Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| x | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|------------------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended June 30, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from                                 to                                 **

 

**CommissionFile Number: 000-50839**

 

**Phase Forward Incorporated**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                       | ** ** | **04-3386549**       |
|----------------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of                   | ** ** | (I.R.S. Employer     |
| incorporation or  organization)                    | ** ** | Identification  No.) |
|                                               | ** ** |                 |
| **77  Fourth Avenue**                              | ** ** | ** **           |
| **Waltham,  Massachusetts**                        | ** ** | **02451**            |
| ** **(Address of principal executive offices) | ** ** | (Zip Code)           |

 

**(888) 703-1122**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  x No  o

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”,and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large accelerated filer x                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  x

 

As of July 31, 2009,the registrant had 43,218,073 shares of common stock outstanding.

 

 

 

----

Tableof Contents

 

**PHASEFORWARD INCORPORATED**

**QUARTERLYREPORT ON FORM 10-Q**

**Forthe quarterly period ended June 30, 2009**

**Table of Contents**

 
| ** **                                 | ** **                                                                                                                                         | **Page  Number** |
|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------------|
| **Part I—Financial Information** |                                                                                                                                               |
|                                       |                                                                                                                                               |             |
| Item  1.                                   | Condensed  Consolidated Balance Sheets as of December 31, 2008 (unaudited) and  June 30, 2009 (unaudited)                                | 3                |
|                                       |                                                                                                                                               |             |
|                                       | Condensed Consolidated Statements of Income for the  three and six months ended  June 30, 2008 (unaudited) and June 30, 2009 (unaudited) | 4                |
|                                       |                                                                                                                                               |             |
|                                       | Condensed Consolidated Statements of Cash Flows for  the six months ended  June 30, 2008 (unaudited) and June 30, 2009 (unaudited)       | 5                |
|                                       |                                                                                                                                               |             |
|                                       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                  | 6                |
|                                       |                                                                                                                                               |             |
| Item 2.                                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                        | 22               |
|                                       |                                                                                                                                               |             |
| Item 3.                                    | Quantitative  and Qualitative Disclosures about Market Risk                                                                                        | 41               |
|                                       |                                                                                                                                               |             |
| Item 4.                                    | Controls and  Procedures                                                                                                                           | 42               |
|                                       |                                                                                                                                               |             |
| **Part II—Other  Information**   |                                                                                                                                               |
|                                       |                                                                                                                                               |             |
| Item 1.                                    | Legal Proceedings                                                                                                                                  | 42               |
|                                       |                                                                                                                                               |             |
| Item  1A.                                  | Risk  Factors                                                                                                                                      | 42               |
|                                       |                                                                                                                                               |             |
| Item 2.                                    | Unregistered  Sale of Equity Securities and Use of Proceeds                                                                                        | 42               |
|                                       |                                                                                                                                               |             |
| Item 4                                     | Submission of  Matters to a Vote of Security Holders                                                                                               | 43               |
|                                       |                                                                                                                                               |             |
| Item 5.                                    | Other Information                                                                                                                                  | 43               |
|                                       |                                                                                                                                               |             |
| Item  6.                                   | Exhibits                                                                                                                                           | 44               |
|                                       |                                                                                                                                               |             |
| Signatures                                 |                                                                                                                                               | 45               |
|                                       |                                                                                                                                               |             |
| Exhibit Index                         |                                                                                                                                               | 46               |

 

2

----

Tableof Contents

 

**Part I—Financial Information**

 

**Item 1. *Condensed Consolidated Financial Statements***

 

**Phase Forward Incorporated**

**Condensed Consolidated Balance Sheets**

**(unaudited)**

**(in thousands, except per shareamounts)**

 
| ** **                                                                                                                     | ** ** | **December 31, 2008** | ** ** | **June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                     |       |                            | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                |       |                            |       |                        |       |
| Cash and cash equivalents                                                                                                      |       | $                               | 131,550    |                        | $          | 94,721 |   |
| Restricted cash, current portion                                                                                               |       | 500                             |       | —                      |       |
| Short-term investments                                                                                                         |       | 27,893                          |       | 43,882                      |       |
| Accounts receivable, net of allowance of $578 and  $655, respectively                                                          |       | 39,999                          |       | 40,516                      |       |
| Acquired future billings, current portion                                                                                      |       | 1,129                           |       | 924                         |       |
| Deferred set up costs, current portion                                                                                         |       | 2,393                           |       | 2,878                       |       |
| Prepaid commissions and royalties, current portion                                                                             |       | 4,524                           |       | 5,266                       |       |
| Prepaid expenses and other current assets                                                                                      |       | 4,773                           |       | 4,539                       |       |
| Deferred income taxes, current portion                                                                                         |       | 12,895                          |       | 11,171                      |       |
| Securities settlement agreement                                                                                                |       | —                          |       | 5,336                       |       |
|                                                                                                                           |       |                            |       |                        |       |
| Total current assets                                                                                                           |       | 225,656                         |       | 209,233                     |       |
|                                                                                                                           |       |                            |       |                        |       |
| Acquired future billings, net of current portion                                                                               |       | 962                             |       | 502                         |       |
| Property and equipment, net                                                                                                    |       | 36,615                          |       | 42,170                      |       |
| Deferred set up costs, net of current portion                                                                                  |       | 1,630                           |       | 1,833                       |       |
| Prepaid commissions and royalties, net of current  portion                                                                     |       | 4,277                           |       | 5,180                       |       |
| Intangible assets, net of accumulated amortization  of $3,624 and $5,220, respectively                                         |       | 27,586                          |       | 34,895                      |       |
| Goodwill                                                                                                                       |       | 39,125                          |       | 47,099                      |       |
| Deferred income taxes, net of current portion                                                                                  |       | 7,107                           |       | 4,170                       |       |
| Restricted cash, non-current portion                                                                                           |       | 962                             |       | 962                         |       |
| Long-term investments                                                                                                          |       | 18,022                          |       | 30,077                      |       |
| Securities settlement agreement                                                                                                |       | 5,322                           |       | —                      |       |
| Other assets                                                                                                                   |       | 626                             |       | 749                         |       |
|                                                                                                                           |       |                            |       |                        |       |
| Total assets                                                                                                                   |       | $                               | 367,890    |                        | $          | 376,870 |   |
|                                                                                                                           |       |                            |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                 | ** ** | ** **                      | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                           |       |                            |       |                        |       |
| Accounts payable                                                                                                               |       | $                               | 8,895      |                        | $          | 6,137 |   |
| Accrued expenses                                                                                                               |       | 22,686                          |       | 18,172                      |       |
| Leasehold incentive obligation, current portion                                                                                |       | 791                             |       | 791                         |       |
| Deferred revenues, current portion                                                                                             |       | 79,918                          |       | 82,527                      |       |
|                                                                                                                           |       |                            |       |                        |       |
| Total current liabilities                                                                                                      |       | 112,290                         |       | 107,627                     |       |
|                                                                                                                           |       |                            |       |                        |       |
| Deferred rent, net of current portion                                                                                          |       | 564                             |       | 1,739                       |       |
| Leasehold incentive obligation, net of current  portion                                                                        |       | 7,248                           |       | 6,852                       |       |
| Deferred revenue, net of current portion                                                                                       |       | 8,600                           |       | 8,588                       |       |
| Other long-term liabilities                                                                                                    |       | 1,515                           |       | 1,535                       |       |
|                                                                                                                           |       |                            |       |                        |       |
| Total liabilities                                                                                                              |       | 130,217                         |       | 126,341                     |       |
|                                                                                                                           |       |                            |       |                        |       |
| Commitments and contingencies (Note 12)                                                                                        |       |                            |       |                        |       |
|                                                                                                                           |       |                            |       |                        |       |
| **Stockholders’ equity:**                                                                                                 |       |                            |       |                        |       |
| Preferred stock, $0.01 par value; 5,000,000 shares  authorized, none issued                                                    |       | —                          |       | —                      |       |
| Common stock, $0.01 par value; 100,000,000 shares  authorized: 42,986,235 and 43,224,761 issued in 2008 and 2009, respectively |       | 430                             |       | 433                         |       |
| Additional paid-in capital                                                                                                     |       | 283,676                         |       | 289,630                     |       |
| Treasury stock, 37,000 shares at cost                                                                                          |       | (111                            | )          | (111                        | )          |
| Accumulated other comprehensive loss                                                                                           |       | (672                            | )          | (78                         | )          |
| Accumulated deficit                                                                                                            |       | (45,650                         | )          | (39,345                     | )          |
| Total stockholders’ equity                                                                                                |       | 237,673                         |       | 250,529                     |       |
|                                                                                                                           |       |                            |       |                        |       |   |   |
| Total liabilities and stockholders’ equity                                                                                |       | $                               | 367,890    |                        | $          | 376,870 |   |

 

See accompanying notes.

