provided a liquid market for these securities. However, in February 2008, the broker-dealers managing our ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of purchase orders. Our ARS continued to fail to settle at auctions through the third quarter of 2009. We continue to earn interest on these investments at the contractual rate.

On November 12, 2008, we entered into a settlement agreement with UBS pursuant to which we (1) received the right (the “put option”) to sell the ARS, originally purchased through UBS, at par value, to UBS between June 30, 2010 and July 2, 2012, and (2) gave UBS the right to purchase the ARS, originally purchased through UBS, from us any time after the acceptance date of the settlement agreement as long as we receive the par value of the securities.

As of September 30, 2009, we have recorded these investments, including the put option, at their estimated fair value of $86.0 million. All of our ARS were at an unrealized loss position as of September 30, 2009. Due to events in the credit markets, quoted prices of the ARS in active markets are not readily available at this time. We estimated the fair value of these ARS as of September 30, 2009 based on various factors using a trinomial discount model. The model considers possible cash flows and probabilities which are forecasted under a number of potential scenarios. Each scenario’s cash flow is multiplied by the probability of that scenario occurring. The major inputs are as follows: forecasted maximum interest rates, probability of passing auction or early redemption, probability of failing auction, probability of default at auction, severity of default, and the discount rate. We also considered the credit quality and duration of the securities. We accounted for illiquidity by using a discount rate within the valuation, with an additional spread representing the additional rates of return investors would require for certain securities to hold those securities in an illiquid environment. The put option was valued using a valuation approach for forward contracts in which one party agrees to sell a financial instrument to another party at a particular time for a particular price. In this approach, the present value of all expected future cash flows are subtracted from the current fair value of the security. The resulting value is calculated as a future value at an interest rate reflective of counterparty risk. There have not been any changes in our valuation model for ARS and the put option from December 31, 2008.

The assumptions that we used to determine the fair value estimates of the ARS and put option were highly subjective and, therefore, were considered Level 3 unobservable inputs in the fair value hierarchy. The fair value of these assets represents 44.1% of total assets measured at fair value. The estimate of the fair value of the ARS we hold could change significantly based on future market conditions. For additional information on our investments, see Note I – Fair Value Measurement.

We have accounted for the put option as a freestanding financial instrument and elected to record the value under the fair value option. This resulted in the recording of a $0.1 million increase and a $0.5 million decrease to the asset value with a corresponding

charge to earnings for the change in the value of the put option for the three and nine month periods ended September 30, 2009. We have classified the related UBS purchased ARS as trading securities. We recorded a $0.1 million and a $1.2 million unrealized gain to earnings for the change in fair value of the ARS purchased through UBS for the three and nine month periods ended September 30, 2009. We expect that the future changes in the fair value of the put option will generally offset the fair value movements in the related UBS purchased ARS. The underlying credit quality of UBS will impact the future value of the put option and could cause the put option to decrease in fair value and not offset the change in fair value of the UBS purchased ARS. We have recorded a cumulative temporary loss on the ARS purchased through Goldman Sachs of $5.8 million, as of September 30, 2009, in accumulated other comprehensive loss, reflecting the decline in the fair value of these securities, as these securities remain classified as available for sale.

In evaluating our ARS purchased from Goldman Sachs for other than temporary impairment, as of September 30, 2009, we considered several factors related to the recognition and presentation of other-than-temporary impairments including a number of qualitative factors such as: the loans are sufficiently collateralized; all of the underlying student loans in the Goldman Sachs’ portfolio are guaranteed by the Federal Family Education Loan Program (“FFELP”); there have been principal repayments of some of the securities to investors; we continue to earn interest on the securities at market rates; and there was continued evidence of improvement in the secondary market for ARS during the third quarter of 2009. We believe these investments continue to be of high credit quality, and we currently do not intend to sell the securities, “more likely than not” will not be required to sell the securities before recovering our cost, and expect to recover the securities’ entire amortized cost basis. Accordingly, we have classified these securities as long-term investments in our condensed consolidated balance sheet. We have concluded that no other-than-temporary impairment losses, including any credit loss, occurred for the three and nine month periods ended September 30, 2009. We will continue to analyze our ARS purchased from Goldman Sachs each reporting period for impairment and may be required to record an impairment charge in our condensed consolidated statement of operations if the decline in fair value of the Goldman Sachs purchased ARS is determined to be other-than-temporary.

There were no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on February 24, 2009.

We do not currently use derivative financial instruments or enter into foreign currency hedge transactions. Foreign currency fluctuations through September 30, 2009 have not had a material impact on our financial position or results of operations. We continually monitor our exposure to foreign currency fluctuations and may use derivative financial instruments and hedging transactions in the future if, in our judgment, the circumstances warrant their use. We believe most of our international operations are naturally hedged for foreign currency risk as our foreign subsidiaries invoice their customers and satisfy their obligations primarily in their local currencies with the exception of our development center in India. Our development center in India is not naturally hedged for foreign currency risk since their obligations are paid in their local currency but are funded in U.S. dollars. There can be no guarantee that the impact of foreign currency fluctuations in the future will not be significant.

We hold investments in auction-rate securities (“ARS”). These ARS are debt instruments with long-term nominal maturities that previously could be sold via Dutch auctions every 7, 14, 21, 28, or 35 days, creating a short-term instrument. In February 2008, broker-dealers holding our ARS portfolio experienced failed auctions in which the amount of ARS submitted for sale exceeded the amount of related purchase orders. Our ARS continued to fail to settle at auctions through the third quarter of 2009. We continue to earn interest on these investments at the contractual rate, and the ARS that we hold have not been placed on credit watch by credit rating agencies. The average interest rate, based on the par value of the ARS, earned on these investments for the three and nine months ended September 30, 2009 was 0.6% and 1.2%, respectively. As of September 30, 2009, we held approximately $91.6 million par value of investments in ARS of which $36.1 million was purchased through UBS and $55.5 million was purchased through Goldman Sachs. As of September 30, 2009, our ARS purchased through UBS are comprised of $32.3 million triple-A rated pools of student loans and $3.8 million “A3” rated pools of student loans, and our ARS purchased through Goldman Sachs are comprised of $40.1 million triple-A rated pools of student loans and $15.4 million “B3” rated pools of student loans.

During the year ended December 31, 2008 and the first nine months of 2009, we adjusted the carrying amount of our ARS to estimated fair market value. If uncertainties in the credit and capital markets continue and these markets deteriorate further or we experience any additional rating downgrades on any investments in our portfolio, we may incur further temporary impairments or other-than-temporary impairments, which could negatively affect our financial condition, cash flow and reported earnings.

As discussed further in Liquidity and Capital Resources above, in November 2008 we entered into a put option to sell our UBS purchased ARS to UBS between June 30, 2010 and July 2, 2012. Associated with this put, we classified $32.4 million of our ARS as trading as of December 31, 2008. This classification results in changes in fair value being recorded to earnings. Although the underlying credit quality of UBS will impact the future value of the put option and could cause the put option to decrease in fair value and not offset the change in fair value of the UBS purchased ARS, we expect that the future changes in the fair value of the put option will be generally offset by the fair value movements in the related ARS.

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 declined in market value due to changes in interest rates.

