q2-10q2007.htm

10-Q 1 q2-10q2007.htm ECLIPSYS CORPORATION Q2 10Q 2007 q2-10q2007.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________

FORM 10-Q

________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

COMMISSION FILE NUMBER: 000-24539

ECLIPSYS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	65-0632092
(State of Incorporation)	(IRS Employer Identification Number)

1750 Clint Moore Road

Boca Raton, Florida

33487

(Address of principal executive offices)

561-322-4321

(Telephone number of registrant)

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 for the past 90 days. Yes [ ] No [ x ]

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

Large accelerated filer [ × ] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [×]

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

Class	Shares outstanding as of August 6, 2007
Common Stock, $.01 par value	53,435,994

ECLIPSYS CORPORATION AND SUBSIDIARIES
FORM 10-Q
For the period ended June 30, 2007
Table of Contents


Part I.	Financial Information

Item 1.	Financial Statements - Unaudited

	Condensed Consolidated Balance Sheets (unaudited) - As of June 30, 2007
		and December 31, 2006	3

	Condensed Consolidated Statements of Operations (unaudited) - For the Three
		and Six Months Ended June 30, 2007 and June 30, 2006	4

	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Six
		Months Ended June 30, 2007 and June 30, 2006 (restated)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results
		of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

Item 4.	Controls and Procedures		19

Part II.	Other Information		20

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 4.	Submission of Matters to a Vote of Security Holders		30

Item 6.	Exhibits		30

Signatures

Certifications

ECLIPSYS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)

	June 30,		December 31,
	2007		2006
Assets
Current assets:
Cash and cash equivalents	$	29,904	$	41,264
Marketable securities		104,645		89,549
Accounts receivable, net of allowance for doubtful accounts of $3,739 and $3,907, respectively		95,882		93,821
Inventory		129		1,076
Prepaid expenses		32,486		22,947
Other current assets		1,387		1,026
Total current assets		264,433		249,683

Property and equipment, net		46,248		45,806
Capitalized software development costs, net		33,114		32,302
Acquired technology, net		896		1,224
Intangible assets, net		2,751		3,307
Deferred tax asset		3,751		3,661
Goodwill		14,250		12,281
Other assets		15,605		15,014
Total assets	$	381,048	$	363,278

Liabilities and Stockholders’ Equity
Current liabilities:
Deferred revenue	$	97,697	$	103,298
Accounts payable		23,776		19,879
Accrued compensation costs		14,942		12,997
Deferred tax liability		3,827		3,699
Other current liabilities		16,579		20,213
Total current liabilities		156,821		160,086

Deferred revenue		9,458		11,289
Other long-term liabilities		1,418		1,247
Total liabilities		167,697		172,622

Stockholders’ equity:
Total stockholders’ equity		213,351		190,656
Total liabilities and stockholders’ equity	$	381,048	$	363,278

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

ECLIPSYS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2006		2007		2006
Revenues:
Systems and services	$	114,266	$	97,821	$	223,449	$	194,151
Hardware		4,753		4,576		8,600		9,137
Total revenues		119,019		102,397		232,049		203,288

Costs and expenses:
Cost of systems and services		67,414		58,120		131,701		114,594
Cost of hardware		3,737		3,851		6,764		7,502
Sales and marketing		18,034		14,531		36,172		30,741
Research and development		13,799		14,020		28,207		30,982
General and administrative		7,614		6,184		15,603		11,840
Depreciation and amortization		4,296		3,894		8,571		7,696
Restructuring charge		-		1,349		-		8,547
Total costs and expenses		114,894		101,949		227,018		211,902

Income (loss) from operations before interest and taxes		4,125		448		5,031		(8,614	)
Interest income, net		1,588		1,313		3,102		2,462
Income (loss) before taxes		5,713		1,761		8,133		(6,152	)
Provision for income taxes		19		-		38		-
Net income (loss)	$	5,694	$	1,761	$	8,095	$	(6,152	)

Net income (loss) per common share:
Basic net income (loss) per common share	$	0.11	$	0.03	$	0.15	$	(0.12	)
Diluted net income (loss) per common share	$	0.11	$	0.03	$	0.15	$	(0.12	)

Weighted average common shares outstanding
Basic		52,596		51,598		52,471		51,109
Diluted		53,737		52,993		53,629		51,109

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

ECLIPSYS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

	Six Months Ended June 30,
	2007			2006
				As restated
Operating activities:
Net income (loss)	$	8,095		$	(6,152	)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		19,263			18,401
Provision for bad debt		900			818
Stock compensation expense		5,547			6,669
Gain on sale of investments		(10	)		-
Deferred provision for income taxes		38			-
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(2,126	)		4,418
Increase in prepaid expenses and other current assets		(9,724	)		(3,242	)
Decrease in inventory		946			676
Decrease in other assets		26			1,449
Decrease in deferred revenue		(7,809	)		(13,055	)
Increase (decrease) in accrued compensation		2,394			(5,907	)
Decrease in accounts payable and other current liabilities		(859	)		(4,417	)
Increase (decrease) in other long-term liabilities		65			(1,095	)
Total adjustments		8,651			4,715
Net cash provided by (used in) operating activities		16,746			(1,437	)
Investing activities:
Purchases of property and equipment		(8,425	)		(9,167	)
Purchase of marketable securities		(33,999	)		(60,621	)
Proceeds from sales of marketable securities		18,898			5,700
Capitalized software development costs		(9,825	)		(4,626	)
Restricted cash		(1,969	)		-
Cash paid for acquisitions		(686	)		(800	)
Net cash used in investing activities		(36,006	)		(69,514	)
Financing activities:
Proceeds from stock options exercised		7,497			22,449
Proceeds from issuance of common stock in employee
stock purchase plan		-			223
Net cash provided by financing activities		7,497			22,672
Effect of exchange rates on cash and cash equivalents		403			174
Net decrease in cash and cash equivalents		(11,360	)		(48,105	)
Cash and cash equivalents — beginning of period		41,264			76,693
Cash and cash equivalents — end of period	$	29,904		$	28,588

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

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Eclipsys Corporation (“Eclipsys” or the “Company”), and the notes thereto have been prepared in accordance with the instructions for Form 10-Q of the Securities and Exchange Commission (“SEC”). The December 31, 2006 condensed consolidated balance sheet data was derived from audited financial statements. These condensed statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America but do reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented.

The results of operations for the three and six months ended June 30, 2007 are not necessarily indicative of annual results. The Company manages its business as one reportable segment.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 that was filed with the SEC on May 23, 2007.

The Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 include a reclassification related to medical benefit costs to conform to 2007 presentation. Specifically, for both periods, $0.6 million of cost was reclassified to general and administrative expenses resulting in corresponding reductions of $0.3 million in cost of systems and services, $0.2 million in research and development and $0.1 million in sales and marketing.

The Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2006 has been revised to reflect auction rate securities that are held "at market" or held "at rate" on a net basis. Previously, these securities were reported by the Company on a gross basis within "Net cash used in investing activities" section of the statement of cash flows. The impact of this revised presentation was to decrease both the purchases of marketable securities and proceeds from sales of marketable securities during the six months ended June 30, 2006 by an equal amount of $451.7 million. These changes had no impact on net cash used in investing activities.

2. RESTATEMENT OF CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2006 included in this Form 10-Q has been restated in connection with the Company’s restatement of its prior financial statements. For additional information, please refer to Note 3, “Review of Stock Option Practices and Restatements of Consolidated Financial Statements,” in Notes to the Consolidated Financial Statements and Exhibit 99.1 in our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on May 23, 2007.