 

3

----

Table of Contents

 

**Phase Forward Incorporated**

**CondensedConsolidated Statements of Income**

**(unaudited)**

**(in thousands, except per share amounts)**

 
| ** **                                                                           | ** ** | **Three Months Ended  June 30****,** | ** ** | **Six Months Ended  June 30****,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2008**                                            | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** |
|                                                                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                                            | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| License                                                                              |       | $                                                   | 13,087     |                                              | $          | 14,695 |   | $ | 25,701 |   | $ | 28,811 |   |
| Service                                                                              |       | 27,764                                              |       | 37,806                                            |       | 53,170 |   | 72,506 |   |
| Total revenues                                                                       |       | 40,851                                              |       | 52,501                                            |       | 78,871 |   | 101,317 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Costs of revenues:                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| License (2)                                                                          |       | 626                                                 |       | 785                                               |       | 1,281 |   | 1,351 |   |
| Service (1), (2)                                                                     |       | 17,191                                              |       | 21,245                                            |       | 32,719 |   | 41,144 |   |
| Total cost of revenues                                                               |       | 17,817                                              |       | 22,030                                            |       | 34,000 |   | 42,495 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Gross margin:                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| License                                                                              |       | 12,461                                              |       | 13,910                                            |       | 24,420 |   | 27,460 |   |
| Service                                                                              |       | 10,573                                              |       | 16,561                                            |       | 20,451 |   | 31,362 |   |
| Total gross margin                                                                   |       | 23,034                                              |       | 30,471                                            |       | 44,871 |   | 58,822 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Sales and marketing (1), (2)                                                         |       | 6,783                                               |       | 8,216                                             |       | 12,934 |   | 15,422 |   |
| Research and development (1)                                                         |       | 6,021                                               |       | 9,425                                             |       | 11,579 |   | 17,605 |   |
| General and administrative (1), (2)                                                  |       | 6,045                                               |       | 9,715                                             |       | 11,745 |   | 17,519 |   |
| Total operating expenses                                                             |       | 18,849                                              |       | 27,356                                            |       | 36,258 |   | 50,546 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Income from operations                                                               |       | 4,185                                               |       | 3,115                                             |       | 8,613 |   | 8,276 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Other income:                                                                        |       |                                                |       |                                              |       |   |   |   |   |
| Interest income                                                                      |       | 1,386                                               |       | 502                                               |       | 3,287 |   | 1,142 |   |
| Other income                                                                         |       | 115                                                 |       | 56                                                |       | 249 |   | 465 |   |
| Total other income                                                                   |       | 1,501                                               |       | 558                                               |       | 3,536 |   | 1,607 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Income before provision for income taxes                                             |       | 5,686                                               |       | 3,673                                             |       | 12,149 |   | 9,883 |   |
| Provision for income taxes                                                           |       | 1,992                                               |       | 1,446                                             |       | 4,453 |   | 3,578 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net income                                                                           |       | $                                                   | 3,694      |                                              | $          | 2,227 |   | $ | 7,696 |   | $ | 6,305 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net income per share applicable to common stockholders:                              | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** |   | ** ** |
| Basic                                                                                |       | $                                                   | 0.09       |                                              | $          | 0.05 |   | $ | 0.18 |   | $ | 0.15 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Diluted                                                                              |       | $                                                   | 0.08       |                                              | $          | 0.05 |   | $ | 0.18 |   | $ | 0.14 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of common shares used in net income per share  calculations: |       |                                                |       |                                              |       |   |   |   |   |
| Basic                                                                                |       | 42,007                                              |       | 42,623                                            |       | 41,933 |   | 42,527 |   |
|                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Diluted                                                                              |       | 43,859                                              |       | 44,298                                            |       | 43,798 |   | 44,190 |   |

 

----

| (1)  Amounts include stock-based  compensation expense, as follows:                   |
|--------------------------------------------------------------------------------------------|
|                                                                                       |   |   |   |   |   |   |   |   |   |
| Costs of service revenues                                                                  |   | $ | 448 |   | $ | 489 |   | $ | 841 |   | $ | 965 |   |
| Sales and marketing                                                                        |   | 368 |   | 462 |   | 682 |   | 877 |   |
| Research and development                                                                   |   | 323 |   | 705 |   | 602 |   | 1,326 |   |
| General and administrative                                                                 |   | 853 |   | 1,969 |   | 1,613 |   | 3,026 |   |
|                                                                                       |   |   |   |   |   |   |   |   |   |
| (2)  Amounts include  amortization expense of acquired intangible assets, as follows: |
|                                                                                       |   |   |   |   |   |   |   |   |   |
| Costs of license revenues                                                                  |   | $ | 155 |   | $ | 194 |   | $ | 310 |   | $ | 349 |   |
| Cost of service revenues                                                                   |   | — |   | 260 |   | — |   | 521 |   |
| Sales and marketing                                                                        |   | 100 |   | 354 |   | 200 |   | 674 |   |
| General and administrative                                                                 |   | — |   | 28 |   | — |   | 53 |   |

 

See accompanying notes.

 

4

----

Tableof Contents

 

**Phase Forward Incorporated**

**CondensedConsolidated Statements of Cash Flows**

**(unaudited)**

**(in thousands)**

 
| ** **                                                                              | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2008**                                            | ** ** | **2009** | ** ** |
| ** **                                                                              | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Operating activities**                                                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
|                                                                                    |       |                                                |       |   |   |
| Net income                                                                              |       | $                                                   | 7,696      |   | $ | 6,305 |   |
|                                                                                    |       |                                                |       |   |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:      |       |                                                |       |   |   |
| Depreciation and amortization                                                           |       | 4,492                                               |       | 7,699 |   |
| Stock-based compensation expense                                                        |       | 3,738                                               |       | 6,194 |   |
| Loss on disposal of fixed assets                                                        |       | 317                                                 |       | — |   |
| Amortization of leasehold incentive obligation                                          |       | —                                              |       | (396 | ) |
| Provision for allowance for doubtful accounts                                           |       | 71                                                  |       | 174 |   |
| Deferred income taxes                                                                   |       | 4,328                                               |       | 2,240 |   |
| Amortization of premiums or discounts on investments                                    |       | (125                                                | )          | 100 |   |
| Change in fair value of long-term investments                                           |       | —                                              |       | (464 | ) |
| Change in fair value of securities settlement agreement                                 |       | —                                              |       | (14 | ) |
| Changes in assets and liabilities:                                                      |       |                                                |       |   |   |
| Accounts receivable                                                                     |       | 7,235                                               |       | 518 |   |
| Deferred costs                                                                          |       | (1,271                                              | )          | (2,010 | ) |
| Prepaid expenses and other current assets                                               |       | 295                                                 |       | 285 |   |
| Accounts payable                                                                        |       | 1,396                                               |       | (2,923 | ) |
| Accrued expenses                                                                        |       | (1,594                                              | )          | (5,325 | ) |
| Deferred revenues                                                                       |       | 15,417                                              |       | 1,642 |   |
| Deferred rent                                                                           |       | (321                                                | )          | 1,175 |   |
|                                                                                    |       |                                                |       |   |   |
| Net cash provided by operating activities                                               |       | 41,674                                              |       | 15,200 |   |
|                                                                                    |       |                                                |       |   |   |
| **Investing activities**                                                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
|                                                                                    |       |                                                |       |   |   |
| Increase (decrease) in restricted cash                                                  |       | (1,462                                              | )          | 500 |   |
| Proceeds from maturities of short-term and long-term investments                        |       | 39,825                                              |       | 19,389 |   |
| Purchase of short-term and long-term investments                                        |       | (36,091                                             | )          | (47,069 | ) |
| Purchase of property and equipment                                                      |       | (5,895                                              | )          | (11,467 | ) |
| Cash paid for acquisitions, net of cash acquired (1)                                    |       | —                                              |       | (13,629 | ) |
|                                                                                    |       |                                                |       |   |   |
| Net cash used in investing activities                                                   |       | (3,623                                              | )          | (52,276 | ) |
|                                                                                    |       |                                                |       |   |   |
| **Financing activities**                                                                | ** ** | ** **                                          | ** ** | ** ** | ** ** |
|                                                                                    |       |                                                |       |   |   |
| Proceeds from issuance of common stock                                                  |       | 1,373                                               |       | 1,482 |   |
| Withholding taxes in connection with vesting of restricted stock awards                 |       | (1,247                                              | )          | (1,718 | ) |
|                                                                                    |       |                                                |       |   |   |
| Net cash provided by (used in) financing activities                                     |       | 126                                                 |       | (236 | ) |
|                                                                                    |       |                                                |       |   |   |
| Effect of exchange rate changes on cash and cash equivalents                            |       | 23                                                  |       | 483 |   |
|                                                                                    |       |                                                |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                    |       | 38,200                                              |       | (36,829 | ) |
| Cash and cash equivalents at beginning of period                                        |       | 133,401                                             |       | 131,550 |   |
|                                                                                    |       |                                                |       |   |   |
| Cash and cash equivalents at end of period                                              |       | 171,601                                             |       | 94,721 |   |
| Short-term and long-term investments at end of period                                   |       | 44,335                                              |       | 73,959 |   |
| Total cash, cash equivalents and short-term and long-term investments  at end of period |       | $                                                   | 215,936    |   | $ | 168,680 |   |

 

----

| (1) Cash paid for  acquisition of Waban Software, Inc. (Note 5) |   |   |   |   |   |
|----------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Fair value of assets acquired                                        |   | $      | — |   | $      | 990 |   |
| Liabilities assumed                                                  |   | — |   | (3,982 | )      |
| Acquired intangible assets                                           |   | — |   | 8,905  |   |
| Cost in excess of net assets acquired                                |   | — |   | 7,747  |   |
| Cash paid                                                            |   | — |   | 13,660 |   |
| Less cash acquired                                                   |   | — |   | (31    | )      |
| Cash paid for acquisition                                            |   | $      | — |   | $      | 13,629 |   |

 

See accompanying notes.