The following table illustrates potential fluctuation in annualized interest income based upon hypothetical values for blended interest rates for hypothetical ARS balances (we currently earn interest on $91.6 million par value of ARS):

We estimate that a one-percentage point decrease in interest rates for our long-term investment securities portfolio as of September 30, 2009 would have resulted in a decrease in interest income of $0.2 million for a three month period or $0.9 million for a 12 month period, based on a $90.0 million investment balance. This sensitivity analysis contains certain simplifying assumptions, including a constant level of investment securities and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the portfolio as a result of our business needs or as a response to changes in the market. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

Our cash and cash equivalents balance earning interest at September 30, 2009 was $108.8 million of the $122.1 million. The interest rate at September 30, 2009 was 0.1%. The following table illustrates potential fluctuations in annualized interest income based upon hypothetical values for blended interest rates for hypothetical cash and cash equivalents balances:

We estimate that a one tenth-percentage point decrease in interest rate for our cash and cash equivalents earning interest as of September 30, 2009 would have resulted in a decrease in interest income of $28 thousand for a three month period or $110 thousand for a 12 month period, based on a $110.0 million investment balance. This sensitivity analysis contains certain simplifying assumptions, including a constant level of cash and cash equivalents and an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the balance of cash and cash equivalents as a result of our business needs. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

On August 26, 2008, we entered into a credit agreement pursuant to which we received a senior secured revolving credit facility in the aggregate principal amount of $125.0 million. As of September 30, 2009, borrowings under the Credit Facility totaled $60.0 million. The interest rate applicable to the borrowed amount is based, at our option, on the prime rate, one-month LIBOR rate, three-month LIBOR rate, six-month LIBOR rate or 12-month LIBOR rate at the initial debt draw date and interest rate contract end date plus an applicable margin. The applicable margin, which is based on our leverage ratio, was 2.0% as of September 30, 2009. The leverage ratio, as defined in the credit agreement, is the ratio of (i) funded debt to (ii) earnings before interest, taxes, depreciation and amortization plus or minus certain other adjustments, for the four consecutive fiscal quarters as of the last day of each current fiscal quarter. For the three and nine month periods ended of September 30, 2009, our effective interest rate was 2.5% and 3.2%, respectively. Based on borrowings of $60.0 million, as of September 30, 2009, for each percentage point increase in the interest rate, annual interest expense would increase $0.6 million. This sensitivity analysis contains certain simplifying assumptions, including a constant level and rate of outstanding debt under the Credit Facility, an immediate across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period, and it does not consider the impact of changes in the outstanding debt as a result of our business needs or as a response to changes in the market. Therefore, although it gives an indication of our exposure to changes in interest rates, it is not intended to predict future results, and our actual results will likely vary.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of September 30, 2009. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There is no assurance that our disclosure controls and procedures will operate effectively under all circumstances. Based upon the evaluation described above our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter-ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The information set forth under Note K– Contingencies to the unaudited condensed consolidated financial statements of this quarterly report on Form 10-Q is incorporated herein by reference.

Many risks affect our business. These risks include, but are not limited to, those described below, each of which may be relevant to decisions regarding an investment in or ownership of our stock. We have attempted to organize the description of these risks into logical groupings to enhance readability, but many of the risks interrelate or could be grouped or ordered in other ways, so no special significance should be attributed to these groupings or order. The occurrence of any of these risks could have a significant adverse effect on our reputation, business, financial condition or results of operations.

The risk factors below reflect the following previously disclosed updates to the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2008 (our “10-K”): (i) the risk factors titled “We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do” and “The healthcare industry faces financial constraints that could adversely affect the decimal for our software and services” have been updated to note the risk associated with client demands for pricing and financing concessions; and (ii) the risk factor titled “Changes in federal and state regulations relating to patient data could increase our compliance costs, depress the demand for our software and impose significant software redesign costs on us” has been updated to reflect provisions of ARRA that subject us to certain provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as well as additional data restrictions and disclosure and reporting requirements.

In addition, as previously disclosed, we have added to the risk factors set forth in our 10-K a risk factor titled “The HITECH Act will result in new business imperatives and failure to provide our clients with health information technology systems that are “certified” under the HITECH Act could result in breach of some client obligations and put us at a competitive disadvantage,” related to costs and risk associated with the need to comply with the provisions of the American Recovery and Reinvestment Act of 2009, or ARRA, that call for health information technology systems that are “certified” according to technical standards developed under the supervision of the Secretary of Health and Human Services.

Our software may not operate properly, which could damage our reputation and impair our sales.

Software development is time consuming, expensive and complex. Unforeseen difficulties can arise. We may encounter technical obstacles and additional problems that prevent our software from operating properly. Client environments and practice patterns are widely divergent; consequently, there is significant variability in the configuration of our software from client to client, and we are not able to identify, test for, and resolve in advance all issues that may be encountered by clients. If our software contains errors or does not function consistent with software specifications or client expectations, clients could assert liability claims against us and/or attempt to cancel their contracts with us. These risks are generally more significant for newer software, until we have enough experience with the software to have addressed issues that are discovered in disparate client circumstances and environments, and for new installations, until potential issues associated with each new client’s particular environment and configurability are identified and addressed. Due to our ongoing development efforts, at any point in time, we generally have significant software that could be considered relatively new and therefore more vulnerable to these risks. It is also possible that future releases of our software, which would typically include additional features, may be delayed or may require additional work to address issues that may be discovered as the software is introduced into our client base. If we fail to deliver software with the features and functionality promised to our clients, we could be subject to significant contractual damages and face serious harm to our reputation, and our results of operations could be negatively impacted.

Our software development efforts may be inefficient or ineffective, which could adversely affect our results of operations.

We face intense competition in the marketplace and are confronted by rapidly changing technology, evolving user needs and the frequent introduction of new software and enhancements by our competitors to meet the needs of clients. As a result, our future success will depend in part upon our ability to enhance our existing software and services, and to timely develop and introduce competing new software and services with features and pricing that meet changing client and market requirements. We schedule and prioritize these development efforts according to a variety of factors, including our perceptions of market trends, client requirements, and resource availability. Our software is complex and requires a significant investment of time and resources to develop, test, and introduce into use. This can take longer than we expect. We may encounter unanticipated difficulties that require us to re-direct or scale-back our efforts and we may need to modify our plans in response to changes in client requirements, market demands, resource availability, regulatory requirements, or other factors. These factors place significant demands upon our software development organization, require complex planning and decision making, and can result in acceleration of some initiatives and delay of others. If we do not manage our development efforts efficiently and effectively, we may fail to produce, or timely produce, software that responds appropriately to our clients’ needs, or we may fail to meet client expectations regarding new or enhanced features and functionality.

As we evolve our offering in an attempt to anticipate and meet market demand, clients and potential clients may find our software and services less appealing. In addition, if software development for the healthcare information technology market becomes significantly more expensive due to changes in regulatory requirements or healthcare industry practices, or other factors, we may find ourselves at a disadvantage to larger competitors with more financial resources to devote to development. If we are unable to enhance our existing software or develop new software to meet changing healthcare information technology market requirements and standards in a timely manner, demand for our software could suffer.

Market changes could decrease the demand for our software, which could harm our business and decrease our revenues.

The healthcare information technology market is characterized by rapidly changing technologies, evolving industry standards and new software introductions and enhancements that may render existing software obsolete or less competitive. Our position in the market could erode rapidly due to the development of regulatory or industry standards that our software may not fully meet or due to changes in the features and functions of competing software, as well as the pricing models for such software. Our future success will depend in part upon our ability to enhance our existing software and services, and to timely develop and introduce competing new software and services with features and pricing that meet changing client and market requirements. If our products rapidly become obsolete, it makes it more difficult to recover the cost of product development, which could adversely affect our operating results.

Our software strategy is dependent on the continued development and support by Microsoft of its .NET Framework and other technologies.

Our software strategy is substantially dependent upon Microsoft’s .NET Framework and other Microsoft technologies. If Microsoft were to cease actively supporting .NET or other technologies that we use, 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 software. This could lead to lost or delayed sales, loss of functionality, client costs associated with platform changes, unanticipated development expenses and harm our reputation, and would cause our financial results and business to suffer.

Any failure by us to protect our intellectual property, or any misappropriation of it, could enable our competitors to market software with similar features, which could reduce demand for our software.

We are dependent upon our proprietary information and technology. Our means of protecting our proprietary rights may not be adequate to prevent misappropriation. In addition, the laws of some foreign countries may not enable us to protect our proprietary rights in those jurisdictions. 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 software, reverse engineer our software or otherwise obtain and use information that we regard as proprietary. In some limited instances, clients 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 software. Although our license agreements with clients 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 software. Furthermore, others could independently develop technologies similar or superior to our technology or design around our proprietary rights.