3. EMPLOYEE BENEFIT PLANS

2005 Stock Incentive Plan

At our Annual Meeting of Stockholders held June 29, 2005, our stockholders approved the Company's 2005 Stock Incentive Plan ("2005 Plan"). Under the 2005 Plan, no further awards will be granted under our prior Stock Incentive Plans which include our 1996, 1998, 1999 and 2000 plans. Awards may be made under the 2005 Plan for a number of shares (subject to adjustment in the event of stock splits and other similar events) equal to the sum of (1) 2,000,000 shares of the Company’s common stock, (2) any shares reserved for issuance under the Amended and Restated 2000 Stock Incentive Plan that remain available for issuance as of the date the 2005 Plan was approved by our stockholders and (3) any shares subject to outstanding awards under our 1996 Stock Plan, the Amended and Restated 1998 Stock Incentive Plan, the Amended and Restated 1999 Stock Incentive Plan and the Amended and Restated 2000 Stock Incentive Plan that expire or are terminated, surrendered or canceled without having been fully exercised, are repurchased or forfeited in whole or part or result in any shares subject to such award not being issued.

In the second quarter of 2006, we implemented a deferred stock unit plan to provide for equity compensation for our non-employee directors in the form of deferred stock units ("DSUs") granted under the 2005 Plan. As of the date of each annual meeting of the Company's stockholders, each continuing non-employee director receives a number of DSUs determined by dividing $75,000 by the fair market value of a share of the Company's common stock on the grant date. These DSUs vest quarterly over the course of the ensuing year. After cessation of board service, the Company will settle the DSUs by issuing to the former director a number of shares of the Company's common stock equal to the number of accumulated vested DSUs. In addition, a non-employee director may elect to receive DSUs in lieu of all or a portion of his or her cash fees. All DSUs received for cash fees are fully vested upon issuance.

As of June 30, 2007, there were 1,621,997 shares available for future issuance under the 2005 Plan.

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

Stock Options

A summary of stock option transactions is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2007		5,631,584		$	15.40		6.32	$	32,480
Options granted		320,000		$	20.12
Options exercised		(564,209	)	$	13.28
Options canceled		(158,902	)	$	19.51

Outstanding at June 30, 2007		5,228,473		$	15.78		6.19	$	25,028
Vested and expected to vest at June 30, 2007		5,064,161		$	15.68		0.66	$	24,741
Exercisable at June 30, 2007		3,014,932		$	14.10		4.52	$	19,567

As of June 30, 2007, $31.7 million of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted average period of 3.6 years.

The weighted average fair value of outstanding stock options is estimated at the date of grant using a Black-Scholes option pricing model. We issued 320,000 stock options during the six months ended June 30, 2007. The following are significant weighted average assumptions used for estimating the fair value of the activity under our stock option plans:

	Six Months Ended June 30,
	2007			2006
Expected term (in years)		6.50			6.46
Risk free interest rate		4.96	%		5.08	%
Expected volatility		64.54	%		77.54	%
Dividend yield		0	%		0	%

We have elected to use the simplified method for estimating our expected term equal to the midpoint between the vesting period and the contractual term as allowed by Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment.

We currently estimate volatility by using the historical volatility of our common stock.

The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term input to the Black-Scholes model.

We estimate forfeitures using a historical forfeiture rate. Our estimate of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from our estimate.

Non-vested Stock Awards

Non-vested stock award activity for the six months ended June 30, 2007 is summarized as follows:

	Non-vested Number of Shares			Weighted Average Grant-Date Fair Value
Nonvested balance at January 1, 2007		366,128		$	17.29
Awarded		150,000			19.62
Vested		(79,433	)		17.23
Forfeited		(3,616	)		15.11
Nonvested balance at June 30, 2007		433,079		$	18.12

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

As of June 30, 2007, $7.2 million of total unrecognized compensation costs related to non-vested stock awards is expected to be recognized over a weighted average period of 3.6 years. All non-vested stock awards vest semiannually, in June and December of each year. The total fair value of shares vested during the six months ended June 30, 2007 was $1.6 million.

Deferred Stock Units

We granted 2,893 DSUs during the six months ended June 30, 2007 at an average market value of $20.07. As of June 30, 2007, 29,352 DSUs were outstanding at the weighted average grant-date fair value of $19.03. The value of these DSUs is amortized to compensation expense and director fees ratably over the vesting period. During the three and six months ended June 30, 2007, we recorded expense related to DSUs of $0.2 million and $0.3 million, respectively.

4. MARKETABLE SECURITIES

At June 30, 2007 and December 31, 2006, all of our marketable securities were classified as available-for-sale and were carried at fair market value with unrealized gains and losses, reported in accumulated other comprehensive loss. The unrealized gain (loss) associated with the marketable securities was not significant for the periods presented. We do not recognize changes in the fair value of investments in income unless a decline in value is considered other-than-temporary. Marketable securities consisted of the following (in thousands):

	June 30,		December 31,
Security Type	2007		2006

Auction Rate Securities:
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies	$	46,399	$	45,139
Debt securities issued by states of the United States and political subdivisions of the states		42,441		21,187
		88,840		66,326
Other Securities:
Government Bonds/Agencies		9,229		11,259
Other debt securities		6,576		11,964
Total	$	104,645	$	89,549

All of the marketable securities held as of June 30, 2007 and December 31, 2006 were classified as short-term as they had remaining maturities of less than one year from the balance sheet date or related to auction rate securities and were available to meet our current operating needs. Auction rate securities typically have an interest rate reset feature every 30 days pursuant to which we can sell or reset the interest rate on the security.

5. ACCOUNTS RECEIVABLE

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

	June 30,		December 31,
	2007		2006
Accounts Receivable:
Billed accounts receivable, net	$	79,823	$	77,570
Unbilled accounts receivable, net		16,059		16,251
Total accounts receivable, net	$	95,882	$	93,821

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

6. WARRANTY RESERVE

The agreements that we use to license software to our customers generally include limited warranties including a warranty that the product, in its unaltered form, will perform substantially in accordance with the related documentation. Warranty costs are charged to the cost of systems and services when they are probable and reasonably estimable.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Acquired technology and other intangible assets are amortized over their estimated useful lives on a straight-line basis. The carrying values of acquired technology and other intangible assets are reviewed if the facts and circumstances suggest that they may be impaired, and goodwill is reviewed annually in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Testing is performed on a more frequent basis if impairment triggering events arise. The impairment test is based upon a number of factors, including operating results, business plans and projected future cash flows. No impairment charge has been recorded in the six months ended June 30, 2007 or the year ended December 31, 2006.The change in the carrying amount of goodwill for the six months ended June 30, 2007, is as follows (in thousands):

Balance at January 1, 2007	$	12,281
Earnouts related to past acquisitions		1,969
Balance at June 30, 2007	$	14,250

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

	June 30, 2007							December 31, 2006
	Gross					Net		Gross					Net
	Carrying		Accumulated			Book		Carrying		Accumulated			Book		Estimated
	Amount		Amortization			Value		Amount		Amortization			Value		Life
Intangibles subject to amortization
Acquired Technology	$	1,967	$	(1,071	)	$	896	$	1,967	$	(743	)	$	1,224	3-5 years
Ongoing customer relationships		5,644		(2,893	)		2,751		5,644		(2,337	)		3,307	5-7 years