 

5

----

Table of Contents

 

**PhaseForward Incorporated**

**Notes to Condensed Consolidated FinancialStatements**

**(unaudited)**

**(inthousands, except share and per share amounts)**

 

**1.****             ****Basis of Presentation**

 

The accompanyingunaudited condensed consolidated financial statements included herein have beenprepared by Phase Forward Incorporated (the “Company”) pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles in theUnited States have been condensed or omitted pursuant to such SEC rules andregulations. Management of the Company believes that the disclosures herein areadequate to make the information presented not misleading. In the opinion ofmanagement, the unaudited condensed consolidated financial statements have beenprepared on the same basis as the audited consolidated financial statements andreflect all material adjustments (consisting only of those of a normal andrecurring nature) which are necessary to present fairly the consolidatedfinancial position of the Company as of June 30, 2009, the results of itsoperations for the three and six months ended June 30, 2008 and 2009 andits cash flows for the six months ended June 30, 2008 and 2009. Theseunaudited condensed consolidated financial statements and notes thereto shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2008. The results of operations for the interimperiods are not necessarily indicative of the results of operations to beexpected for the year ending December 31, 2009.

 

As of June 30, 2009,the Company’s significant accounting policies and estimates, which are detailedin the Company’s Annual Report on Form 10-K for the year ended December 31,2008, have not changed except for the adoption of Statement of FinancialAccounting Standards (“SFAS”) No. 141 (R), *BusinessCombinations*, SFAS No. 160, **Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of ARB No. 51,**SFAS No. 161, **Disclosures about Derivative Instruments and Hedging Activities—anamendment of FASB Statement No. 133,** SFAS 162, **The Hierarchy ofGenerally Accepted Accounting Principles, and SFAS 165. Subsequent Events**.  The Company evaluates subsequent eventsthrough the date of filing its Quarterly Report on Form 10-Q.  See Note 19 for additional informationregarding the Company’s adoption of these pronouncements.

 

On April 22, 2009,the Company acquired all of the outstanding common stock of Waban Software, Inc.(“Waban”), a provider of platform solutions for the automation and complianceof clinical data analysis and reporting.  Waban’s Statistical ComputingEnvironment and Clinical Data Repository (SCE/CDR) solutions provideautomation, traceability and control of the key activities involved in theintegration, analysis and reporting on clinical trial data.  The results of Waban have been included inthe Company’s condensed consolidated financial statements since the date ofacquisition (see Note 5).

 

**2.****                ****Revenue Recognition and Deferred Set Up Costs**

 

The Company derives revenues from software licenses andservices. License revenues are derived principally from the sale of termlicenses for the following software products offered by the Company: *InFormTM, ClintrialTM,**Empirica Study*TM,*Empirica*TM*Trace*,*EmpiricaTM Signal,**CTSDTM, WabanCDR*TM*and Waban SCE*TM*.*Service revenues are derived principally from the Company’sdelivery of the hosted solutions of its *InFormTM,**ClarixTM, Empirica Signal,**CTSD and**Empirica Study* software products, andconsulting services and customer support, including training, for all of theCompany’s products.

 

The components of revenueare as follows:

 
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| License                       |       | $                                               | 13,087     |                                          | $          | 14,695 |   | $ | 25,701 |   | $ | 28,811 |   |
| Application  hosting services |       | 21,235                                          |       | 29,810                                        |       | 40,420 |   | 56,438 |   |
| Consulting  services          |       | 3,604                                           |       | 4,701                                         |       | 7,170 |   | 9,561 |   |
| Customer support              |       | 2,925                                           |       | 3,295                                         |       | 5,580 |   | 6,507 |   |
|                          |       |                                            |       |                                          |       |   |   |   |   |
| Total                         |       | $                                               | 40,851     |                                          | $          | 52,501 |   | $ | 78,871 |   | $ | 101,317 |   |

 

The Company recognizessoftware license revenues in accordance with the American Institute ofCertified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2,*Software Revenue Recognition,* as amended,while revenues resulting from application hosting services are recognized inaccordance with Emerging Issues Task Force (“EITF”) Issue No. 00-3,*Application of*

 

6

----

Tableof Contents

 

*AICPAStatement of Position 97-2 to Arrangements that include the Right to UseSoftware Stored on Another Entity’s Hardware*, SEC Staff Accounting Bulletin (“SAB”) No. 104,*Revenue Recognition,* and EITF Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables.*

 

Customers generally havethe ability to terminate application hosting, consulting and training serviceagreements upon 30 days notice to the Company. License agreements,multiple element arrangements, including license and service agreements andcertain application hosting services can generally be terminated by eitherparty for material breach of obligations not corrected within 30 daysafter notice of the breach.

 

The Company recognizesrevenues when all of the following conditions are satisfied: (1) there ispersuasive evidence of an arrangement; (2) the product or service has beenprovided to the customer; (3) the collection of fees is probable; and (4) theamount of fees to be paid by the customer is fixed or determinable.

 

The Company generallyenters into software term licenses for its*InForm*,*Clintrial, Empirica Trace,Waban CDR and Waban SCE* productswith its customers for 3 to 5-year periods. License agreements for otherlicensed products are generally for annual or multi-year terms.  Thesearrangements typically include multiple elements: software license, consultingservices and customer support. The Company bills its customers in accordancewith the terms of the underlying contract. Generally, the Company bills licensefees annually in advance for each year of the license term. Payment terms aregenerally net 30 days.

 

The Company’s softwarelicense revenues are earned from the sale of off-the-shelf software requiringno significant modification or customization subsequent to delivery to thecustomer. Consulting services, which can also be performed by third-partyconsultants, are deemed to be non-essential to the functionality of thesoftware and typically are for trial configuration, implementation planning,loading of software, building simple interfaces and running test data anddocumentation of procedures.

 

Customer support includestraining services, telephone support and software maintenance.  TheCompany generally bundles customer support with the software license for theentire term of the arrangement. As a result, the Company generally recognizesrevenues for all elements, including consulting services, ratably over the termof the software license and support arrangement. The Company allocates the revenuesrecognized for these arrangements to the different elements based on management’sestimate of the relative fair value of each element. For its term-basedlicenses, the Company allocates to consulting services, the anticipated serviceeffort and value throughout the term of the arrangement at an amount that wouldhave been allocated had those services been sold separately to the customer.The value of the Company’s consulting services sold within a bundledarrangement is equal to the value of consulting services sold on a stand-alonebasis, as the activities performed under both types of arrangements are similarin nature.  The remaining value is allocated to license and supportservices, with 10% of this amount allocated to support services. The customersupport services rate of 10% for multi-year term-based licenses reflects asignificant discount from the rate for customer support services associatedwith perpetual licenses due to the reduction in the time period during whichthe customer can utilize the upgrades and enhancements.  The Companybelieves this rate is substantive and represents an amount it believesreasonable to be allocated.  The Company has allocated the estimated fairvalue to its multiple element arrangements to provide meaningful disclosuresabout each of its revenue streams. The costs associated with the consulting andcustomer support services are expensed as incurred. There are instances inwhich the Company sells software licenses based on usage levels. These softwarelicenses can be based on estimated usage, in which case the license fee chargedto the customer is fixed based on this estimate. When the fee is fixed, therevenues are generally recognized ratably over the contractual term of thearrangement. If the fee is based on actual usage, and therefore variable, therevenues are recognized in the period of use. Revenues from certain follow-onconsulting services, which are sold separately to customers with existingsoftware licenses and are not considered part of a multiple elementarrangement, are recognized as the services are performed.

 

The Company continues tosell additional perpetual licenses for the*Clintrial, Empirica Trace, Waban CDR and Waban SCE*software productsin certain situations to its existing customers with the option to purchasecustomer support. The Company has established vendor specific objectiveevidence of fair value for the customer support. Accordingly, license revenuesare recognized upon delivery of the software and when all other revenue recognitioncriteria are met. Customer support revenues are recognized ratably over theterm of the underlying support arrangement. The Company generates customersupport and maintenance revenues from its perpetual license customer base.Training revenues are recognized as earned.

 

In addition to making itssoftware products available to customers through licenses, the Company offersits*InForm*,*Empirica Signal*,*CTSD and Empirica Study*softwaresolutions through a hosted application solution delivered through a standardWeb-browser.  The Company’s*Clarix*solution is presently available only on a hosted application basis.