Failure of security features of our software could expose us to significant liabilities and harm our reputation.

Clients use our systems to store and transmit highly confidential patient health information. Because of the sensitivity of this information, security features of our software are very important. If, notwithstanding our efforts, our software security features do not function properly, or client systems using our software are compromised, we could face claims for contract breach, fines, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation.

Our sales process can be long and expensive and may not result in revenues, and the length of our sales and implementation cycles may adversely affect our operating results.

Some of our software, particularly our hospital enterprise software, requires significant capital expenditures by our clients and involves long sales and implementation cycles. The sales cycle for our hospital software ranges from 6 to 18 months or more from initial contact to contract execution. Our hospital implementation cycle has generally 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 resources preparing contract proposals, negotiating the contract and implementing the software. Our sales efforts may not result in a sale, in which case, we will not realize any revenues to offset these expenditures. If we do complete a sale, accounting principles may not allow us to recognize revenues in the same periods in which corresponding sales and implementation expenses were incurred. Additionally, any decision by our clients to delay purchasing or implementing our software or reduce the scope of products purchased would likely adversely affect our results of operations.

We may experience implementation delays that could harm our reputation and violate contractual commitments.

Some of our software, particularly our hospital enterprise software, is complex, requires a lengthy and expensive implementation process, and requires our clients to make a substantial commitment of their own time and resources and to make significant organizational and process changes. If our clients are unable to fulfill their implementation responsibilities in a timely fashion, our

projects may be delayed or become less profitable. Each client’s situation is different, and unanticipated difficulties and delays may arise as a result of failures by us or the client to meet our respective implementation responsibilities or other factors. Because of the complexity of the implementation process, delays are sometimes difficult to attribute solely to us or the client. Implementation delays could motivate clients to delay payments or attempt to cancel their contracts with us or seek other remedies from us. Any inability or perceived inability to implement our software consistent with a client’s schedule could harm our reputation and be a competitive disadvantage for us as we pursue new business. Our ability to improve sales depends upon many factors, including successful and timely completion of implementation and successful use of our software in live environments by clients who are willing to become reference sites for us.

Implementation costs may exceed our expectations, which can negatively affect our operating results.

Each client’s circumstances may include unforeseen issues that make it more difficult or costly than anticipated to implement our software. As a result, we may fail to project, price or manage our implementation services correctly. If we do not have sufficient qualified personnel to fulfill our implementation commitments in a timely fashion, related revenue may be delayed, and if we must supplement our capabilities with third-party consultants, which are generally more expensive, our costs will increase. Similarly, our operating results will be negatively affected if our personnel take longer than budgeted to implement our solutions.

Some of our software is complex and highly configurable and many clients value our ability to adapt the software to their specific needs. However, this high degree of configurability has resulted in significant implementation costs, which have made our offering too expensive for some clients. Our ability to reach our goals for expansion into smaller clients and in the international market, and to sell to clients with budgetary constraints, depends upon our ability to develop less costly ways of implementing our most complex software.

Our earnings can vary significantly depending on periodic software revenues.

In any financial reporting period, the periodic software revenues include traditional license fees associated with sales made in the financial reporting period, as well as revenues from contract backlog that had not previously been recognized pending contract performance that occurred or was completed during the period, and certain other activities during the period associated with existing client relationships. Although these periodic software revenues represent a relatively small portion of our overall revenue in any period, they generally have high margins, and are therefore an important element of our earnings in any period. These periodic revenues can fluctuate because economic conditions, market factors, client-specific situations, and other issues can result in significant variations in the type and magnitude of sales and other contract and client activity in any period. These variations make it difficult to predict the nature and amount of these periodic revenues. We believe economic conditions, and resulting cash conservation by clients, adversely affected our periodic software revenues in the second half of 2008, and if these conditions and client reactions continue in 2009, or if for other reasons periodic software revenues in any period decline from prior periods or fall short of our expectations, our earnings will be adversely affected.

Various risks could interrupt clients’ access to their data residing in our service center, exposing us to significant costs and other liabilities.

We provide remote hosting services that involve running our software and third-party vendors’ software for clients in our Technology Solutions Center. The ability to access the systems and the data that the Technology Solution Center hosts and supports on demand is critical to our clients. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power loss and telecommunications failures; (ii) fire, flood, hurricane and other natural disasters; (iii) software and hardware errors, failures or crashes; and (iv) computer viruses, hacking and similar disruptive problems. We attempt to mitigate these risks through various means including redundant infrastructure, disaster recovery plans, separate test systems and change control and system security measures, but our precautions may not protect against all problems. If clients’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims by clients or their patients, particularly if the access interruption is associated with problems in the timely delivery of medical care. We maintain disaster recovery and business continuity plans that rely upon third-party providers of related services, and if those vendors fail us at a time that our center is not operating correctly, we could fail to fulfill our contractual service commitments, which could result in a loss of revenue and liability under our client contracts. Furthermore, any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.

Any breach of confidentiality of client or patient data in our possession could expose us to significant expense and harm our reputation.

We must maintain facility and systems security measures to preserve the confidentiality of data belonging to our clients and their patients that resides on computer equipment in our Technology Solution Center or that is otherwise in our possession. Notwithstanding the efforts we undertake to protect data, our measures can be vulnerable to infiltration as well as unintentional lapse, and if confidential information is compromised, we could face claims for contract breach, penalties and other liabilities for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation.

Recruiting challenges and higher than anticipated costs in outsourcing our clients’ IT operations may adversely affect our profitability.

We provide outsourcing services that involve operating clients’ IT departments using our employees. At the initiation of these relationships, clients often require us to hire, at substantially the same compensation, the entire IT staff that had been performing the services we take on. In these circumstances, our costs may be higher than we target unless and until we are able to transition the workforce, methods and systems to a more scalable model. Various factors can make this transition difficult, including geographic dispersion of client facilities and variation in client needs, IT environments, and system configurations. Also, under some circumstances, we may incur significant costs as a successor employer by inheriting obligations of that client for which we may not be indemnified. Further, facilities management contracts require us to provide the IT services specified by contract, and in some places it can be difficult to recruit qualified IT personnel. Changes in circumstances or failure to assess the client’s environment and scope our services accurately can mean we must hire more staff than we anticipated in order to meet our responsibilities. If we have to increase salaries or relocate personnel, or hire more people than we anticipated, our operating results will be adversely affected.

Inability to obtain consents needed from third party software providers could impair our ability to provide remote IT or technology services.

We and our clients need consent from some third-party software providers as a condition to running the providers’ software in our service center, or to allow our employees who work in client locations under facilities management arrangements to have access to their software. Vendors’ refusal to give such consents, or insistence upon unreasonable conditions to such consents, could reduce our revenue opportunities and make our IT or technology services less viable for some clients.

We operate in an intensely competitive market that includes companies that have greater financial, technical and marketing resources than we do.

We face intense competition in the marketplace. We are confronted by rapidly changing technology, evolving user needs and the frequent introduction by our competitors of new and enhanced software. Our principal competitors in our software business include Cerner Corporation, Epic Systems Corporation, Medical Information Technology, Inc., GE Healthcare, McKesson Corporation, and Siemens AG. Other software competitors include providers of practice management, general decision support and database systems, as well as segment-specific applications and healthcare technology consultants. Our services business competes with large consulting firms, as well as independent providers of technology implementation and other services. Our outsourcing business competes with large national providers of technology solutions such as IBM Corporation, Computer Sciences Corp., and Perot Systems Corporation, as well as smaller firms. Several of our existing and potential competitors are better established, benefit from greater name recognition and have significantly more financial, technical and marketing resources than we do. In addition, some competitors, particularly those with a more diversified revenue base or that are privately held, may have greater flexibility than we do to compete aggressively on the basis of price and to provide favorable financing terms to clients. Vigorous and evolving competition could lead to a loss of our market share or pressure on our prices and could make it more difficult to grow our business profitably.