Total	$	7,611	$	(3,964	)	$	3,647	$	7,611	$	(3,080	)	$	4,531

Intangibles not subject to amortization:
Goodwill						$	14,250						$	12,281

Estimated aggregate amortization expense (in thousands):

	For the remainder of
	2007		2008		2009		2010		2011		Thereafter		Total

Total amortization expense	$	859	$	1,463	$	845	$	303	$	177	$	-	$	3,647

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

8. OTHER COMPREHENSIVE INCOME (LOSS)

The components of other comprehensive income (loss) were as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007			2006
Net income (loss)	$	5,694	$	1,761	$	8,095		$	(6,152	)
Net change in foreign currency translation adjustment		1,018		193		1,077			528
Net change in unrealized gain (loss) on investments		8		-		(15	)		-
Total comprehensive income (loss)	$	6,720	$	1,954	$	9,157		$	(5,624	)

9. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE

For all periods presented, basic and diluted income (loss) per common share is presented in accordance with SFAS 128, “Earnings per Share,” which provides for the accounting principles used in the calculation of income (loss) per share. Basic income (loss) per common share excludes dilution and is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per common share reflects the potential dilution from assumed conversion of all dilutive equity 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 income (loss) per common share.

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

	Three Months Ended June 30,
	2007						2006

	Net Income		Shares		Per Share Amount		Net Income			Shares		Per Share Amount
Basic EPS	$	5,694		52,596	$	0.11	$	1,761			51,598	$	0.03
Effect of dilutive securities:
Stock options and other dilutive securities		-		1,116				-			1,395
Shares issuable pursuant to earn-out agreement		-		25				-			-
Diluted EPS	$	5,694		53,737	$	0.11	$	1,761			52,993	$	0.03

	Six Months Ended June 30,
	2007						2006

	Net Income		Shares		Per Share Amount		Net Loss			Shares		Per Share Amount
Basic EPS	$	8,095		52,471	$	0.15	$	(6,152	)		51,109	$	(0.12	)
Effect of dilutive securities:
Stock options and other dilutive securities		-		1,133				-			-
Shares issuable pursuant to earn-out agreement		-		25				-			-
Diluted EPS	$	8,095		53,629	$	0.15	$	(6,152	)		51,109	$	(0.12	)

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

10. RESTRUCTURING

In January 2006, we effected a restructuring of our operations which included a reduction in headcount of approximately 100 individuals, and the reorganization of our Company. This was undertaken to better align our organization, reduce costs, and re-invest some of the cost savings into client-related activities including client support and professional services. We completed the restructuring during the second quarter of 2006. This resulted in restructuring charges of approximately $1.3 million and $8.5 million in the three and six months ended June 30, 2006, respectively, of which $0.3 million and $1.2 million related to non-cash stock-based compensation expense. In addition, in December 2006, we realigned certain management resources and closed three of our facilities to eliminate excess office space.

We did not incur any restructuring charges during the three and six months ended June 30, 2007. As of June 30, 2007, the remaining unpaid restructuring liability of $2.5 million relates to severance and future lease payments which we expect to pay out through 2009.

A summary of the restructuring charges, along with the activity for the six months ended June 30, 2007 are as follows (in thousands):

	Restructuring								Restructuring
	Liability at		2007 Activity						Liability at
	January 1,		Restructuring		Reductions				June 30,
	2007		Charge		Cash		Non-Cash		2007
Severance	$	3,174	$	-	$	2,418	$	-	$	756
Facility closures		2,486		-		788		-		1,698
	$	5,660	$	-	$	3,206	$	-	$	2,454

11. CONTINGENCIES

On July 10 and July 30, 2007, purported stockholder derivative complaints were filed in the United States District Court for the Southern District of Florida against certain current and former directors and officers of the Company and the Company as a nominal defendant. The derivative complaints, which followed the Company’s announcement in May 2007 of the results of the Company’s voluntary review of its historical stock option practices, are similar to derivative complaints regarding stock option dating filed against more than 150 other companies during the last two years. The complaints allege that during the period from at least 1999 until 2006 certain of the Company's option grants were backdated and that as a result of this alleged backdating the Company's financial statements were misstated and stock sales by the named defendants constituted improper insider selling. The complaints seek to assert claims under the Securities Exchange Act of 1934 and under state law, and request as relief that the individual defendants be ordered to pay damages and disgorgement in unspecified amounts to the Company, that unspecified equitable relief be ordered, that the Company be required to make certain corporate governance changes, that plaintiffs be awarded attorneys’ fees, and that other relief as defined by the court be ordered. The Company understands that the complaint has not yet been served, and to date no response has been filed to the complaint. The Company is currently unable to predict the outcome of the litigation or to reasonably estimate the range of potential loss, if any.

In addition to the foregoing, the Company and its subsidiaries are from time to time parties to 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 our 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 matters as of June 30, 2007. However, based on our knowledge, management believes that the final resolution of such matters pending at the time of this report, individually and in the aggregate, will not have a material adverse effect upon our consolidated financial position, results of operations or cash flows.

ECLIPSYS CORPORATION AND SUBSIDIARIES

Notes to condensed consolidated financial statements

(Unaudited)

12. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 allows us an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Eclipsys has not yet determined the impact of adopting SFAS 159 on its financial statements.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, the same effective date as SFAS 159. Eclipsys has not yet determined the impact of adopting SFAS 157 on its financial statements.

In June 2006, the FASB issued Financial Interpretation 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) which clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS 109, "Accounting for Income Taxes." This Interpretation prescribes a recognition threshold and measurement attribute of tax positions taken or expected to be taken on a tax return. We adopted this Interpretation effective January 1, 2007.

We did not have any material unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of implementing FIN 48.

The Company records income tax penalties, if any, in general and administrative expense. Interest on penalties, if any, is recorded as interest expense, which is included in interest income, net, on the income statement. The Company has not recorded any interest or penalties related to FIN 48, in the current quarter or on a cumulative basis.

We file income tax returns in the U.S. federal jurisdiction, numerous states, Canada and India. All federal, state and international jurisdictions are open to examination due to net operating loss carryforwards. The Company has not been audited by the Internal Revenue Service. We do not believe there will be any material change in our unrecognized tax benefits over the next twelve months.

In June 2006, EITF 06-3, “How Sales Taxes Collected from Clients and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross Versus Net Presentation)” (“EITF 06-3”) was issued. EITF 06-3 requires disclosure of the presentation of taxes on either a gross (included in revenues and costs) or a net (excluded from revenue) basis as an accounting policy decision. The Company adopted the provisions of this standard effective January 1, 2007 and records taxes on a net basis. The adoption of EITF 06-3 did not have a material impact on our consolidated financial statements.