 

Revenues resulting from*InForm *and*Clarix* application hosting services consist of three stagesfor each clinical trial: the first stage involves application set up, includingdesign, implementation of the system and server configuration; the second stageinvolves application hosting and related support services; and the third stageinvolves services required to close out, or lock, the database for the clinicaltrial. Services provided for the first and third stages are provided on a fixedfee basis based upon the complexity of the

 

7

----

Tableof Contents

 

trial and systemrequirements. Services for the second stage are charged separately as a fixedmonthly fee. The Company recognizes revenues from all stages of the*InForm *and*Clarix* hosting service ratably over the hosting period. Feescharged and costs incurred for the trial system design, set up andimplementation are deferred until the start of the hosting period and areamortized and recognized ratably over the estimated hosting period. Thedeferred costs include incremental direct costs with third parties and certaininternal direct costs related to the trial and application set up, as definedunder SFAS No. 91,*Accounting forNonrefundable Fees and Costs Associated with Originating or Acquiring Loans andIndirect Costs of Leases*. These costs include salary and benefitsassociated with direct labor costs incurred during trial set up, as well asthird-party subcontract fees and other contract labor costs. Work performedoutside the original scope of work is contracted for separately as anadditional fee and is generally recognized ratably over the remaining term ofthe hosting period. Fees for the first and third stages of the service arebilled based upon milestones. Fees for application hosting and related servicesin the second stage are generally billed quarterly in advance. Bundled intothis revenue element are revenues attributable to the software license used bythe customer.

 

Revenues resulting fromhosting services for the*Empirica Signal*,*CTSD* and*Empirica Study* products consist of installation and serverconfiguration, application hosting and related support services.  Servicesfor this offering are generally charged a monthly fixed fee.  Revenues arerecognized ratably over the period of the service.

 

In the event that an applicationhosting customer cancels a clinical trial and its related statement of work,all deferred revenues are recognized and all deferred set up costs areexpensed.  In addition, certain termination related fees may be chargedand if so, such fees are recognized in the period of termination.

 

Provisions for estimatedlosses on uncompleted contracts are made on a contract-by-contract basis andare recognized in the period in which such losses become probable and can bereasonably estimated. To date, the Company has not experienced any materiallosses on uncompleted application hosting or consulting contracts.

 

One customer,GlaxoSmithKline, accounted for approximately 12% of the Company’s totalrevenues in the three months ended June 30, 2008 and 13% of the Company’stotal revenues in the six months ended June 30, 2008. The same customeraccounted for $863 or 2% of accounts receivable outstanding as of December 31,2008.  In the three and six months ended June 30,2009, no customer accounted for 10% or more of the Company’s total revenues forthe period.

 

The Company deferred$1,074 and $1,295 of set up costs and amortized $878 and $985 of set up costsin the three months ended June 30, 2008 and 2009, respectively, anddeferred $2,279 and $2,590 of set up costs and amortized $1,683 and $1,902 ofset up costs in the six months ended June 30, 2008 and 2009,respectively.  The amortization ofdeferred set up costs is a component of cost of service revenues.

 

The Company may alsoenter into arrangements to provide consulting services separate from a licensearrangement. In these situations, revenue is recognized in accordance with SOP81-1,*Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts,* on either atime and materials basis or using the proportional performance method. If theCompany is not able to produce reasonably dependable estimates, revenue isrecognized upon completion of the project and final acceptance from thecustomer. If significant uncertainties exist about project completion orreceipt of payment, the revenue is deferred until the uncertainty is resolved.Provisions for estimated losses on contracts are recorded during the period inwhich they are identified.

 

Deferred revenuerepresents amounts billed or cash received in advance of revenue recognition.

 

In accordance with EITFIssue No. 01-14, *Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred,* the Company included $188 and $257 of out-of-pocketexpenses in service revenues and cost of service revenues in the three monthsended June 30, 2008 and 2009, respectively, and included $343 and $378 ofout-of-pocket expenses in service revenues and cost of service revenues in thesix months ended June 30, 2008 and 2009, respectively.

 

**Internal Use Software and Website Development Costs**

 

The Company follows theguidance of EITF Issue No. 00-2,*Accounting for Web Site Development Costs,* which sets forth theaccounting for website development costs based on the website developmentactivity. The Company follows the guidance set forth in SOP No. 98-1,*Accounting for the Cost of Computer SoftwareDeveloped or Obtained for Internal Use*, in accounting for thedevelopment of its on demand use systems. SOP No. 98-1 requires companiesto capitalize qualifying computer software costs which are incurred during theapplication development stage, and to amortize them over the software’sestimated useful life. The Company capitalized $196 and $172 during the threemonths ended June 30, 2008 and 2009, respectively, and $196 and $378during the six months ended June 30, 2008 and 2009 respectively, relatedto Company-wide financial systems and outside software development costsassociated with the Company’s hosting operation, and has included these amountsin purchased computer software in the accompanying unaudited condensedconsolidated financial statements.  The Company amortizes such costs whenthe systems or software becomes operational. Costs are amortized over theestimated useful life of the respective system or software.  Amortization

 

8

----

Tableof Contents

 

expense was $23 and $28during the three months ended June 30, 2008 and 2009, respectively, and$48 and $38 during the six months ended June 30, 2008 and 2009respectively.

 

**ComputerSoftware Development Costs and Research and Development Expenses**

 

TheCompany has evaluated the establishment of technological feasibility of itsproducts in accordance with SFAS No. 86,*Accounting for the Costs of Computer Software to Be Sold, Leased or OtherwiseMarketed*. The Company sells products in a market that is subject torapid technological change, new product development and changing customer needs.Accordingly, the Company has concluded that technological feasibility is notestablished until the development stage of the product is nearly complete. TheCompany defines technological feasibility as the completion of a working model.The time period during which costs could be capitalized, from the point ofreaching technological feasibility until the time of general product release,is very short, and consequently, the amounts that could be capitalized are notmaterial to the Company’s financial position or results of operations.Therefore, the Company has charged all such costs to research and developmentexpense in the period incurred.

 

**3.****                ****Prepaid Sales Commissions andRoyalties**

 

For arrangements where revenues are recognized over therelevant contract period, the Company defers related commissions paid to itsdirect sales force and software license royalties paid to third parties, andamortizes these expenses over the period in which the related revenues arerecognized.

 

Commission payments are nonrefundable unless the salesrepresentatives do not achieve their specific quota, amounts due from acustomer are determined to be uncollectible or if the customer subsequentlychanges or terminates the level of service, in which case commissions paid arerecoverable by the Company. The Company deferred $2,361 and $3,123 of commissions and amortized tosales and marketing expense $2,035 and $1,965 in the three months ended June 30,2008 and 2009, respectively, and deferred $4,380 and $5,107 of commissions andamortized to sales and marketing expense $3,818 and $3,709 in the six monthsended June 30, 2008 and 2009, respectively.

 

The Company’s royaltyobligation is based upon the license and customer support revenues earned forcertain products in an arrangement. The Company has the right to recover theroyalties in the event the arrangement is cancelled. The Company deferred $521and $638 of royalties and amortized to cost of revenues $648 and $819 in thethree months ended June 30, 2008 and 2009, respectively, and deferred$1,569 and $1,727 of royalties and amortized to cost of revenues $1,340 and$1,480 in the six months ended June 30, 2008 and 2009, respectively.

 

**4.****                ****Warranties and Indemnification**

 

The Company’s softwarelicense arrangements and hosting services are typically warranted to perform ina manner consistent with general industry standards that are reasonablyapplicable and substantially in accordance with the Company’s productdocumentation under normal use and circumstances. The Company’s arrangementsalso include certain provisions for indemnifying customers against liabilitiesif its products or services infringe a third party’s intellectual propertyrights.

 

The Company has enteredinto service level agreements with some of its hosted application customerswarranting certain levels of uptime reliability and permitting those customersto receive credits against monthly hosting fees or terminate their agreementsin the event that the Company fails to meet those levels.

 

To date, the Company hasnot incurred any material costs as a result of such indemnifications and hasnot accrued any liabilities related to such obligations in the accompanyingconsolidated financial statements.

 

**5.****                ****Acquisitions**

 

*Maaguzi,LLC (Non-recognized subsequent event)*

 

On July 27, 2009,the Company acquired privately held Maaguzi LLC (“Maaguzi”), an innovativeprovider of Web-based, electronic patient reported outcomes (ePRO) and latephase solutions, for approximately $11,000 in cash.  The acquisition of Maaguziextends the Company’s integrated clinical research suite and marks the Company’sentry into the increasingly important ePRO and observational studiesmarkets.  The acquisition of Maaguzi willbe accounted for as a purchase under SFAS No. 141 (R). Accordingly, theresults of Maaguzi will be included in the consolidated financial statements ofthe Company from the date of acquisition.

 

9

----

Tableof Contents

 

*Covance(Non-recognized subsequent event)*

 

On July 15, 2009,the Company entered into an agreement to purchase the Interactive Voice &Web Response Services (IVRS/IWRS) business of Covance Inc. (“Covance”) for$10,000 in cash. As part of this transaction, the Company and Covance have alsoagreed to enter into a multi-year marketing agreement to provide the Company’sInForm electronic data capture (EDC) solution and Clarix interactiveresponse technology solution to Covance clients.  The acquisition is expected to be completedby the middle of August 2009.  Theacquisition will be accounted for as a purchase under SFAS No. 141(R).  Accordingly, the results of the acquired IVRS/IWRS business will beincluded in the consolidated financial statements of the Company from the dateof acquisition.