The principal factors that affect competition within our market include software functionality, performance, flexibility and features, use of open industry standards, speed and quality of implementation and client service and support, company reputation, price and total cost of ownership. We anticipate continued consolidation in both the information technology and healthcare industries and large integrated technology companies may become more active in our markets, both through acquisition and internal investment. There is a finite number of hospitals and other healthcare providers in our target market. As costs fall, technology improves, and market factors continue to compel investment by healthcare organizations in software and services like ours, market saturation may change the competitive landscape in favor of larger competitors with greater scale.

Clients that use our legacy software are vulnerable to sales efforts of our competitors.

A significant part of our revenue comes from relatively high-margin legacy software that was installed by our clients many years ago. We attempt to convert clients using legacy software to our newer generation software, but such conversions may require significant investments of time and resources by clients. As the marketplace becomes more saturated and technology advances, there will be competition to retain existing clients, particularly those using older generation products, and loss of this business would adversely affect our results of operations.

The healthcare industry faces financial constraints that could adversely affect the demand for our software and services.

The healthcare industry faces significant financial constraints. For example, managed healthcare puts pressure on healthcare organizations to reduce costs, and regulatory changes and payor requirements have reduced reimbursements to healthcare organizations. For example, the Inpatient Prospective Payment System rules, published by the Centers for Medicare & Medicaid in the U.S., identified several “hospital-acquired conditions” for which treatment will no longer be reimbursed by Medicare. Federal, state and local governments and private payors are imposing other requirements that may have the effect of reducing payments to healthcare organizations. Our software often involves a significant financial commitment by our clients. Our ability to grow our business is largely dependent on our clients’ information technology budgets, which in part depends on the client’s cash generation and access to other sources of liquidity. Recent financial market disruptions have adversely affected the availability of external financing, and led to tighter lending standards and interest rate concerns. These factors can reduce access to cash for our clients and potential clients. In addition, many of our clients’ budgets rely in part on investment earnings, which decrease when portfolio investment values decline. Economic factors are causing many clients to take a conservative approach to investments, including the purchase of systems like we sell, and to seek pricing and financing concessions from vendors like us. If healthcare information technology spending declines or increases more slowly than we anticipate, or if we are not able to offer competitive pricing or financing terms, demand for our software could be adversely affected and our revenue could fall short of our expectations. Challenging economic conditions also may impair the ability of our clients to pay for our software and services for which they have contacted. As a result, reserves for doubtful accounts and write-offs of accounts receivable may increase.

Healthcare industry consolidation could put pressure on our software prices, reduce our potential client base and reduce demand for our software.

Many healthcare organizations have consolidated to create larger healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the size of our target market and give the resulting enterprises greater bargaining power, each of which may lead to erosion of the prices for our software. In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems, and acquisitions of our clients could erode our revenue base.

Changes in standards applicable to our software could require us to incur substantial additional development costs.

Integration and interoperability of the software and systems provided by various vendors are important issues in the healthcare industry. Market forces, regulatory authorities and industry organizations are causing the emergence of standards for software features and performance that are applicable to our products. Healthcare delivery and ultimately the functionality demands of the electronic health record, or EHR, are now expanding to support community health, public health, public policy and population health initiatives. In addition, interoperability and health information exchange features that support emerging and enabling technologies are becoming increasingly important to our clients and require us to undertake large scale product enhancements and redesign.

For example, the Certification Commission for Healthcare Information Technology, or CCHIT, is developing comprehensive sets of criteria for the functionality, interoperability, and security of healthcare software in the U.S. Achieving CCHIT certification is evolving as a de facto competitive requirement, resulting in increased research and development expense to conform to these requirements. Similar dynamics are evolving in international markets. CCHIT requirements may diverge from our software’s characteristics and our development direction. We may choose not to apply for CCHIT certification of certain modules of our software or to delay applying for certification. The CCHIT application process requires conformity with 100% of all criteria applicable to each module in order to achieve certification and there is no assurance that we will receive or retain certification for any particular module notwithstanding application. Certification for a software module lasts for two years and must then be re-secured, and certification requirements evolve, so even certifications we receive may be lost. U.S. government initiatives, such as the HITECH Act described below, and related industry trends are resulting in comprehensive and evolving standards related to interoperability, privacy, and other features that are becoming mandatory for systems purchased by governmental healthcare providers and other providers receiving governmental payments, including Medicare and Medicaid reimbursement. Various state and foreign governments are also developing similar standards, which may be different and even more demanding.

Our software does not conform to all of these standards, and conforming to these standards is expected to consume a substantial and increasing portion of our development resources. If our software is not consistent with emerging standards, our market position and sales could be impaired and we will have to upgrade our software to remain competitive in the market. We expect compliance with

these kinds of standards to become increasingly important to clients and therefore to our ability to sell our software. If we make the wrong decisions about compliance with these standards, or are late in conforming our software to these standards, or if despite our efforts our software fails standards compliance testing, our offerings will be at a disadvantage in the market to the offerings of competitors who have complied, which could have a significant adverse effect upon our reputation, business, financial condition and results of operations.

The HITECH Act will result in new business imperatives and failure to provide our clients with health information technology systems that are “certified” under the HITECH Act could result in breach of some client obligations and put us at a competitive disadvantage.

The HITECH Act, which is a part of the American Recovery and Reinvestment Act of 2009, provides financial incentives for hospitals and doctors that are “meaningful EHR users,” which includes use of health information technology systems that are “certified” according to technical standards developed under the supervision of the Secretary of Health and Human Services. In addition, the HITECH Act imposes certain requirements upon governmental agencies to use, and require health care providers, health plans, and insurers contracting with such agencies to use, systems that are certified according to such standards. This has at least four important implications for us. First, we will have to further invest in development of our applicable clinical software so that it complies with these standards and can be used by clients to achieve compliance with meaningful use requirements. Second, because the HITECH Act authorizes provider incentive payments to be made available beginning in calendar year 2011 and some lead time is required to implement the technologies and for clients to satisfy any associated use requirements, the work to comply with the standards will need to be done quickly and consequently may displace other important initiatives. Third, new client prospects are requiring us to agree that our software will be certified according to applicable HITECH technical standards so that, assuming clients satisfy the meaningful use and other requirements of the HITECH Act, they will qualify for available incentive payments. We plan to meet these requirements as part of our normal software maintenance obligations, and failure to comply could result in costly contract breach and jeopardize our relationships with clients who are relying upon us to provide certified software. Fourth, if for some reason we are not able to comply with these standards in a timely fashion after their promulgation, our offerings will be at a severe competitive disadvantage in the market to the offerings of vendors who have complied, which could have a significant adverse effect upon our business, financial condition and results of operations.

Our business strategy includes expansion into markets outside North America, which will require increased expenditures and if our international operations are not successfully implemented, such expansion may cause our operating results and reputation to suffer.

We are working to further expand operations in markets outside North America. There is no assurance that these efforts will be successful. We have limited experience in marketing, selling, implementing and supporting our software abroad. Expansion of our international sales and operations will require a significant amount of attention from our management, establishment of service delivery and support capabilities to handle that business and commensurate financial resources, and will subject us to risks and challenges that we would not face if we conducted our business only in the United States. We may not generate sufficient revenues from international business to cover these expenses.

The risks and challenges associated with operations outside the United States may include: the need to modify our software to satisfy local requirements and standards, including associated expenses and time delays; laws and business practices favoring local competitors; compliance with multiple, conflicting and changing governmental laws and regulations, including healthcare, employment, tax, privacy, healthcare information technology, and data and intellectual property protection laws and regulations; laws regulating exports of technology products from the United States and foreign government restrictions on acquisitions of U.S.-origin products; fluctuations in foreign currency exchange rates; difficulties in setting up foreign operations, including recruiting staff and management; and longer accounts receivable payment cycles and other collection difficulties. One or more of these requirements and risks may preclude us from operating in some markets and may cause our operating results and reputation to suffer.