13. LETTER OF CREDIT

In April 2007, we entered into a letter of credit agreement in the amount of $1.9 million to secure our obligation under a lease agreement for our new Atlanta location. The letter of credit is collateralized by the Company’s cash of $2.0 million. The letter of credit expires in October 2008, but is automatically extended for one year periods, not beyond December 2017. The cash collateral is restricted by the terms of the credit agreement and is included in “Other assets” on our Balance Sheet as of June 30, 2007.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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; benefits provided by Eclipsys software, outsourcing and consulting services; 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 due to a number of risks and uncertainties. Software development may take longer and cost more than expected, and incorporation of anticipated features and functionality may be delayed, due to various factors including programming and integration challenges and resource constraints. We may change our product strategy in response to client requirements, market factors, resource availability, and other factors. Implementation of some of our software is complex and time consuming. Clients' circumstances vary and may include unforeseen issues that make it more difficult or costly than anticipated to implement or derive benefit from software, outsourcing or consulting services. The success and timeliness of our services often depend at least in part upon client involvement, which can be difficult to control. We are required to meet standard performance specifications, and contracts can be terminated or their scope reduced under certain circumstances. Competition is vigorous, and competitors may develop more compelling offerings or offer more aggressive pricing. New business is not assured and existing clients may migrate to competing offerings. Financial performance targets might not be achieved due to various risks, including slower-than-expected business development or new account implementation, or higher-than-expected costs to develop products, meet service commitments or sign new contracts. Our cash consumption may exceed expected levels if profitability does not meet expectations or strategic opportunities require cash investments. These and other risks and uncertainties that could cause our actual results to differ materially from our forward-looking statements are described in this report under the headings “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results in Operations” and in our other filings made from time to time with the Securities and Exchange Commission. The cautionary statements made in this report should be read as being applicable to all related forward-looking statements wherever they appear. These statements are only predictions. We cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us or any persons acting on our behalf are expressly qualified in their entirety by the risk factors referenced above and other risks set forth in this report or other reports we have filed or may file with the Securities and Exchange Commission. 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. We nonetheless reserve the right to make such updates from time to time without the need for specific reference to this report. No such update shall be deemed to indicate that other statements not addressed by such updates remain correct or create an obligation to provide any other updates.

Executive Overview

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

Eclipsys is a healthcare information technology company and a leading provider of advanced integrated information software clinical content and professional services that help healthcare organizations improve clinical, financial and operational processes. We develop and license proprietary software and content that is designed for use in connection with many of the key clinical, administrative and financial functions that healthcare organizations require. Among other things, our software enables physicians, nurses and other clinicians to order tests, treatments and medications, and to record, access and share information about patients. The software also facilitates hospitals’ patient admissions, scheduling, records maintenance, invoicing, inventory control, cost accounting, and assessment of profitability of specific medical procedures and personnel. Our content, which is integrated with our software, provides practice guidelines for use by physicians, nurses and other clinicians.

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

We market our software to small, stand-alone hospitals, large multi-entity healthcare systems, academic medical centers, community hospitals and other healthcare organizations. We have one or more of our software applications installed in, or licensed to be installed at approximately 1,500 facilities. Most of the top-ranked U.S. hospitals named in U.S. News & World Report’s Honor Roll use one or more of our solutions.

THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006

(in thousands, except per share amounts)

	2007		% of Total Revenues			2006		% of Total Revenues			Change ($)			Change (%)
Revenues
Systems and services	$	114,266		96.0	%	$	97,821		95.5	%	$	16,445			16.8	%
Hardware		4,753		4.0	%		4,576		4.5	%		177			3.9	%
Total revenues		119,019		100.0	%		102,397		100.0	%		16,622			16.2	%

Costs and expenses
Cost of systems and services		67,414		56.6	%		58,120		56.8	%		9,294			16.0	%
Cost of hardware		3,737		3.1	%		3,851		3.8	%		(114	)		-3.0	%
Sales and marketing		18,034		15.2	%		14,531		14.2	%		3,503			24.1	%
Research and development		13,799		11.6	%		14,020		13.7	%		(221	)		-1.6	%
General and administrative		7,614		6.4	%		6,184		6.0	%		1,430			23.1	%
Depreciation and amortization		4,296		3.6	%		3,894		3.8	%		402			10.3	%
Restructuring charge		-		0.0	%		1,349		1.3	%		(1,349	)		-100.0	%
Total costs and expenses		114,894		96.5	%		101,949		99.6	%		12,945			12.7	%
Income from operations		4,125		3.5	%		448		0.4	%		3,677			820.8	%
Interest income, net		1,588		1.3	%		1,313		1.3	%		275			20.9	%
Income before taxes		5,713		4.8	%		1,761		1.7	%		3,952			224.4	%
Provision for income taxes		19		0.0	%		-		0.0	%		19			0.0	%

Net income	$	5,694		4.8	%	$	1,761		1.7	%	$	3,933			223.3	%
Basic net income per common share	$	0.11				$	0.03				$	0.08
Diluted net income per common share	$	0.11				$	0.03				$	0.08

RESULTS OF OPERATIONS

Revenues

Total revenues increased $16.6 million, or 16.2%, to $119.0 million for the quarter ended June 30, 2007, compared with $102.4 million for the second quarter of 2006.

Systems and services

Systems and services revenues increased $16.5 million, or 16.8%, to $114.3 million for the quarter ended June 30, 2007, compared with $97.8 million for the same period of 2006. This increase is primarily attributable to revenue recognized on a ratable basis from contracts signed since the second quarter of 2006.

Revenues recognized ratably from software, maintenance, outsourcing and remote hosting were $74.4 million, an increase of $6.3 million or 9.3%, when compared to the same period in 2006. The increase was due to higher sales bookings of our software as well as higher revenues from our outsourcing and remote hosting related services.

The increase in professional services revenues, which include implementation and consulting related services, also contributed to the increase in systems and services revenues. Professional services revenues were $29.1 million, which represented an increase of $5.6 million or 23.8% over the prior year. The increase is related to additional customer implementation activity and an improvement in utilization. Professional service implementations and activations are expected to continue at higher levels in 2007 when compared to 2006.

Additionally, periodic revenues related to software licenses were $5.4 million, revenues related to third party software licenses were $2.4 million and revenues related to networking services were $3.0 million for the quarter ended June 30, 2007. This compared to revenues of $1.4 million for software licenses, $1.3 million for third party software licenses and $3.5 million for network services for the quarter ended June 30, 2006. In any quarter the Company recognizes software revenue that can be considered non-recurring in nature and results from new traditional client contracts signed during the period, achievement during the period of contract milestones from traditional client contracts signed in previous periods, and certain other activities during the period associated with clients. There is generally relatively little in-period cost associated with these revenues so they can contribute significantly to margin in the period. We expect these periodic revenues to continue to fluctuate on a quarterly basis as a result of significant variations in the type and magnitude of sales and other contract activity in any period, and these variations make it difficult to predict the nature and amount of these periodic revenues.

Hardware

Hardware revenues increased slightly during the quarter to $4.8 million, compared with $4.6 million in the second quarter of 2006.

Expenses

Included in costs and expenses for the quarters are the following non-cash stock-based compensation charges (in thousands):

	Three Months Ended June 30,
	2007		2006
Cost of systems & services	$	1,099	$	744
Sales and marketing		710		890
Research and development		573		494
General and administrative		405		579
Restructuring charge		-		267
Total stock-based compensation expense	$	2,787	$	2,974

Cost of systems and services increased by $9.3 million, or 16.0%, to $67.4 million in the quarter ended June 30, 2007, compared to $58.1 million in the second quarter of 2006. The increase in costs of systems and services was primarily driven by additional sales of our products as described above, with associated increases in compensation costs and travel to support the increased level of sales activity.

Cost of hardware was $3.7 million during the second quarter of 2007 and was relatively consistent with the second quarter of 2006. Due to a more favorable hardware costs, gross margins on hardware revenue increased to 21.4% in the second quarter of 2007 compared with 15.8% in second quarter 2006.

Sales and marketing expenses increased by $3.5 million, or 24.1%, to $18.0 million for the quarter ended June 30, 2007, compared to $14.5 million for the second quarter of 2006. The increase in sales and marketing expenses was primarily related to increased commissions on higher sales bookings during the quarter and additional expenses for trade shows and other marketing events, targeted to increase market awareness of our software and services.