 

*WabanSoftware, Inc.*

 

On April 22,2009, the Company acquired all of the outstanding common stock of WabanSoftware, Inc. (“Waban”), a provider of platform solutions for theautomation and compliance of clinical data analysis and reporting.  Waban’sStatistical Computing Environment and Clinical Data Repository (SCE/CDR)solutions provide automation, traceability and control of the key activitiesinvolved in the integration, analysis and reporting on clinical trialdata.  The aggregate purchase price was $13,766 in cash, of which $7,747has been recorded as goodwill.  The Company acquired the technology ofWaban to allow it to penetrate the market for statistical computing andclinical data repository solutions.  The acquisition of Waban has beenaccounted for as a purchase under SFAS No. 141 (R).  Under SFASNo. 141(R), all of the assets acquired and liabilities assumedin the transaction are recognized at their acquisition-date fair values, whiletransaction costs and restructuring costs associated with the transaction areexpensed as incurred.

 

*Purchase Price. *The $13,766 purchase price forWaban is based on the acquisition-date fair value of the considerationtransferred, which was calculated based on the initial cash paid and anyworking capital adjustments as of 90 days after the acquisition date. Working capitaladjustments have been classified as “Accrued expenses” in the accompanyingunaudited condensed consolidated balance sheet for the period endedJune 30, 2009. The acquisition-date fair value of the considerationconsisted of the following:

 
| ** **                          | ** ** | **Preliminary Estimated**            | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **Fair Values as of** | ** ** |
| ** **                          | ** ** | **June 30, 2009**          | ** ** |
| Cash  paid                          |       | $                                    | 13,660     |   |
| Accrued  working capital adjustment |       | 106                                  |       |
| Total  purchase price               |       | $                                    | 13,766     |   |

 

*Preliminary Allocations ofAssets and Liabilities. *For thepurposes of the condensed consolidated balance sheets, the Company has madepreliminary allocations of the purchase price for Waban to the net tangibleassets and intangible assets, goodwill, deferred income taxes and deferredrevenue. However, the Company is in the process of completing its valuations ofcertain intangible assets and deferred revenue. The difference between theaggregate purchase price and the fair value of assets acquired and liabilitiesassumed, if any, is allocated to goodwill. The final allocations of thepurchase price to intangible assets, goodwill, deferred income taxes anddeferred revenue may differ materially from the information presented in theseunaudited condensed consolidated financial statements. The following tablesummarizes the preliminary estimated fair values of the assets acquired andliabilities assumed at the acquisition date:

 
| ** **                     | ** ** | **Preliminary Estimated   Fair Values as of   June 30, 2009** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| Current  Assets                |       | $                                                                                                     | 825        |   |
| Property,  plant and equipment |       | 135                                                                                                   |       |
| Other  assets                  |       | 30                                                                                                    |       |
| Intangible  assets             |       | 8,905                                                                                                 |       |
| Goodwill                       |       | 7,747                                                                                                 |       |
| Current  liabilities           |       | (427                                                                                                  | )          |
| Deferred  Income Taxes         |       | (2,421                                                                                                | )          |
| Deferred  revenues             |       | (1,028                                                                                                | )          |
| Net  assets acquired           |       | $                                                                                                     | 13,766     |   |

 

Under SFAS No. 141(R), based on the preliminaryallocations, $4,758, $3,174 and $973 of the intangible assets acquired fromWaban relate to developed technology, customer relationships and tradenames,respectively.  In accordance with SFASNo. 142, *Goodwill and Other Intangible Assets*,the

 

10

----

Table of Contents

 

Company will periodically evaluate the assets allocated to intangibleassets.  Developed technology, customerrelationships and tradenames will be amortized over a period of 15 years, 15years and 8 years, respectively.  If anallocated asset becomes impaired or is abandoned, the carrying value of the relatedintangible asset will be written down to its fair value and an impairmentcharge will be taken in the period in which the impairment occurs. Theseintangible assets will be tested for impairment on an annual basis, or earlierif impairment indicators are present.

 

The difference between the consideration transferred toacquire the business and the fair value of assets acquired and liabilitiesassumed is allocated to goodwill. None of the goodwill is expected to bedeductible for income tax purposes. As of June 30, 2009, there were nochanges in the recognized amounts of goodwill resulting from the acquisition ofWaban.

 

*Waban FinancialInformation. *The resultsof operations of Waban have been included in the condensed consolidatedfinancial statements since the acquisition date. Waban had $280 in revenues inthe period from the acquisition date (April 22, 2009) to June 30,2009, and Waban’s net operating loss in the period from the acquisition date toJune 30, 2009 was immaterial to the Company’s condensed consolidated financialresults.  Pro forma results of operationsfor the three and six months ended June 30, 2008 and 2009, assuming theacquisition of Waban had taken place at the beginning of each period, would notdiffer significantly from the actual reported results.

 

**6.****                   ****Net Income Per Share**

 

Basic and diluted netincome per share is presented in conformity with SFAS No. 128,*Earnings Per Share*.  Basic net income per common share for allperiods presented was determined by dividing net income applicable to commonstockholders by the weighted average number of common shares outstanding duringthe period. Weighted average shares outstanding exclude unvested restrictedcommon stock. Diluted net income per share includes the effects of alldilutive, potentially issuable common shares using the treasury stock method.

 

The calculation of basicand diluted net income per share is as follows:

 
| ** **                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| **Numerator:**                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Net income                                                                 |       | $                                               | 3,694      |                                          | $          | 2,227 |   | $ | 7,696 |   | $ | 6,305 |   |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| **Denominator:**                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Weighted-average  common shares outstanding                                |       | 42,800,795                                      |       | 43,159,822                                    |       | 42,759,162 |   | 43,091,200 |   |
| Less  weighted-average unvested restricted common stock awards outstanding |       | (793,761                                        | )          | (536,429                                      | )          | (826,301 | ) | (564,136 | ) |
| Basic weighted-average  common shares outstanding                          |       | 42,007,034                                      |       | 42,623,393                                    |       | 41,932,861 |   | 42,527,064 |   |
| Dilutive effect  of common stock options                                   |       | 1,307,323                                       |       | 1,071,396                                     |       | 1,335,742 |   | 1,093,458 |   |
| Dilutive effect  of unvested restricted common stock awards and units      |       | 544,204                                         |       | 603,584                                       |       | 529,650 |   | 569,653 |   |
| Diluted  weighted-average common shares outstanding                        |       | 43,858,561                                      |       | 44,298,373                                    |       | 43,798,253 |   | 44,190,175 |   |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Net income per  share applicable to common stockholders:                   |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                      |       | $                                               | 0.09       |                                          | $          | 0.05 |   | $ | 0.18 |   | $ | 0.15 |   |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Diluted                                                                    |       | $                                               | 0.08       |                                          | $          | 0.05 |   | $ | 0.18 |   | $ | 0.14 |   |

 

Diluted weighted averagecommon shares outstanding do not include options, awards and units outstandingto purchase 394,463 and 99,883 common equivalent shares for the three monthsended June 30, 2008 and 2009, respectively, and do not include options,awards, and units outstanding to purchase 399,176 and 100,138 common equivalentshares for the six months ended June 30, 2008 and 2009, respectively astheir effect would have been anti-dilutive.

 

11

----

Tableof Contents

 

**7.****     ****Foreign Currency Translation**

 

The financial statementsof the Company’s foreign subsidiaries are translated in accordance with SFAS No. 52,*Foreign Currency Translation.*  The reporting currency for the Company is theU.S. dollar. The functional currency of the Company’s subsidiaries inAustralia, Belgium, France, India, Japan, Romania and the United Kingdom arethe local currencies of those countries. Accordingly, the assets andliabilities of the Company’s foreign subsidiaries are translated into U.S.dollars using the exchange rate in effect at each balance sheet date. Revenueand expense accounts are translated using an average rate of exchange duringthe period. Gains and losses arising from transactions denominated in foreigncurrencies are primarily related to intercompany accounts that have beendetermined to be temporary in nature and cash accounts and accounts receivabledenominated in non-functional currencies.  The Company recorded foreign currency gains/(losses)of $15 and $(174) in the three months ended June 30, 2008 and 2009,respectively, and $14 and $(26) in the six months ended June 30, 2008 and2009, respectively.  Such gains/(losses)are included in other income in the accompanying unaudited condensedconsolidated statements of income.

 

Foreign currencytranslation adjustments are accumulated as a component of other comprehensiveincome as a separate component of stockholders’ equity.

 

**8.****     ****Cash, Cash Equivalents, Short-termand Long-term Investments**

 

The Company accounts forits investments in accordance with SFAS No. 115,*Accounting for Certain Investments in Debt and Equity Securities*.Under SFAS No. 115, securities that the Company has the intent and abilityto hold to maturity are reported at amortized cost, which approximates marketvalue, and are classified as held-to-maturity. Securities for which it is notthe Company’s intent to hold to maturity are classified as eitheravailable-for-sale securities or trading securities. Available-for-salesecurities are reported at fair value, with temporary unrealized gains (losses)excluded from earnings and reported in a separate component of stockholders’equity and other than temporary unrealized losses included in earnings. Tradingsecurities are reported at fair value, with unrealized gains (losses) includedin earnings. The Company considers all highly liquid investments with originalmaturities of 90 days or less at the time of purchase to be cash equivalentsand investments with original maturities of between 91 days and one year to beshort-term investments. The Company considers investments with maturitiesgreater than one year to be long-term investments.  All securities, withthe exception of auction rate securities (“ARS”), are classified asheld-to-maturity securities. The auction rate securities are debt instrumentsissued by various municipalities throughout the United States. In prior periods and up through theexecution of the signed settlement agreement with UBS in November 2008 asfurther discussed below, the ARS were classified as available-for-sale because it was the Company’s intent notto hold them to maturity. Upon the execution of the settlement agreement withUBS, the Company elected to make a one-time transfer of the ARS fromavailable-for-sale securities to trading securities.  Accordingly, on a prospective basis, allunrealized gains (losses) for these trading securities have been included inearnings.