Foreign sales subject us to numerous stringent U.S. and foreign laws, including the Foreign Corrupt Practices Act, or FCPA, and comparable foreign laws and regulations which prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. As we expand our international operations, there is some risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, which could constitute a violation by Eclipsys of various laws including the FCPA, even though such parties are not always subject to our control. Safeguards we implement to discourage these practices may prove to be less than effective and violations of the FCPA and other laws may result in severe criminal or civil sanctions, or other liabilities or proceedings against us, including class action law suits and enforcement actions from the SEC, Department of Justice and overseas regulators, which could adversely affect our reputation, business, financial condition or results of operations.

Our past stock option practices and related accounting issues have caused costly derivative litigation and may result in additional litigation, regulatory proceedings and governmental enforcement actions.

As a result of the voluntary review of historical stock option practices we undertook from February to May 2007, we concluded that incorrect measurement dates were used for accounting for certain prior stock option grants. As a result, we recorded additional non-cash stock-based compensation expense, and related tax effects, with regard to certain past stock option grants, and we restated certain previously filed financial statements. In 2008 we settled related stockholder derivative litigation. We believe these restatements reflect appropriate judgments in determining the correct measurement dates for our stock option grants, and to date those judgments have not been challenged. We believe the settlement of the derivative suit effectively ends litigation of this matter. However, as with other aspects of our financial statements, the results of our stock option review are subject to regulatory review and additional claims and there is a risk that we may have to further restate prior period results or incur additional costs as a result of such a review or proceeding.

We have a history of operating losses and future profitability is not assured.

We experienced operating losses in the years ended December 31, 2003 through 2006. Although we reported operating income for the years ended December 31, 2007 and 2008, we may incur losses in the future, and it is not certain that we will sustain or increase our recent profitability.

Our operating results may fluctuate significantly and may cause our stock price to decline.

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 software 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 client, the effectiveness of the client’s management, general economic conditions and the regulatory environment. In addition, the timing of our revenue recognition could vary considerably depending upon whether our clients license our software under our subscription model or our traditional licensing arrangements, and current economic conditions are motivating some clients to prefer subscription contracting to traditional licenses, which can result in commensurate decreases in, or failure to achieve our expectations for, in-period license revenue and associated margin. 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. Investors should not rely on these comparisons as indicators of future performance.

In addition, prices for our common stock may be influenced by investor perception of us and our industry in general, research analyst recommendations, and our ability to meet or exceed quarterly performance expectations of investors or analysts.

Early termination of client contracts or contract penalties could adversely affect results of operations.

Client contracts can change or terminate early for a variety of reasons. Change of control, financial issues, declining general economic conditions or other changes in client circumstances may cause us or the client to seek to modify or terminate a contract. Further, either we or the client may generally terminate a contract for material uncured breach by the other. If we breach a contract or fail to perform in accordance with contractual service levels, we may be required to refund money previously paid to us by the client, or to pay penalties or other damages. Even if we have not breached, we may deal with various situations from time to time for the reasons described above which may result in the amendment or termination of a contract. These steps can result in significant current period charges and/or reductions in current or future revenue.

Because in many cases we recognize revenues for our software monthly over the term of a client contract, downturns or upturns in sales may not be fully reflected in our operating results until future periods.

We recognize a significant portion of our revenues from clients monthly over the terms of their agreements, which are typically 5-7 years and can be up to 10 years. As a result, much of the revenue that we report each quarter is attributable to agreements executed during prior quarters. Consequently, a decline in sales, client renewals, or market acceptance of our software in one quarter may negatively affect our revenues and profitability in future quarters. In addition, we may be unable to rapidly adjust our cost structure to compensate for reduced revenues. This monthly revenue recognition also makes it more difficult for us to rapidly increase our revenues through additional sales in any period, as a significant portion of revenues from new clients or new sales may be recognized over the applicable agreement term.

Loss of revenue from large clients could have significant negative impact on our results of operations and overall financial condition.

During the fiscal year ended December 31, 2008, approximately 40% of our revenues were attributable to our 20 largest clients. In addition, approximately 39% of our accounts receivable as of December 31, 2008 were attributable to 20 clients. One client represented 10.7% of our revenues. Loss of revenue from significant clients or failure to collect accounts receivable, whether as a result of client payment default, contract termination, or other factors could have a significant negative impact on our results of operation and overall financial condition.

A significant portion of our assets consists of intangible assets, including capitalized development costs, goodwill and other intangibles acquired in connection with acquisitions. Current accounting standards require us to evaluate goodwill on an annual basis and other intangibles if certain triggering events occur, and adjust the carrying value of these assets to net realizable value when such testing reveals impairment of the assets. Various factors, including regulatory or competitive changes, could affect the value of our intangible assets. If we are required to write-down the value of our intangible assets due to impairment, our reported expenses will increase, resulting in a corresponding decrease in our reported profit.

Failure to maintain effective internal controls could adversely affect our operating results and the market price of our common stock.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control over financial reporting that meets applicable standards. If we are unable, or are perceived as unable, to produce reliable financial reports due to internal control deficiencies, investors could lose confidence in our reported financial information and operating results, which could result in a negative market reaction.

Funds invested in auction rate securities may not be liquid or accessible for in excess of 12 months, and our auction rate securities may experience further fair value adjustments or other-than-temporary declines in value, which would adversely affect our financial condition, cash flow and reported earnings.

Our long-term investment portfolio is invested in auction rate securities, or ARS. Beginning in February 2008, negative conditions in the credit and capital markets resulted in failed auctions of our ARS. The ratings on some of the ARS in our portfolio have been downgraded, and there may be further deterioration in creditworthiness in the future. We reevaluate the fair value of these securities on a quarterly basis. See Note B – “Recently Issued Accounting Pronouncements” and Note E – “Long-Term Investments” in Notes to the Consolidated Financial Statements for further information. If uncertainties in the credit and capital markets continue, these markets deteriorate further or we experience further deterioration in creditworthiness on any investments in our portfolio, funds associated with these securities may not be liquid or available to fund current operations for in excess of 12 months. This could result in further fair value adjustments or other-than-temporary impairments in the carrying value of our investments, which could negatively affect our financial condition, cash flow and reported earnings.

Our commercial credit facility subjects us to operating restrictions and risks of default.

On August 26, 2008, we entered into a credit agreement with certain lenders and Wachovia Bank, as Administrative Agent, providing for a senior secured revolving credit facility in the aggregate principal amount of $125 million. This credit facility is subject to certain financial ratio and other covenants that could restrict our ability to conduct business as we might otherwise deem to be in our best interests, and breach of these covenants could cause the debt to become immediately due. In such an event, our liquid assets might not be sufficient to repay in full the debt outstanding under the credit facility. Such an acceleration also would expose us to the risk of liquidation of collateral assets at unfavorable prices.

The conditions of the U.S. and international financial markets may adversely affect our ability to draw on our credit facility.

The U.S. and international credit markets contracted significantly during the second half of 2008. If one or more of the financial institutions that have extended credit commitments to us under our credit facility are adversely affected by the conditions of the U.S. and international capital markets, they may become unwilling or unable to fund borrowings under their credit commitments to us. In such a case we might not be able to locate replacement lenders or other sources of financing, which could have a material and adverse impact on our ability to fund working capital, capital expenditures, acquisitions, research and development and other corporate needs.

Inability to obtain other financing could limit our ability to conduct necessary development activities and make strategic investments.