Research and development expenses during the current quarter were $13.8 million, compared to $14.0 million in the second quarter of 2006. Gross research and development costs, including capitalized software, were $19.2 million in the second quarter of 2007, compared to $17.1 million in the same quarter of 2006. The increase in gross research and development costs was due to additional compensation-related expenses on a higher employee base as we expand our development activities. Capitalized software development costs increased by $2.3 million to $5.4 million in the quarter ended June 30, 2007 from $3.1 million in the quarter ended June 30, 2006. Software development costs capitalized during the second quarter of 2007 reflect increased activity related to the upcoming release of Sunrise XA 5.0, while a large portion of development costs in the second quarter of 2006 were non-capitalizable, as they related to maintenance following the release of Sunrise XA 4.5 in early 2006.

General and administrative expenses increased by $1.4 million, or 23.1%, to $7.6 million, in the quarter ended June 30, 2007, compared to $6.2 million in the second quarter of 2006. The increase in expenses was primarily related to $1.2 million in additional expenses, mostly related to legal and audit fees, in connection with our voluntary stock option review completed in May of 2007.

Depreciation and amortization increased by $0.4 million, or 10.3%, to $4.3 million for the quarter ended June 30, 2007, compared to $3.9 million, in the second quarter of 2006. The increase in depreciation and amortization is attributable to the increased asset base, including our enterprise resource planning (“ERP”) system implemented in the second quarter of 2006, intangible assets acquired in July of 2006 related to the acquisition of Sysware Health Care Systems, Inc, as well as on-going purchases of fixed assets needed to support our operations.

During the second quarter of 2006, we recorded additional restructuring charges of $1.3 million. This was undertaken to better align our organization, reduce costs and to re-invest some of the cost savings into client-related activities including client support and professional services. We did not incur any restructuring charges during the second quarter of 2007. At June 30, 2007, the remaining unpaid liability in connection with our 2006 restructuring activities was $2.5 million, which we expect to pay out through 2009.

Interest income increased $0.3 million, or 20.9%, to $1.6 million for the quarter ended June 30, 2007, compared to $1.3 million for the second quarter of 2006. The increase was due to higher interest income earned in the quarter on higher balances of marketable securities investments.

As a result of these factors, our net income was $5.7 million for the quarter ended June 30, 2007, compared to $1.8 million for the second quarter in 2006.

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO SIX MONTHS ENDED JUNE 30, 2006

(in thousands, except per share amounts)

	2007		% of Total Revenues			2006			% of Total Revenues			Change ($)			Change (%)
Revenues
Systems and services	$	223,449		96.3	%	$	194,151			95.5	%	$	29,298			15.1	%
Hardware		8,600		3.7	%		9,137			4.5	%		(537	)		-5.9	%
Total revenues		232,049		100.0	%		203,288			100.0	%		28,761			14.1	%

Costs and expenses
Cost of systems and services		131,701		56.8	%		114,594			56.4	%		17,107			14.9	%
Cost of hardware		6,764		2.9	%		7,502			3.7	%		(738	)		-9.8	%
Sales and marketing		36,172		15.6	%		30,741			15.1	%		5,431			17.7	%
Research and development		28,207		12.2	%		30,982			15.2	%		(2,775	)		-9.0	%
General and administrative		15,603		6.7	%		11,840			5.8	%		3,763			31.8	%
Depreciation and amortization		8,571		3.7	%		7,696			3.8	%		875			11.4	%
Restructuring charge		-		0.0	%		8,547			4.2	%		(8,547	)		-100.0	%
Total costs and expenses		227,018		97.8	%		211,902			104.2	%		15,116			7.1	%
Income from operations		5,031		2.2	%		(8,614	)		-4.2	%		13,645			158.4	%
Interest income, net		3,102		1.3	%		2,462			1.2	%		640			26.0	%
Income before taxes		8,133		3.5	%		(6,152	)		-3.0	%		14,285			232.2	%
Provision for income taxes		38		0.0	%		-			0.0	%		38			0.0	%

Net income (loss)	$	8,095		3.5	%	$	(6,152	)		-3.0	%	$	14,247			231.6	%
Basic net income (loss) per common share	$	0.15				$	(0.12	)				$	0.27
Diluted net income (loss) per common share	$	0.15				$	(0.12	)				$	0.27

RESULTS OF OPERATIONS

Revenues

Total revenues increased by $28.7 million, or 14.1%, to $232.0 million in the six months ended June 30, 2007, compared with $203.3 million in the first six months of 2006.

Systems and services

Systems and services revenues increased by $29.3 million, or 15.1%, to $223.4 million in the six months ended June 30, 2007, compared with $194.2 million in the first six months of 2006. This increase is primarily attributable to revenue recognized on a ratable basis from contracts signed since the second quarter of 2006.

Specifically, revenues recognized ratably from software, maintenance, outsourcing and remote hosting were $147.6 million, an increase of $12.2 million or 9.1%, when compared to the prior year. The increase was due to higher sales bookings of our software as well as higher revenues from our outsourcing and remote hosting related services, primarily related to contracts signed during 2006.

The increase in professional services revenues also contributed to the increase in systems and services revenues. Professional services revenues, which include implementation and consulting related services, were $58.8 million, an increase of $11.6 million or 24.6% over the prior year. The increase was related to additional customer implementation activity and an improvement in utilization. Professional service implementations and activations are expected to continue at higher levels in 2007 when compared to 2006.

Additionally, periodic revenues related to software licenses were $8.1 million, revenues related to third party software licenses were $3.6 million and revenues related to networking services were $5.5 million for the six months ended June 30, 2007. This compared to revenues of $5.5 million for software licenses, $3.6 million for third party software licenses and $2.9 million for network services for the six months ended June 30, 2006. In any quarter the Company recognizes software revenue that can be considered non-recurring in nature and results from new traditional client contracts signed during the period, achievement during the period of contract milestones from traditional client contracts signed in previous periods, and certain other activities during the period associated with clients. There is generally relatively little in-period cost associated with these revenues so they can contribute significantly to margin in the period. We expect these periodic revenues to continue to fluctuate on a quarterly basis as a result of significant variations in the type and magnitude of sales and other contract activity in any period, and these variations make it difficult to predict the nature and amount of these periodic revenues.

Hardware

Hardware revenues decreased by $0.5 million, or 5.9%, to $8.6 million for the six months ended June 30, 2007, compared with $9.1 million for the first six months of 2006, mainly due to a lower level of sales activity in the first quarter of 2007.

Expenses

Included in costs and expenses for the six months are the following non-cash stock-based compensation charges (in thousands):

	Six Months Ended June 30,
	2007		2006
Cost of systems & services	$	2,175	$	1,669
Sales and marketing		1,680		1,688
Research and development		1,102		851
General and administrative		590		1,299
Restructuring charge		-		1,162
Total stock-based compensation expense	$	5,547	$	6,669

Cost of systems and services increased by $17.1 million, or 14.9%, to $131.7 million, for the six months ended June 30, 2007, compared to $114.6 million for the first six months of 2006. The increase in costs of systems and services was primarily driven by additional sales of our products as described above, with associated increases in compensation expense and travel to support increased activity during the period. Gross margins on systems and services revenue increased slightly to 41.1% in the first six months of 2007 compared to 41.0% for the first six months of 2006.