 

Cash, cash equivalents, short-termand long-term investments as of December 31, 2008 and June 30, 2009consist of the following:

 
| ** **                      | ** ** | **December  31, 2008** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Contracted**         | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** | **Balance Per** | ** ** |
| **Description**                 | ** ** | **Maturity**           | ** ** | **Cost** | ** ** | **Value** | ** ** | **Balance Sheet** | ** ** |
| Cash                            |       | Demand                 |       | $ | 22,487 |   | $ | 22,487 |   | $ | 22,487 |   |
| Money market funds              |       | Demand                 |       | 109,063 |   | 109,063 |   | 109,063 |   |
| Total cash and cash equivalents |       |                   |       | $ | 131,550 |   | $ | 131,550 |   | $ | 131,550 |   |
|                            |       |                   |       |   |   |   |   |   |   |
| U.S. agency notes               |       | 236 days               |       | $ | 2,000 |   | $ | 2,000 |   | $ | 2,000 |   |
| Municipal bonds                 |       | 1 day                  |       | 1,000 |   | 1,000 |   | 1,000 |   |
| Corporate bonds                 |       | 127 days               |       | 24,893 |   | 24,884 |   | 24,893 |   |
| Total short-term investments    |       |                   |       | $ | 27,893 |   | $ | 27,884 |   | $ | 27,893 |   |
|                            |       |                   |       |   |   |   |   |   |   |
| Auction rate securities         |       | 26 years               |       | $ | 24,050 |   | $ | 18,022 |   | $ | 18,022 |   |
| Total long-term investments     |       |                   |       | $ | 24,050 |   | $ | 18,022 |   | $ | 18,022 |   |

 

12

----

Tableof Contents

 
| ** **                      | ** ** | **June 30, 2009** | ** ** |
|---------------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **Contracted**              | ** ** | **Amortized** | ** ** | **Fair Market** | ** ** | **Balance Per** | ** ** |
| **Description**                 | ** ** | **Maturity**                | ** ** | **Cost** | ** ** | **Value** | ** ** | **Balance Sheet** | ** ** |
| Cash                            |       | Demand                      |       | $ | 17,150 |   | $ | 17,150 |   | $ | 17,150 |   |
| Money market funds              |       | Demand                      |       | 77,571 |   | 77,571 |   | 77,571 |   |
| Total cash and cash equivalents |       |                        |       | $ | 94,721 |   | $ | 94,721 |   | $ | 94,721 |   |
|                            |       |                        |       |   |   |   |   |   |   |
| U.S. agency notes               |       | 192 days                    |       | $ | 7,746 |   | $ | 7,763 |   | $ | 7,746 |   |
| Corporate bonds                 |       | 329 days                    |       | 17,700 |   | 17,769 |   | 17,700 |   |
| Auction rate securities         |       | 26 years                    |       | 24,000 |   | 18,436 |   | 18,436 |   |
| Total short-term investments    |       |                        |       | $ | 49,446 |   | $ | 43,968 |   | $ | 43,882 |   |
|                            |       |                        |       |   |   |   |   |   |   |
| U.S. agency notes               |       | 604 days                    |       | $ | 13,846 |   | $ | 13,949 |   | $ | 13,846 |   |
| Municipal bonds                 |       | 684 days                    |       | 2,000 |   | 2,013 |   | 2,000 |   |
| Corporate bonds                 |       | 508 days                    |       | 14,231 |   | 13,364 |   | 14,231 |   |
| Total long-term investments     |       |                        |       | $ | 30,077 |   | $ | 29,326 |   | $ | 30,077 |   |

 

The Company has had norealized gains or losses from the sale of cash equivalents or short-terminvestments.

 

As of December 31,2008 and June 30, 2009 the Company held ARS totaling $24,050 and $24,000,respectively, at par value, which were classified as long-term investments andshort-term investments, respectively, in the accompanying unaudited condensedconsolidated balance sheets, and which are recorded at fair value.  These ARS are debt instruments issued byvarious states throughout the United States to finance student loans.  Thetypes of ARS that the Company owns are backed by student loans, 95% of whichare guaranteed under the Federal Family Education Loan Program, and all havecredit ratings of AAA (or equivalent) from a recognized rating agency. Historically, the carrying value of ARS approximated fair value due to thefrequent resetting of the interest rates. With the liquidity issues experiencedin the global credit and capital markets, the Company’s ARS have experiencedmultiple failed auctions. While the Company continues to earn and receiveinterest on these investments at the maximum contractual rate, the estimatedfair value of these ARS no longer approximates par value.

 

In November 2008,the Company accepted an offer from and entered into an agreement (the “Agreement”)with UBS AG (“UBS”) with respect to all of the Company’s ARS held at that time. As a UBS client who holds ARS, the Company will receive certain rights, whichwill entitle the Company to sell ARS to UBS affiliates during the period from June 30,2010 to July 2, 2012 for a price equal to par value.  In acceptingthe Agreement, the Company granted UBS the authority to sell or auction the ARSat par at any time up until the expiration date of the Agreement and releasedUBS from any claims relating to the marketing and sale of ARS.  UBSobligations under the Agreement are not secured by its assets and do notrequire UBS to obtain any financing to support its performance obligationsunder the Agreement.  UBS has disclaimed any assurance that it will havesufficient financial resources to satisfy its obligations under the Agreement. If UBS has insufficient funding to buy back the ARS and the auction processcontinues to fail, the Company may incur further losses on the carrying valueof the ARS.

 

The Company performed afair value calculation of these ARS as of December 31, 2008 and June 30,2009.  Fair value was determined using a secondary market indicationsmethod (direct discounts) and a discounted cash flow method as recent auctionsof these securities were not successful, resulting in the Company continuing tohold these securities and issuers paying interest at the maximum contractualrate. This valuation technique considers the following: time left to maturity,the rate of interest paid on the securities, the amount of principal to berepaid to the holders of the securities; the credit worthiness of the issuerand guarantors (if any) and the sufficiency of the collateral; tradingcharacteristics of the securities; ability to borrow against the ARS; evidencefrom secondary market sales; and the market-clearing yield for the securities.Based upon the valuation performed, the Company concluded that the fair valueof these ARS at December 31, 2008 was $18,022, a decline of $6,028 frompar value. Since the Company’s signed Agreement with UBS indicates that theCompany intends to sell the ARS to UBS affiliates before their stated maturitydates under the terms of the ARS, the decline in fair value is deemedother-than-temporary. Accordingly, the Company recorded a loss on thesesecurities of $6,028 in the accompanying unaudited condensed consolidatedstatement of income for the year ended December 31, 2008 as it was deemedto be other-than-temporary.

 

As of June 30, 2009,the Company concluded that the fair value of these ARS increased to $18,436 andtherefore, recorded the change in fair value of these securities from December 31,2008 of $414 in the accompanying unaudited condensed consolidated statement ofincome for the six months ended June 30, 2009.  During the three months ended June 30,2009 the fair value of these ARS decreased $23 and therefore, the Companyrecorded the change in fair value of these securities in the accompanyingunaudited condensed consolidated statement of income for the three months endedJune 30, 2009.  As of June 30,2009, it is the Company’s intent to sell the ARS on June 30, 2010 inaccordance with its rights under the Agreement.  Accordingly, they were reclassified fromlong-term investments to short-term investments in the accompanying unauditedcondensed consolidated balance sheets.

 

13

----

Tableof Contents

 

The Company elected tomeasure the fair value of the put option under the Agreement (the “put option”)under the fair value option of SFAS No. 159,*The Fair Value Option for Financial Assets and Liabilities- includingan amendment of FASB Statement No. 115*. Fair value wasdetermined using a discounted cash flow method, which considered the followingfactors: term of the agreement, the availability to borrow against the ARS, thecreditworthiness of UBS and current market interest rates. Based on thevaluation performed, the Company concluded that the fair value of the putoption was $5,322 as of December 31, 2008.  Accordingly, a gain of $5,322was recorded in the consolidated statement of income for the year ended December 31,2008 with a corresponding long term asset, “securities settlement agreement”,in the consolidated balance sheet at December 31, 2008.  Based on the valuation performed as of June30, 2009 the Company concluded that the fair market value of the securitiessettlement agreement was $5,336, resulting in an increase in fair value of $199and $14 being recorded in the Company’s accompanying unaudited condensedconsolidated statements of income for the three and six months ended June 30,2009, respectively. As of June 30, 2009, it is the Company’s intent tosell the ARS on June 30, 2010 in accordance with its rights under thesettlement agreement, and accordingly reclassified the fair value of the“securities settlement agreement” from long-term-assets to current assets inthe accompanying unaudited condensed consolidated balance sheets.