Although we believe at this time that our available cash and cash equivalents and the cash we anticipate generating from operations will be adequate to meet our foreseeable needs, we could incur significant expenses or shortfalls in anticipated cash generated as a result of unanticipated events in our business or competitive, regulatory, or other changes in our market. As a result, we may in the future need to obtain other financing. The availability of such financing is limited by the tightening of the global credit markets. In addition, the commitment under our credit facility expires on August 26, 2011. Our ability to renew such credit facility or to enter into a new credit facility to replace the existing facility could be impaired if current market conditions continue or worsen. In addition, if credit is available, lenders may seek more restrictive lending provisions and higher interest rates that may reduce our borrowing capacity and increase our costs, which could have a material adverse effect on our business.

If other financing is not available on acceptable terms, or at all, we may not be able to respond adequately to these changes or maintain our business, which could adversely affect our operating results and the market price of our common stock. Alternatively, we may be forced to obtain additional financing by selling equity, and this could be dilutive to our existing stockholders.

Our software and content are used by clinicians in the course of treating patients. If our software fails to provide accurate and timely information or is associated with faulty clinical decisions or treatment, clients, clinicians or their patients could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our software to decline.

We provide software and content that provides information and tools for use in clinical decision-making, provides access to patient medical histories and assists in creating patient treatment plans. If our software fails to provide accurate and timely information, or if our content or any other element of our software is associated with faulty clinical decisions or treatment, we could have liability to clients, clinicians or their patients. The assertion of such claims, whether or not valid, and ensuing litigation, regardless of its outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our software. We attempt to limit by contract our liability for damages and to require that our clients assume responsibility for medical care and approve all system rules and protocols. Despite these precautions, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable, may not be binding upon our client’s patients, or may not otherwise protect us from liability for damages. We maintain general liability and errors and omissions insurance coverage, but 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.

Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. It is challenging for us to envision and test our software for all potential problems because it is difficult to simulate the wide variety of computing environments, medical circumstances or treatment methodologies that our clients may deploy or rely upon. Despite extensive testing by us and clients, from time to time we have discovered defects or errors in our software, and additional defects or errors can be expected to appear in the future.

Defects and errors that are not timely detected and remedied could expose us to risk of liability to clients, clinicians and their patients and cause delays in software introductions and shipments, result in increased costs and diversion of development resources, require design modifications or decrease market acceptance or client satisfaction with our software.

Our software and software provided by third parties that we include in our offering could infringe third-party intellectual property rights, exposing us to costs that could be significant.

Infringement or invalidity claims or claims for indemnification resulting from infringement claims could be asserted or prosecuted against us based upon design or use of software we provide to clients, including software we develop as well as software provided to us by third parties. Regardless of the validity of any claims, defending against these claims could result in significant costs and diversion of our resources, and vendor indemnity might not be available. The assertion of infringement claims could result in injunctions preventing us from distributing our software, or require us to obtain a license to the disputed intellectual property rights, which might not be available on reasonable terms or at all. We might also be required to indemnify our clients at significant expense.

We depend on licenses from third parties for rights to some of the technology we use, and if we are unable to continue these relationships and maintain our rights to this technology, our business could suffer.

We depend upon licenses for some of the technology used in our software from a number of third-party vendors. 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 software sales 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 software.

Our software offering often includes modules provided by third parties, and if these third parties do not meet their commitments, our relationships with our clients could be impaired.

Some of the software modules we offer to clients are provided by third parties. We often rely upon these third parties to produce software that meets our clients’ needs and to implement and maintain that software. If these third parties are unable or unwilling to fulfill their responsibilities, our relationships with affected clients could be impaired, and we could be responsible to clients for the failures. We might not be able to recover from these third parties for any or all of the costs we incur as a result of their failures.

Any acquisitions we undertake may be disruptive to our business and could have an adverse effect on our future operations and the market price of our common stock.

An important element of our business strategy has been expansion through acquisitions and while there is no assurance that we will identify and complete any future acquisitions, any acquisitions would involve a number of risks, including the following:

Potential regulation by the U.S. Food and Drug Administration of our software and content as medical devices could impose increased costs, delay the introduction of new software and hurt our business.

The U.S. Food and Drug Administration, or FDA, may 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 software 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 software, or third party software that we resell, as medical devices, it could impose extensive requirements upon us, including requiring us to:

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

Changes in federal and state regulations relating to patient data could increase our compliance costs, depress the demand for our software and impose significant software redesign costs on us.

Clients use our systems to store and transmit highly confidential patient health information and data. State and federal laws and regulations and their foreign equivalents govern the collection, security, use, transmission and other disclosures of health information. These laws and regulations may change rapidly and may be unclear, or difficult or costly to apply.

Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and related laws and regulations, impose national health data standards on healthcare providers that conduct electronic health transactions, healthcare clearinghouses that convert health data between HIPAA-compliant and non-compliant formats, and health plans and entities providing certain services to these organizations. The American Recovery and Reinvestment Act of 2009, or ARRA, includes provisions specifying additional HIPAA requirements for such organizations, including more detailed penalty and enforcement provisions and provisions specifying additional data restrictions, and disclosure and reporting requirements. The HIPAA standards, as modified by ARRA, require, among other things, transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; 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; and require notification to individuals in the event of a security breach with respect to unsecured protected health information. Most of our clients are covered by these regulations and require that our software and services adhere to HIPAA standards. In addition, ARRA includes provisions that apply several of HIPAA’s security and privacy requirements to us in our role as a “business associate” to certain of the organizations mentioned above, and business associates will now also be subject to certain penalties and enforcement proceedings for violations of applicable HIPAA standards. Any failure or perception of failure of our software or services to meet HIPAA standards and related regulations could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our software and services and force us to expend significant capital, research and development and other resources to modify our software or services to address the privacy and security requirements of our clients.

States and foreign jurisdictions in which we or our clients operate have adopted, or may adopt, privacy standards that are similar to or more stringent than the federal HIPAA privacy standards. This may lead to different restrictions for handling individually identifiable health information. As a result, our clients may demand, and we may be required to provide information technology solutions and services that are adaptable to reflect different and changing regulatory requirements, which could increase our development costs. In the future, federal, state or foreign governmental or regulatory authorities or industry bodies may impose new data security standards or additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules may have on our business. However, the demand for our software and services may decrease if we are not able to develop and offer software and services that can address the regulatory challenges and compliance obligations facing us and our clients.

Our growing operations in India expose us to risks that could have an adverse effect on our results of operations.

We now have a significant workforce employed in India engaged in a broad range of development, support and corporate infrastructure activities that are integral to our business and critical to our profitability. This involves significant challenges that are increased by our lack of prior experience managing operations in India. Further, while there are certain cost advantages to operating in India, significant growth in the technology sector in India has increased competition to attract and retain skilled employees with commensurate increases in compensation costs. In the future, we may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for hiring experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, our operations in India require ongoing capital investments and expose us to foreign currency fluctuations, which may significantly reduce or negate any cost benefit anticipated from such expansion.

In addition, our reliance on a workforce in India exposes us to disruptions in the business, political and economic environment in that region. Maintenance of a stable political environment is important to our operations, and terrorist attacks and acts of violence or war may directly affect our physical facilities and workforce or contribute to general instability. Our operations in India may also be affected by trade restrictions, such as tariffs or other trade controls, as well as other factors that may adversely affect our business and operating results.

If we fail to attract, motivate and retain highly qualified technical, marketing, sales and management personnel, our ability to execute our business strategy could be impaired.

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 and we maintain at-will employment terms with our employees. 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.

Provisions of our charter documents and Delaware law may inhibit potential acquisition bids that stockholders may believe are desirable, and the market price of our common stock may be lower as a result.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock. Our 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 and we terminated, effective as of May 8, 2008, our stockholder rights agreement, which used preferred stock purchase rights designed to enable our board of directors to better respond to any takeover efforts. However, we could implement a new stockholder rights plan in the future, or make other uses of preferred stock to inhibit a potential acquisition of the company.

We are also subject to provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in any business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. These provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.