Cost of hardware decreased by $0.7 million, or 9.8%, to $6.8 million for the six months ended June 30, 2007, compared to $7.5 million in the same period of 2006. The decrease in the cost of hardware was attributable to the decrease in hardware revenues discussed above. Gross margins on hardware revenue increased to 21.3% in the first six months of 2007 compared to 17.9% in first six months 2006, due to more favorable hardware costs during the period.

Sales and marketing expenses increased by $5.5 million, or 17.7%, to $36.2 million during the six months ended June 30, 2007, compared to $30.7 million during the first six months of 2006. The increase in sales and marketing expenses was primarily related to increased commissions on higher sales bookings during the second quarter and additional expenses for trade shows and other marketing events, targeted to increase market awareness of our software and services.

Research and development expenses, net of capitalized software, decreased by $2.8 million, or 9.0%, to $28.2 million, in the six months ended June 30, 2007, compared to $31.0 million in the first six months of 2006. The decrease in research and development expense was related to higher research and development activity in connection with capitalizable project costs, in particular, the upcoming release of version 5.0 of Sunrise XA. A large portion of development costs in the second quarter of 2006 were non-capitalizable as they related to maintenance following the release of Sunrise XA 4.5 in early 2006. Capitalized software development costs increased by $5.2 million to $9.8 million for the six months ended June 30, 2007 from $4.6 million for the six months ended June 30, 2006. The increase in capitalizable software development costs was somewhat offset by additional compensation-related expenses on higher employee base as we expand our development activities. Gross research and development costs were $38.0 million in the six months, compared to $35.6 million in the first six months of 2006.

General and administrative expenses increased by $3.8 million, or 31.8%, to $15.6 million, in the six months ended June 30, 2007, compared to $11.8 million in the first six months of 2006. The increase in expenses was primarily related to $2.2 million in additional expenses, mostly related to legal and audit fees, in connection with the voluntary stock option review completed in May of 2007. The 2007 results also include increased compensation-related expenses for additional headcount added to support current and future growth. Additionally, the results for the first six months of 2006 included capitalization of internal labor costs of $0.4 million in connection with implementation of our ERP system, thus reducing the expense incurred in the period.

Depreciation and amortization increased by $0.9 million, or 11.4%, to $8.6 million for the six months ended June 30, 2007, compared to $7.7 million in the same period of 2006. The increase in depreciation and amortization is attributable to the increased asset base, including our ERP system implemented in the second quarter of 2006, intangible assets acquired in July of 2006 related to the acquisition of Sysware Health Care Systems, Inc, as well as on-going purchases of fixed assets needed to support our operations.

In the six months ended June 30, 2006, we recorded a charge of $8.5 million in connection with the restructuring. The restructuring was implemented to re-invest some of the cost savings into client-related activities, including client support and professional services. We did not incur any restructuring charges during the first six months of 2007. At June 30, 2007, the remaining unpaid liability in connection with our 2006 restructuring activities was $2.5 million, which we expect to pay out through 2009.

Interest income increased $0.6 million, or 26.0%, to $3.1 million for the six months ended June 30, 2007, compared to $2.5 million for the first six months of 2006. The increase was due to higher interest income earned in the first six months of 2007 on higher balances of marketable securities investments.

As a result of these factors, our net income was $8.1 million for the six months ended June 30, 2007, compared to a net loss of $6.2 million for the first six months in 2006.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2007, operating activities provided $16.7 million of cash. Operating activities were favorably impacted by income generated from operations of $33.8 million (adjusted for non cash charges of $25.7 million), offset by uses of cash of $17.1 million from the fluctuations in operating assets and liabilities due to timing of payments and cash receipts. Additionally, included in the operating activities are payments of $3.2 million in connection with our 2006 restructuring activities. Investing activities used $36.0 million of cash, primarily consisting of net purchases of marketable securities of $15.1 million to invest excess cash not needed in daily operations, routine business purchases of property and equipment of $8.4 million, capitalized software development costs of $9.8 million for new product development as well as $2.0 million in funds used to collateralize a letter of credit on a new building lease. Financing activities provided cash inflow of $7.5 million from exercises of stock options. The timing and amount of cash provided by future stock option exercises is uncertain.

As of June 30, 2007, our principal source of liquidity was our cash and cash equivalents and marketable securities balances of $134.5 million. Our future liquidity 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. We believe that our current cash and cash equivalents and marketable securities balances, combined with our anticipated cash collections from customers will be adequate to meet our currently anticipated liquidity requirements for the next twelve months. These requirements are expected to be funded with cash generated from operations, as well as our current cash and cash equivalent balances.

OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2007, we did not have any material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

We believe there are several accounting policies that are critical to understanding our historical and future performance as these policies affect the reported amount of revenues and expenses and other significant areas involving management's judgments and estimates. On an ongoing basis, management evaluates and adjusts its estimates and judgments, if necessary. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be materially different from those estimates. There were no changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on May 23, 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We generally invest in high quality debt instruments with relatively short maturities. Based upon the nature of our investments, we do not expect any material loss from our investments. Nevertheless, investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates.

We do not currently use derivative financial instruments. We do not currently enter into foreign currency hedge transactions. Foreign currency fluctuations have not had a material impact on our financial position or results of operations.

The following table illustrates potential fluctuation in annualized interest income based upon hypothetical values for blended interest rates for marketable securities balances.

Hypothetical	Marketable securities balances (in thousands)
Interest Rate	$ 100,000	$ 110,000	$ 120,000
1.5%	1,500	1,650	1,800
2.0%	2,000	2,200	2,400
2.5%	2,500	2,750	3,000
3.0%	3,000	3,300	3,600
3.5%	3,500	3,850	4,200
4.0%	4,000	4,400	4,800

We estimate that a one-percentage point decrease in interest rates for our marketable securities portfolio as of June 30, 2007 would have resulted in a decrease in interest income of $1.0 million for a twelve month period. This sensitivity analysis contains certain simplifying assumptions (for example, 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.

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 June 30, 2007. 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 June 30, 2007, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were changes in our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As previously disclosed in our 2006 Annual Report on Form 10-K and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, the following changes were implemented to improve our non-cash stock-based compensation expense internal controls, and such controls were implemented and were operating effectively during the quarter ended June 30, 2007:

·	A review of the method of amortization for all grants on a quarterly basis to detect changes to previously input information; and

·	A quarterly review of a system report that includes all grants, as opposed to only reviewing new grants in the quarter to detect changes to previously input information.

PART II.

ITEM 1. LEGAL PROCEEDINGS

The information set forth under Note 11 to the unaudited condensed consolidated financial statements of this quarterly report on Form 10-Q is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Many risks affect our business. We believe the following risk has materially changed from the risk factor disclosed on our 2006 Annual Report on Form 10-K, including principally the addition of the fourth paragraph, and should be considered together with the risk factors we have previously disclosed, which are set forth below.

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

As a result of our voluntary review of historical stock option practices, 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 included in our Form 10-K for the year ended December 31, 2006. In addition, the review and related activities resulted in substantial expenses for legal, accounting, tax and other professional services.

We believe we made appropriate judgments in determining the correct measurement dates for our stock option grants, and to date those judgments have not been challenged. However, as with other aspects of our financial statements, the results of our stock option review are subject to regulatory review and a commensurate risk that we may have to further restate prior period results.

Our past stock option granting practices and the restatement of prior financial statements have exposed us to risks associated with claims by stockholders or employees, regulatory proceedings, government enforcement actions and related investigations and litigation. These risks include significant expenses, management distraction and potential damages, penalties, other remedies, or adverse findings, which could harm our business, financial condition, results of operations and cash flows.