 

Refer to Note 18 forfurther discussion on the adoption of SFAS No. 157,*Fair Value Measurements*, and SFAS No. 159.

 

**9.****      ****Goodwill and Intangible Assets**

 

Goodwill and intangible assets that have indefinite livesare not amortized but are evaluated for impairment annually or whenever eventsor changes in circumstances indicate the carrying value may not be recoverable.Intangible assets that have finite lives are amortized over their useful lives.

 

The goodwill resultingfrom acquisitions is reviewed for impairment on an annual basis in accordancewith SFAS No. 142*.*  Consistent with prior years, the Companyconducted its annual impairment test of goodwill during the fourth quarter of2008.  Based on the results of the firststep of the goodwill impairment test, the Company determined that no impairmentof goodwill existed at December 31, 2008, as the carrying amount ofgoodwill of the reporting unit was less than its fair value and therefore, thesecond step of the goodwill impairment test was not necessary.

 

A rollforward of the netcarrying amount of goodwill is as follows:

 
| ** **                                                            | ** ** | **Amount** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|
|                                                                  |       |       |       |
| Balance  as of December 31, 2008                                 |       | $          | 39,125     |   |
|                                                                  |       |       |       |
| Purchase  price adjustments associated with the acquisition of Clarix |       | 227        |       |
| Increase  associated with the acquisition of Waban (Note 5)           |       | 7,747      |       |
|                                                                  |       |       |       |
| Balance  as of June 30, 2009                                     |       | $          | 47,099     |   |

 

Finite-lived intangibleassets consist of the following:

 
| ** **                        | ** ** | ** **                      | ** ** | **As of December 31, 2008** | ** ** | **As of June 30, 2009** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------|------------|
| **Description**                   | ** ** | **Estimated  Useful Life** | ** ** | **Gross  Carrying  Value**                      | ** ** | **Accumulated  Amortization**               | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** |
| Developed technology and know-how |       | 5-15  years                     |       | $                                               | 15,460     |                                        | $          | 1,743 |   | $ | 20,218 |   | $ | 2,613 |   |
| Customer relationships            |       | 5-15  years                     |       | 10,010                                          |       | 1,309                                       |       | 13,184 |   | 1,821 |   |
| Non-compete agreements            |       | 2-3  years                      |       | 610                                             |       | 335                                         |       | 610 |   | 386 |   |
| Tradename                         |       | 5-8  years                      |       | 300                                             |       | 157                                         |       | 1,273 |   | 200 |   |
| Customer backlog                  |       | 3 years                         |       | 720                                             |       | 80                                          |       | 720 |   | 200 |   |
| Total                             |       |                            |       | $                                               | 27,100     |                                        | $          | 3,624 |   | $ | 36,005 |   | $ | 5,220 |   |

 

Amortization expenserelated to intangible assets for the three months ended June 30, 2008 and2009 was $255 and $836, respectively, and $510 and $1,596 for the six monthsended June 30, 2008 and 2009, respectively.

 

14

----

Tableof Contents

 

The estimated remainingamortization expense for each of the five succeeding years is as follows:

 
| **Year ended December 31,**      | ** ** | **Amount** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| 2009 (six months  ended December 31, 2009) |       | $          | 1,719      |   |
| 2010                                            |       | 4,329      |       |
| 2011                                            |       | 3,691      |       |
| 2012                                            |       | 3,610      |       |
| 2013                                            |       | 3,335      |       |
| 2014 and  thereafter                            |       | 14,101     |       |
| Total                                           |       | $          | 30,785     |   |

 

In connection with theacquisition of Clarix LLC (“Clarix”), the Company identified certain acquiredintangible assets which were determined to have an indefinite life.  The assets, which relate to the tradename ofClarix, totaled $4,110.

 

**10.**** ****Accrued Expenses**

 

Accrued expenses consistof the following:

 
| ** **                            | ** ** | **As of  December 31,** | ** ** | **As of  June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2008**                          | ** ** | **2009**                      | ** ** |
| Accrued payroll  and related benefits |       | $                                 | 14,108     |                          | $          | 11,571 |   |
| Accrued  royalties                    |       | 1,839                             |       | 1,631                         |       |
| Loss on foreign  exchange contracts   |       | 1,059                             |       | —                        |       |
| Lease exit costs                      |       | 527                               |       | —                        |       |
| Accrued other  expenses               |       | 5,153                             |       | 4,970                         |       |
|                                  |       |                              |       |                          |       |
| Total                                 |       | $                                 | 22,686     |                          | $          | 18,172 |   |

 

**11.**    **Restricted Cash**

 

As of December 31,2008, the Company had a $500 collateral obligation for the Company’s priorcorporate headquarters facility lease which was secured by a certificate ofdeposit.  The certificate of deposit was classified as “Restricted cash,current portion” in the accompanying unaudited condensed consolidated balancesheet.  In connection with the relocationof the Company’s corporate headquarters, the $500 collateral obligation wasterminated and as such this amount is no longer classified as “Restricted cash,current portion” as of June 30, 2009.

 

In connection with thesigning of a lease on February 13, 2008 to secure office space for theCompany’s new corporate headquarters at 77 Fourth Avenue, Waltham,Massachusetts, the Company deposited with the landlord an unconditional,irrevocable letter of credit in the landlord’s favor in the amount of $962,secured by a certificate of deposit. The certificate of deposit has been classified as “Restrictedcash, net of current portion” in the accompanying unaudited condensedconsolidated balance sheets as of December 31, 2008 and June 30,2009.  See Note 12 for further discussion regarding this lease.

 

**12.****   ****Commitments and Contingencies**

 

From time to time and inthe ordinary course of business, the Company is subject to various claims,charges and litigation. Intellectual property disputes often have a risk ofinjunctive relief which, if imposed against the Company, could materially andadversely affect its financial condition or results of operations. From time totime, third parties have asserted and may in the future assert intellectualproperty rights to technologies that are important to the Company’s businessand have demanded and may in the future demand that the Company license theirtechnology. Although the outcome of litigation cannot be predicted withcertainty and some lawsuits, claims or proceedings may be disposed ofunfavorably to the Company, which could materially and adversely affect itsfinancial condition or results of operations, the Company does not believe thatit is currently a party to any material legal proceedings.

 

On February 13,2008, the Company entered into a lease (“Lease”) with BP Fourth Avenue, L.L.C.(the “Landlord”) to secure office space for the Company’s current corporateheadquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement datefor occupancy under the Lease was December 2008. The lease for the Company’sprevious corporate headquarters at 880 Winter Street in Waltham, Massachusettsexpired in February 2009.  The new Lease provides for the rental of165,129 rentable square feet of space and has an initial term of 10 years andthree months. The Company can, subject to certain conditions, extend this termby exercising up to two consecutive five year options. The Company is notrequired to pay any rent for the first three months of the

 

15

----

Tableof Contents

 

initial Lease term.  After the initial threemonths, the annual rent under the Lease for years one through five is $6,600,or approximately $548 per month.  For years six through ten, the annualrent will be $7,200, or approximately $603 per month.  The total base rentpayable in the initial term is $69,100.  In connection with the signing ofthe Lease, the Company has deposited with the Landlord an unconditional,irrevocable letter of credit in Landlord’s favor in the amount of $962.

 

**13.    Leasehold Incentive Obligation**

 

In conjunction with the February 2008lease agreement for the Company’s current headquarters, the landlord agreed toreimburse the Company for leasehold improvements totaling $8,104, which wasreceived in 2008.  In accordance with SFAS No. 13,*Accounting for Leases*, and FASB TechnicalBulletin 88-1,*Issues Relating to Accountingfor Leases*, the leasehold improvements are recognized in propertyand equipment on the consolidated balance sheet, with the corresponding reimbursementrecognized as “leasehold incentive obligation” on the consolidated balancesheet.  The amount of the incentive will be amortized on a straight-linebasis over the lease term as a reduction of rental expense at the beginning ofoccupancy.  The leasehold improvements in property, plant and equipmentwill be amortized over the shorter of the lease term or the estimated usefullife of the asset.  The Company amortized the leasehold incentiveobligation as a reduction to rent expense of $198 and $396 in the three and sixmonths ended June 30, 2009, respectively. In the three and six months ended June 30, 2008 there were noamounts expensed relating to the amortization of the leasehold incentiveobligation.

 

**14.    Stockholders’ Equity and Stock-Based Compensation**

 

For options accounted forunder SFAS No. 123(R),*Share-BasedPayments*, the fair value of each option grant is estimated on thedate of grant using the Black-Scholes pricing model. No options were grantedduring the three and six months ended June 30, 2008 and 2009. In addition,while SFAS No. 123,*Accounting forStock-Based Compensation,* permitted companies to record forfeituresbased on actual forfeitures, which was the Company’s historical policy underSFAS No. 123, SFAS No. 123(R) requires companies to utilize anestimated forfeiture rate when calculating stock-based compensation expense forthe period.  During the three months ended June 30, 2008 and 2009,the Company recorded $1,992 and $3,625 of aggregate stock-based compensationexpense, respectively, and $3,738 and $6,194 in the six months ended June 30,2008 and 2009, respectively.  As of June 30,2009, there was $29,272 of unrecognized stock-based compensation expenserelated to stock-based awards that is expected to be recognized over a weightedaverage period of 2.57 years.