The following table sets forth information with respect to purchases by Eclipsys of its equity securities registered pursuant to Section 12 of the Exchange Act during the quarter ended September 30, 2009:

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


Class		Shares outstanding as of November 2, 2009
Common Stock, $0.01 par value		56,951,860


Part I.	Financial Information	1

Item 1.	Financial Statements - Unaudited	1

	Condensed Consolidated Balance Sheets (unaudited) - As of September 30, 2009 and December 31, 2008	1

	Condensed Consolidated Statements of Operations (unaudited) - For the Three and Nine Months Ended September 30, 2009 and September 30, 2008	2

	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Nine Months Ended September 30, 2009 and September 30, 2008	3

	Notes to Condensed Consolidated Financial Statements (unaudited)	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	27

Part II.	Other Information	27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	40

Signatures		41

Certifications


	September 30, 2009			December 31, 2008
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	122,106		$	108,304
Marketable securities		—			154
Accounts receivable, net of allowance for doubtful accounts of $3,244 and $4, 912, respectively		106,010			121,811
Prepaid expenses		25,490			23,975
Deferred tax assets		259			2,643
Other current assets		4,629			5,712

Total current assets		258,494			262,599

Long-term investments		85,964			107,215
Property and equipment:
Property and equipment		160,930			143,103
Accumulated depreciation and amortization		(103,011	)		(89,107	)

Property and equipment, net		57,919			53,996
Capitalized software development costs, net		48,923			37,718
Acquired technology, net		32,060			39,710
Intangible assets, net		8,122			10,258
Goodwill		98,394			96,973
Deferred tax assets		88,272			89,063
Other assets		14,059			11,343

Total assets	$	692,207		$	708,875

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	11,191		$	20,924
Deferred revenue		120,049			123,733
Accrued compensation costs		33,302			16,457
Deferred tax liabilities		3,318			—
Other current liabilities		18,846			22,481

Total current liabilities		186,706			183,595

Deferred revenue		6,012			5,743
Long-term debt and capital leases		60,842			105,000
Other long-term liabilities		15,783			16,540

Total liabilities		269,343			310,878

Stockholders’ Equity:

Common stock, $0.01 par value, 200,000,000 shares authorized; 56,706,804 and 56,126,674 issued and oustanding, respectively		567			561
Additional paid-in capital		591,345			569,717
Accumulated deficit		(165,799	)		(164,712	)
Accumulated other comprehensive loss		(3,249	)		(7,569	)

Total stockholders’ equity		422,864			397,997

Total liabilities and stockholders’ equity	$	692,207		$	708,875


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Systems and services	$	123,471		$	127,575		$	379,283		$	373,021
Hardware		2,015			4,849			6,217			15,925

Total revenues		125,486			132,424			385,500			388,946

Costs and expenses:
Cost of systems and services (excluding depreciation and amortization shown below)		66,455			73,166			201,644			210,042
Cost of hardware		1,672			5,457			5,278			13,408
Sales and marketing		20,876			19,498			71,020			63,150
Research and development		13,204			14,195			40,568			47,102
General and administrative		10,772			8,202			35,223			26,877
Restructuring		—			—			5,434			—
In-process research and development charge		—			—			—			850
Depreciation and amortization		7,980			5,145			24,132			15,651

Total costs and expenses		120,959			125,663			383,299			377,080

Income from operations		4,527			6,761			2,201			11,866
Gain on sale of assets		809			685			2,046			4,200
Loss on investments, net		(871	)		—			(338	)		—
Interest income		316			1,133			1,844			4,800
Interest expense		(716	)		(499	)		(2,821	)		(1,219	)

Income before income taxes		4,065			8,080			2,932			19,647
(Benefit from) provision for income taxes		185			(79,316	)		4,019			(76,549	)

Net income (loss)	$	3,880		$	87,396		$	(1,087	)	$	96,196


Basic EPS:
Net income (loss)	$	3,880		$	87,396		$	(1,087	)	$	96,196
Less: Income allocated to participating securities		34			971			—			1,133

Net income (loss) available to common stockholders	$	3,846		$	86,425		$	(1,087	)	$	95,063


Basic weighted average common shares outstanding		56,036			53,861			55,739			53,684
Basic earnings (loss) per common share	$	0.07		$	1.60		$	(0.02	)	$	1.77

Diluted EPS:
Net income (loss)	$	3,880		$	87,396		$	(1,087	)	$	96,196
Less: Income allocated to participating securities		34			956			—			1,115

Net income (loss) available to common stockholders	$	3,846		$	86,440		$	(1,087	)	$	95,081

Basic weighted average common shares outstanding		56,036			53,861			55,739			53,684
Dilutive effect of potential common shares		946			855			—			875

Diluted weighted average shares common outstanding		56,982			54,716			55,739			54,559

Diluted earnings (loss) per common share	$	0.07		$	1.58		$	(0.02	)	$	1.74


	Nine Months Ended September 30,
	2009			2008
Operating activities:
Net income (loss)	$	(1,087	)	$	96,196
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		37,014			29,818
Provision for bad debts		2,446			2,655
In-process research and development		—			850
Stock compensation expense		14,768			13,093
Gain on sale of assets		(2,046	)		(4,198	)
Deferred provision for income taxes		3,777			(78,184	)
Changes in operating assets and liabilities:
Accounts receivable		7,066			(21,611	)
Prepaid expenses and other current assets		1,420			755
Other assets		59			(289	)
Deferred revenue		(1,217	)		(3,378	)
Accrued compensation		16,964			(5,029	)
Accounts payable and other current liabilities		(12,375	)		5,936
Other long-term liabilities		1,739			3,971
Other		1,669			963

Total adjustments		71,284			(54,648	)

Net cash provided by operating activities		70,197			41,548

Investing activities:
Purchases of property and equipment		(17,556	)		(20,432	)
Purchases of investments		—			(102,000	)
Proceeds from sales of investments		24,061			153,641
Capitalized software development costs		(22,728	)		(12,417	)
Proceeds from sale of assets		—			698
Restricted cash		—			1,963
Earnout on disposition		2,079			3,578
Cash paid for acquisitions, net of cash acquired		(2,984	)		(54,593	)

Net cash used in investing activities		(17,128	)		(29,562	)

Financing activities:
Proceeds from stock options exercised		5,587			5,283
Proceeds from employee stock purchase plan		666			615
Cash paid for debt issuance costs		—			(1,430	)
Repayment of secured financings		(45,000	)		(95,000	)
Proceeds from secured financing		—			146,000
Other		(80	)		—

Net cash provided by (used in) financing activities		(38,827	)		55,468

Effect of exchange rates on cash and cash equivalents		(440	)		(588	)

Net increase in cash and cash equivalents		13,802			66,866
Cash and cash equivalents - beginning of period		108,304			22,510

Cash and cash equivalents - end of period	$	122,106		$	89,376


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009			2008
Basic EPS:
Net income (loss)	$	3,880	$	87,396	$	(1,087	)	$	96,196
Less: Income allocated to participating securities ¹		34		971		—			1,133

Net income (loss) available to common stockholders	$	3,846	$	86,425	$	(1,087	)	$	95,063

Basic weighted average common shares outstanding		56,036		53,861		55,739			53,684
Basic earnings (loss) per common share	$	0.07	$	1.60	$	(0.02	)	$	1.77

Diluted EPS:
Net income (loss)	$	3,880	$	87,396	$	(1,087	)	$	96,196
Less: Income allocated to participating securities ¹		34		956		—			1,115

Net income (loss) available to common stockholders	$	3,846	$	86,440	$	(1,087	)	$	95,081


Basic weighted average common shares outstanding		56,036		53,861		55,739			53,684
Dilutive effect of potential common shares ²		946		855		—			875

Diluted weighted average shares common outstanding		56,982		54,716		55,739			54,559