_______________

Many other risks affect our business. These risks include, but are not limited to, those described below, each of which may be relevant to decisions regarding 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 in other ways, so no special significance should be attributed to these groupings. Any of these risks could have a significant adverse effect on our reputation, business, financial condition or results of operations.

RISKS RELATING TO DEVELOPMENT AND OPERATION OF OUR SOFTWARE

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 it is possible that we could discover additional problems that prevent our software from operating properly. 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 it has been used for enough time in enough client locations for us to have addressed issues that are discovered through use in disparate circumstances and environments. Due to our development efforts, we generally have significant software that could be considered relatively new and therefore more vulnerable to these risks, including at present our medication management and ambulatory software, among other things. 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 comes into use in our client base. If we fail to deliver software with the features and functionality as described in our software specifications, we could be subject to significant contractual damages.

Our software development efforts may not meet the needs of our clients, which could adversely affect our results of operations.

We continuously strive to develop new software, and improve our existing software to add new features and functionality. 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. Sometimes this takes longer than we expect. Sometimes we encounter unanticipated difficulties that require us to re-direct or scale-back our efforts. Sometimes we change our plans in response to changes in client requirements, market demands, resource availability, regulatory requirements, or other factors. All of this can result in acceleration of some initiatives and delay of others. If we make the wrong choices or do not manage our development efforts well, we may fail to produce software that responds appropriately to our clients' needs, or we may fail to meet client expectations regarding new or enhanced features and functionality.

Market changes or mistaken development decisions 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 develop and introduce competing new software and services that are appropriately priced to meet changing client and market requirements. The process of developing software and services such as those we offer is extremely complex and is expected to become more complex and expensive in the future as new technologies are introduced. 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. 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 client requirements, demand for our software could suffer.

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. The .NET Framework, in particular, is a relatively new and evolving technology. If Microsoft were to cease actively supporting .NET or other technologies, fail to update and enhance them to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies or make them unavailable to us, we could be required to invest significant resources in re-engineering our software. This could lead to lost or delayed sales, client costs associated with platform changes, unanticipated development expenses and harm to 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. The laws of some foreign countries may not protect our proprietary rights as fully as do the laws of the United States. Also, despite the steps we have taken to protect our proprietary rights, it may be possible for unauthorized third parties to copy aspects of our 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 content. 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 expense 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, penalties for violation of applicable laws or regulations, significant costs for remediation and re-engineering to prevent future occurrences, and serious harm to our reputation.

RISKS RELATED TO SALES AND IMPLEMENTATION OF OUR SOFTWARE

The length of our sales and implementation cycles may adversely affect our future operating results.

We have experienced long sales and implementation cycles. How and when to implement, replace, expand or substantially modify an information system, or modify or add business processes, are major decisions for healthcare organizations, our target client market. Furthermore, our software generally requires significant capital expenditures by our clients. The sales cycle for our software ranges from 6 to 18 months or more from initial contact to contract execution. Our 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. We may not realize any revenues to offset these expenditures and, if we do, accounting principles may not allow us to recognize the revenues during corresponding periods. Additionally, any decision by our clients to delay purchasing or implementing our software may adversely affect our revenues.

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

Some of our software is complex and requires a lengthy and expensive implementation process. 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. 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 consistent with a client's schedule may be a competitive disadvantage for us as we pursue new business. Implementation also requires our clients to make a substantial commitment of their own time and resources and to make significant organizational and process changes, and if our clients are unable to fulfill their implementation responsibilities in a timely fashion our projects may be delayed or become less profitable.

Implementation costs may exceed 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. 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 expensive third-party consultants, our costs will increase.

Our performance depends upon software sales.

We must achieve higher levels of software sales, consistent with our projections, in order to achieve our expectations for annual revenue and earnings and to provide a solid foundation for future growth. Our ability to improve sales depends upon many factors, including completion of implementation and successful use of our new software releases, particularly our pharmacy and ambulatory solutions, in live environments for clients who achieve success and are willing to become reference sites for us.

RISKS RELATED TO OUR IT OR TECHNOLOGY SERVICES

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

We provide remote hosting services that involve running our software and third-party vendor's software for clients in our Technology Solutions Center. The ability to access the systems and the data 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 must 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 incur a loss of revenue and liability for failure to fulfill our contractual service commitments. 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 service center 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. 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 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 difficult, including geographic dispersion of client facilities and variation in client needs, IT environments, and system configurations. Also, under some circumstances we may incur unanticipated costs as a successor employer by inheriting unforeseen liabilities that the client had to these employees. 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 costs may increase under fixed fee contracts.

Inability to obtain consents needed from third parties 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 their software in our data center, or to allowing 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.

RISKS RELATED TO THE HEALTHCARE IT INDUSTRY AND MARKET

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 of new software to meet the needs of our current and future clients. 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 such as Deloitte & Touche and Cap Gemini, 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., 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. 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. Vigorous and evolving competition could lead to a loss of 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 competition.

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 these clients to our newer generation software, but such conversions require significant investments of time and resources by clients. This reduces our advantage as the incumbent vendor and has allowed our competitors to target these clients, with some success. If we are not successful in retaining a large portion of these clients by continuing to support legacy software - which is increasingly expensive to maintain - or by converting them to our newer software, our results of operations will be negatively affected.

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, the shift to managed healthcare in the 1990's put pressure on healthcare organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically reduced Medicare reimbursement to healthcare organizations. Our software often involves a significant financial commitment by our clients. Our ability to grow our business is largely dependent on our clients' information technology budgets. If healthcare information technology spending declines or increases more slowly than we anticipate, demand for our software could be adversely affected.

Healthcare industry consolidation could impose 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, 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 acquisition of our clients could erode our revenue base.

Potential 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 or regulatory authorities could cause emergence of software standards applicable to us, and if our software is not consistent with those standards we could be forced to incur substantial additional development costs to conform. For example, the CCHIT is developing comprehensive sets of criteria for the functionality, interoperability, and security of various software modules in our industry. Achieving CCHIT certification is evolving as a de facto competitive requirement, resulting in increased research and development and administrative expense to conform to these requirements. If our software is not consistent with emerging standards, our market position and sales could be impaired and we may have to change our software.

RISKS RELATED TO OUR OPERATING RESULTS, ACCOUNTING CONTROLS AND FINANCES

We have a history of operating losses and we cannot predict future profitability.

During each of the five preceding years, we had an operating loss. We may incur losses in the future, and it is not certain that we will achieve sustained or increasing 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:

·	the performance of our software and our ability to promptly and efficiently address software performance shortcomings or warranty issues;

·	the cost, timeliness and outcomes of our software development and implementation efforts, including expansion of our presence in India;

·	the timing, size and complexity of our software sales and implementations;

·	overall demand for healthcare information technology;

·	the financial condition of our clients and potential clients;

·	market acceptance or our new services, software and software enhancements by us or our competitors;

·	client decisions regarding renewal or termination of their contracts;

·	software and price competition;

·	personnel changes and other organizational changes and related expenses;

·	significant judgments and estimates made by management in the application of generally accepted accounting principles;

·	healthcare reform measures and healthcare regulation in general; and

·	fluctuations in general economic and financial market conditions; including interest rates.

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. 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.

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, 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 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 will 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 will not necessarily be reflected in lower revenues in that quarter, and may negatively affect our revenues and profitability in future quarters. In addition, we may be unable to adjust our cost structure to compensate for these reduced revenues. This monthly revenue recognition also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as a significant portion of revenues from new clients must generally 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, 2006, approximately 40% of our revenues were attributable to our 20 largest clients. In addition, approximately 36% of our accounts receivable as of December 31, 2006 were attributable to 20 clients. 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.

Impairment of intangible assets could increase our expenses.

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. We had a material weakness in maintaining effective internal control over financial reporting in accordance with the requirements of Section 404 (see Item 9A. “Controls and Procedures”), and it is possible that we might in the future have another material weakness in maintaining such effective internal control over financial reporting. 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 our operating results which could result in a negative market reaction.

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

While our available cash and cash equivalents and the cash we anticipate generating from operations appear at this time to be adequate to meet our foreseeable needs, we could incur significant expenses 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 additional financing. If additional financing is not available on acceptable terms, we may not be able to respond adequately to these changes, which could adversely affect our operating results and the market price of our common stock.

RISK OF LIABILITY TO THIRD PARTIES

Our software and content are used to assist clinical decision-making and provide information about patient medical histories and treatment plans. 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 practice guidelines and potential treatment methodologies, and other 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 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 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 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 such 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 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 our vendors' software 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 vendors. 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.

RISKS RELATED TO OUR STRATEGIC RELATIONSHIPS AND INITIATIVES

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 shipments until we obtain equivalent technology, which could hurt our business. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the technology covered by these licenses and use the technology to compete directly with us. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, particularly with regard to Microsoft, we may not be able to modify or adapt our own software.

Our offering often includes software 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 clients' needs and to implement and maintain that software. If these third parties fail 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 all of the costs we incur as a result of their failures.

If we undertake additional acquisitions, they 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 complete any future acquisitions, any future acquisitions would involve a number of risks, including the following:

·	the anticipated benefits from any acquisition may not be achieved. The integration of acquired businesses requires substantial attention from management. The diversion of management’s attention and any difficulties encountered in the transition process could hurt our business.

·	in future acquisitions, we could issue additional shares of our common stock, incur additional indebtedness or pay consideration in excess of book value, which could have dilutive effect on future net income, if any, per share.

·	new business acquisitions must be accounted for under the purchase method of accounting. These acquisitions may generate significant intangible assets and result in substantial related amortization charges to us.

Additional investment will be required to realize the potential of our Sysware and Mosum acquisition.

We must make significant investments of money and management time in software development and infrastructure in order to realize the potential of our acquisition of the business of Sysware and Mosum to (i) have a fully integrated and leverageable laboratory information system to sell to our diversified client base, and (ii) build Mosum's India operations into an integrated development and support organization that can cost-effectively augment our onshore resources. If the additional investment turns out to be more than what we anticipated, this may negatively affect our results of operations.

RISKS RELATED TO INDUSTRY REGULATION

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 the following requiring us to:

·	seek FDA clearance of pre-market notification submission demonstrating substantial equivalence to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the software;

·	comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and

·	comply with the FDC Act regarding general controls including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified device malfunctions and adverse device events.

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 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, use, transmission and other disclosures of health information. These laws and regulations may change rapidly and may be unclear or difficult to apply.

Federal regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, 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. Collectively, these groups are known as covered entities. The HIPAA standards prescribe transaction formats and code sets for electronic health transactions; protect individual privacy by limiting the uses and disclosures of individually identifiable health information; and require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form. Though we are not a covered entity, most of our clients are and require that our software and services adhere to HIPAA standards. Any failure or perception of failure of our software or services to meet HIPAA standards 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 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 or state governmental authorities 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 our clients.

RISKS RELATED TO OUR PERSONNEL AND ORGANIZATION

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

As a result of our 2006 acquisition of Mosum, we have a significant workforce employed in India. To date our operations in India have focused primarily upon our laboratory software, but we intend to increase the size and scope of our operations in India to include additional research and development and administrative functions, with the expectation that our India operations will be integral to the Company. 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 increases in the numbers of foreign businesses that have established operations in India and commensurate competition to attract and retain skilled employees has increased, and will likely continue to increase, compensation costs. As a result of these and other factors there can be no assurance that we will successfully integrate our India operations, or that our India operations will advance our business strategy and provide a satisfactory return on this investment.

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.

More generally, foreign operations subject us to additional risks including fluctuations in foreign currency exchange rates, varying legislative or regulatory requirements and protections, particularly for intellectual property rights, and cultural differences. Furthermore, remote operations require significant management attention and financial resources.

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.

RISKS RELATED TO OUR EQUITY STRUCTURE

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

Our charter documents contain additional anti-takeover devices including:

·	only one of the three classes of directors is elected each year;

·	the ability of our stockholders to remove directors without cause is limited;

·	the right of stockholders to act by written consent has been eliminated;

·	the right of stockholders to call a special meeting of stockholders has been eliminated; and

·	advance notice must be given to nominate directors or submit proposals for consideration at stockholders meetings.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

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 June 30, 2007:

	(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
April 1-30, 2007	-	-	-	-
May 1-31, 2007	-	-	-	-
June 1-30, 2007	21,230 ¹	$20.65	-	-
Total	21,230	$20.65	-	-

These shares were tendered to the Company by employees holding common stock initially issued to them in the form of restricted stock awards in order to reimburse the Company for income tax deposits paid by the Company on their behalf in respect of taxable income resulting from scheduled vesting of restricted shares.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Pursuant to SEC rules, the Company plans on disclosing the voting results on each matter considered at the 2007 Annual Meeting of Stockholders held on July 11, 2007 in the Company’s Form 10-Q for the period ending September 30, 2007. The summary outcome of the Annual Meeting is as follows:

1.	Dan L. Crippen and Edward A. Kangas were elected Class III Directors;

2.	Eclipsys' Incentive Compensation Plan For Specified Officers was approved; and

3.	The selection of PricewaterhouseCoopers, LLP as Eclipsys' independent registered certified public accounting firm for the fiscal year ending December 31, 2007 was ratified.

ITEM 6. EXHIBITS

See Index to exhibits.

SIGNATURES

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

Date: August 8, 2007

/s/ Robert J. Colletti

Robert J. Colletti

Senior Vice President and Chief Financial Officer

ECLIPSYS CORPORATION

EXHIBIT INDEX

Exhibit

Number

Description

3.1 (1)	Third Amended and Restated Certificate of Incorporation of the Registrant
3.2 (1)	Certificate of Designation of Series A Junior Participating Preferred
3.3 (2)	Third Amended and Restated Bylaws of the Registrant
4.1 (2)	Specimen certificate for shares of Common Stock
4.2 (3)	Rights Agreement, dated July 26, 2000, by and between the Registrant and Fleet National Bank, as Rights Agent
10.1 *	Employment Offer Letter with Joseph C. Petro, dated February 8, 2007 (Mr. Petro became a Section 16 executive officer in the second quarter of 2007)
31.1	Rule 13a-14(a) Certification of R. Andrew Eckert
31.2	Rule 13a-14(a) Certification of Robert J. Colletti
32.1	Rule 13a-14(b) Certification of R. Andrew Eckert (pursuant to 18 U.S.C. Section 1350)
32.2	Rule 13a-14(b) Certification of Robert J. Colletti (pursuant to 18 U.S.C. Section 1350)

(1)	Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 000-24539)
(2)	Incorporated by reference to the Registrant's Registration Statement on Form S-1, as amended (File No. 333-50781)
(3)	Incorporated by reference to the Registrant's Current Report on Form 8-K dated August 8, 2000 (File No. 000-24539)
*	Indicates a management contract or compensatory plan or arrangement