Diluted earnings (loss) per common share	$	0.07	$	1.58	$	(0.02	)	$	1.74


	September 30, 2009		December 31, 2008
Accounts Receivable:
Billed accounts receivable, net	$	73,731	$	90,144
Unbilled accounts receivable, net		32,279		31,667

Total accounts receivable, net	$	106,010	$	121,811


	September 30, 2009		December 31, 2008
Security Type:
Auction rate securities
UBS purchased ⁽¹⁾	$	33,420	$	32,413
Goldman Sachs purchased ⁽²⁾		49,698		71,499
Auction rate securities put option ⁽³⁾		2,846		3,303
Other marketable securities		—		154

Total	$	85,964	$	107,369


Beginning Balance December 31, 2008	$	96,973
Acquisition adjustments		1,421

Ending Balance September 30, 2009	$	98,394


	September 30, 2009							December 31, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value		Estimated Life
Intangibles subject to amortization

Acquired technology	$	45,027	$	(12,967	)	$	32,060	$	45,027	$	(5,317	)	$	39,710	3-4 years

Ongoing customer relationships		9,409		(2,679	)		6,730		9,409		(1,382	)		8,027	5-6 years
Non-compete agreements		2,640		(1,308	)		1,332		2,640		(470	)		2,170	2 years

Total	$	57,076	$	(16,954	)	$	40,122	$	57,076	$	(7,169	)	$	49,907

Intangibles not subject to amortization:
Trade names						$	60						$	60
Goodwill							98,394							96,973

Total						$	98,454						$	97,033


	Three Months Ended September 30,
	2009			2008
Net income	$	3,880		$	87,396
Foreign currency translation adjustments, net of tax		827			(613	)
Net change in unrealized holding loss, net of tax		1,199			1,922

Total comprehensive income	$	5,906		$	88,705


	Nine Months Ended September 30,
	2009			2008
Net income (loss)	$	(1,087	)	$	96,196
Foreign currency translation adjustments, net of tax		2,482			(1,232	)
Net change in unrealized holding loss, net of tax		1,838			(3,306	)

Total comprehensive income	$	3,233		$	91,658


	One-time Employee- Related Benefits			Facility Closures			Total
Balance at December 31, 2008	$	17		$	297		$	314
Payments		(17	)		(297	)		(314	)

Balance at September 30, 2009	$	—		$	—		$	—


			Quoted Prices in
			Active Markets For		Significant Other		Unobservable
	Balance as of		Identical Assets		Observable Inputs		Inputs
	September 30, 2009		(Level 1)		(Level 2)		(Level 3)
Cash equivalents:
Money market funds	$	108,778	$	108,778	$	—	$	—
Long-term investments
Auction rate securities ¹		83,118		—		—		83,118
Put option ²		2,846		—		—		2,846

	$	194,742	$	108,778	$	—	$	85,964


				Auction Rate
	Auction Rate			Securities Put
	Securities			Options			Total
Balance at December 31, 2008	$	103,912		$	3,303		$	107,215

Total gains/(losses):
Included in earnings (realized and unrealized)		119			(457	)		(338	)
Included in accumulated other comprehensive income		2,998			—			2,998

Purchases, sales, issuances, and settlements, net		(23,911	)		—			(23,911	)
Transfers out of Level 3		—			—			—

Balance at September 30, 2009	$	83,118		$	2,846			85,964


	For The Three Months Ended September 30,						Change ($)			Change (%)		For The Nine Months Ended September 30,						Change ($)			Change (%)
	2009			2008			Change ($)			Change (%)		2009			2008			Change ($)			Change (%)
Revenues:
Systems and services	$	123,471		$	127,575		$	(4,104	)	-3.2	%	$	379,283		$	373,021		$	6,262		1.7	%
Hardware		2,015			4,849			(2,834	)	-58.4	%		6,217			15,925			(9,708	)	-61.0	%

Total revenues		125,486			132,424			(6,938	)	-5.2	%		385,500			388,946			(3,446	)	-0.9	%

Costs and expenses:

Cost of systems and services (excluding depreciation and amortization shown below)		66,455			73,166			(6,711	)	-9.2	%		201,644			210,042			(8,398	)	-4.0	%
Cost of hardware		1,672			5,457			(3,785	)	-69.4	%		5,278			13,408			(8,130	)	-60.6	%
Sales and marketing		20,876			19,498			1,378		7.1	%		71,020			63,150			7,870		12.5	%
Research and development		13,204			14,195			(991	)	-7.0	%		40,568			47,102			(6,534	)	-13.9	%
General and administrative		10,772			8,202			2,570		31.3	%		35,223			26,877			8,346		31.1	%
Restructuring		—			—			—		*			5,434			—			5,434		*
In-process research and development charge		—			—			—		*			—			850			(850	)	-100.0	%
Depreciation and amortization		7,980			5,145			2,835		55.1	%		24,132			15,651			8,481		54.2	%

Total costs and expenses		120,959			125,663			(4,704	)	-3.7	%		383,299			377,080			6,219		1.6	%

Income from operations		4,527			6,761			(2,234	)	-33.0	%		2,201			11,866			(9,665	)	-81.5	%
Gain on sale of assets		809			685			124		18.1	%		2,046			4,200			(2,154	)	-51.3	%
Loss on investments, net		(871	)		—			(871	)	*			(338	)		—			(338	)	*
Interest income		316			1,133			(817	)	-72.1	%		1,844			4,800			(2,956	)	-61.6	%
Interest expense		(716	)		(499	)		(217	)	43.5	%		(2,821	)		(1,219	)		(1,602	)	131.4	%

Income before taxes		4,065			8,080			(4,015	)	-49.7	%		2,932			19,647			(16,715	)	-85.1	%
(Benefit from) provision for income taxes		185			(79,316	)		79,501		*			4,019			(76,549	)		80,568		*

Net income (loss)	$	3,880		$	87,396		$	(83,516	)	-95.6	%	$	(1,087	)	$	96,196		$	(97,283	)	-101.1	%


Hypothetical Interest Rate	ARS balances (in thousands)
	$	80,000	$	90,000

0.0%	$	—	$	—
0.5%	$	400	$	450
1.0%	$	800	$	900
1.5%	$	1,200	$	1,350
2.0%	$	1,600	$	1,800
2.5%	$	2,000	$	2,250


Hypothetical Interest Rate	Cash and cash equivalents earning interest (in thousands)
	$	100,000	$	110,000	$	120,000

0.1%	$	100	$	110	$	120
0.2%	$	200	$	220	$	240
0.3%	$	300	$	330	$	360
0.4%	$	400	$	440	$	480
0.5%	$	500	$	550	$	600


	(a)	(b)		(c)	(d)
Period	Total Number of Shares of Common Stock Purchased	Average Price Paid Per Share of Common Stock		Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares of Common Stock that May Yet Be Purchased Under the Plans or Programs
July 1-31, 2009	—		—	—	—
August 1-31, 2009	—		—	—	—
September 1-30, 2009 ⁽¹⁾	540	$	17.03	—	—

Total	540	$	17.03	—	—


Exhibit			Incorporated by Reference
Number	Exhibit Description	Form	Exhibit	Filing Date

3.1	Third Amended and Restated Certificate of Incorporation of the Registrant	10-Q	3.1	September 21, 1998

3.2	Amended and Restated Bylaws of the Registrant	8-K	3.1	May 19, 2009

4.1	Specimen certificate for shares of Common Stock	S-1	4.1	April 23, 1998

10.1*	Employment Agreement between the Registrant and Philip M. Pead entered into on July 8, 2009	8-K	10.1	July 9, 2009

10.2*	Employment Agreement between the Registrant and Chris E. Perkins entered into on July 8, 2009	8-K	10.2	July 9, 2009

10.3*	Inducement Grant Omnibus Incentive Plan	S-8	4.2	August 6, 2009

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)			Filed herewith

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)			Filed herewith

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350			Filed herewith

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350			Filed herewith