 

The Company appliedforfeiture rates derived from an analysis of its historical data in determiningthe expense recorded in the Company’s consolidated statements of income asfollows:

 
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Restricted stock  units and awards |       | 6.25                                            | %          | 5.25                                          | %          | 6.25 | % | 5.25 | % |
| Service-based  stock options       |       | 9.00                                            | %          | 9.00                                          | %          | 9.00 | % | 9.00 | % |
| Milestone  options                 |       | 12.00                                           | %          | 12.00                                         | %          | 12.00 | % | 12.00 | % |

 

*Common Stock*

 

In the three and six months ended June 30,2009, the Company issued 148,761 and 238,279 shares of common stock,respectively, in connection with the exercise of stock options resulting inproceeds of $899 and $1,241, respectively. In the three and six months ended June 30, 2009, the Company issued18,415 shares of common stock under the 2004 Employee Stock Purchase Planresulting in proceeds of $241.  In thethree and six months ended June 30, 2009, the Company released 237,275 and340,533 shares of common stock in connection with the vesting of restrictedstock awards and units.  The Companyretired 87,538 and 122,961 of these shares to cover withholding taxes in theamount of $1,260 and $1,718.

 

16

----

Tableof Contents

 

*Stock Option Activity*

 

A summary of stock optionactivity under the Phase Forward Incorporated 1997 Stock Option Plan, the PhaseForward Incorporated 2004 Stock Option and Incentive Plan and the 2003Non-Employee Director Stock Option Plan as of June 30, 2009, and changesduring the six months ended June 30, 2009, is as follows:

 
| ** **                                                    | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate Intrinsic  Value (2)** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------|------------|
| Outstanding as  of December 31, 2008                     |       | 2,187,123                  |       | $                                                          | 4.84       |                                                             | 4.77       |                               |       |   |
| Granted                                                       |       | —                     |       | —                                                     |       |                                                             |       |                               |       |
| Exercised                                                     |       | (238,279                   | )          | 5.21                                                       |       |                                                             |       | $                                  | 2,359      |   |
| Canceled                                                      |       | 281                        |       | 6.53                                                       |       |                                                             |       |                               |       |
|                                                          |       |                       |       |                                                       |       |                                                             |       |                               |       |
| Outstanding as  of June 30, 2009                         |       | 1,949,125                  |       | $                                                          | 4.79       |                                                             | 4.22       |                               | $          | 20,113 |   |
|                                                          |       |                       |       |                                                       |       |                                                             |       |                               |       |
| Exercisable as  of June 30, 2009                         |       | 1,853,955                  |       | $                                                          | 4.69       |                                                             | 4.14       |                               | $          | 19,313 |   |
|                                                          |       |                       |       |                                                       |       |                                                             |       |                               |       |
| Vested or  expected to vest as of June 30, 2009 (1) |       | 1,941,810                  |       | $                                                          | 4.79       |                                                             | 4.21       |                               | $          | 20,048 |   |

 

----

|   | (1)    | The vested or expected  to vest options at June 30, 2009 include both the vested options and the  number of options expected to vest calculated after applying an estimated  forfeiture rate to the unvested options.                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                |
|   | (2)    | The aggregate intrinsic  value is calculated based on the positive difference between the fair value  per share of the Company’s common stock on June 30, 2009 of $15.11 or as  of the date of exercise, as applicable and the exercise price of the  underlying options. |

 

*Restricted Stock Awards and Unit Activity*

 

A summary of activityrelated to restricted common stock awards and unit awards during the six monthsended June 30, 2009, is as follows:

 
| ** **                              | ** ** | **Number  of  Shares** | ** ** | **Market  Price  Per Share** | ** **    | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** | **Weighted  Average  Remaining  contractual  Term  (years)** | ** ** | **Aggregate Intrinsic  Value (2)** | ** ** |
|-----------------------------------------|------------|------------------------|------------|------------------------------|---------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------|------------|
| Unvested at December 31, 2008      |       | 2,139,964              |       | $                            | 10.85 - 23.20 |                                                     | $          | 15.66                                                        |       |                               |       |   |   |
| Granted                                 |       | 934,294                |       | 11.10 - 15.53                |          |                                                     |       |                                                         |       |                               |       |
| Vested                                  |       | (340,533               | )          | 12.12 - 18.64                |          |                                                     |       |                                                         |       |                               |       |
| Forfeited                               |       | (17,095                | )          | 10.85 - 23.03                |          |                                                     |       |                                                         |       |                               |       |
| Unvested at June 30, 2009          |       | 2,716,630              |       | $                            | 10.85 - 23.20 |                                                     | $          | 15.41                                                        |       | 2.60                               |       | $ | 41,048 |   |
|                                    |       |                   |       |                         |          |                                                     |       |                                                         |       |                               |       |
| Expected to be free of restrictions (1) |       | 2,221,366              |       | $                            | 10.85 - 23.20 |                                                     | $          | 15.42                                                        |       | 2.58                               |       | $ | 33,565 |   |

 

----

|   | (1)    | The expected to be free  of restrictions at June 30, 2009 was calculated by applying an estimated  forfeiture rate to the unvested shares.     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                |
|   | (2)    | The aggregate intrinsic  value is calculated based on the fair value per share of the Company’s common  stock on June 30, 2009 of $15.11. |

 

17

----

Tableof Contents

 

**15.   Comprehensive Income**

 

The Company’s othercomprehensive income relates to foreign currency translation adjustments andunrealized losses on its ARS that were classified as available-for-sale in2008.  For the three and six months ended2009 there were no unrealized gains or losses on ARS as the Company elected tomake a one-time transfer of the ARS from available-for-sale to tradingsecurities for the fiscal period ended December 31, 2008. Accumulated other comprehensive income is presented separately on thebalance sheet as required.

 

Comprehensive incomeconsisted of the following:

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2009** | ** ** |
| Net income                                                  |       | $                                               | 3,694      |                                          | $          | 2,227 |   | $ | 7,696 |   | $ | 6,305 |   |
| Cumulative  Translation adjustment                          |       | (15                                             | )          | 967                                           |       | 517 |   | 594 |   |
| Impairment of  auction rate securities, net of tax (note 8) |       | (87                                             | )          | —                                        |       | (796 | ) | — |   |
| Comprehensive  income                                       |       | $                                               | 3,592      |                                          | $          | 3,194 |   | $ | 7,417 |   | $ | 6,899 |   |

 

**16.   Forward Foreign Exchange Contracts**

 

The Company enters intotransactions in currencies other than the U.S. dollar and holds cash in foreigncurrencies which expose the Company to transaction gains and losses as foreigncurrency exchange rates fluctuate against the U.S. dollar. The Company fromtime to time enters into forward foreign exchange contracts to hedge theforeign currency exposure of non-U.S. dollar denominated third-party andintercompany receivables and cash balances. The contracts, which relate to theBritish pound, euro, and the Japanese yen, generally have terms of one month.These hedges are deemed fair value hedges and have not been designated forhedge accounting. The gains or losses on the forward foreign exchange contractsalong with the associated losses and gains on the revaluation and settlement ofthe short-term intercompany balances, accounts receivable and cash balances arerecorded in current operations in other income.

 

The following tablesummarizes the outstanding forward foreign exchange contracts held by theCompany as of December 31, 2008 and June 30, 2009:

 
| ** **    | ** ** | ** **          | ** ** | **As of December 31, 2008** | ** ** | **As of June 30, 2009**         | ** ** |
|---------------|------------|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Currency**  | ** ** | **Hedge Type** | ** ** | **Local  Currency********Amount**               | ** ** | **Approximate********U.S. Dollar  Equivalent** | ** ** | **Local********Currency********Amount** | ** ** | **Approximate  U.S. Dollar  Equivalent** | ** ** |
| British pound |       | Buy                 |       | 1,200                                           |       | $                                                   | 1,765      |   | — |   | $ | — |   |
| British pound |       | Buy                 |       | —                                          |       | —                                              |       | 1,400 |   | 2,306 |   |
| Euro          |       | Sale                |       | 7,500                                           |       | 10,454                                              |       | 2,600 |   | 3,645 |   |
| Japanese yen  |       | Sale                |       | 45,000                                          |       | 477                                                 |       | — |   | — |   |
|          |       |                |       |                                            |       |                                                |       |   |   |   |   |
|          |       |                |       |                                            |       | $                                                   | 12,696     |   |   |   | $ | 5,951 |   |

 

Theforward foreign exchange contracts are short-term and generally mature withinone month of origination.

 

Realized and unrealizedforeign currency gains and losses, net of hedging, are accounted for in otherincome.  The Company recorded foreigncurrency gains/(losses) of $15 and $(174) in the three months ended June 30,2008 and 2009.  The Company recordedforeign currency gains/(losses) of $14 and $(26) in the six months ended June 30,2008 and June 30, 2009, respectively. The Company settles forward foreign exchange contracts in cash.

 

**17.**          IncomeTaxes

 

The Company’s effectivetax rates for the three months ended June 30, 2008 and 2009 were 35% and39%, respectively, and for the six months ended June 30, 2008 and 2009were 37% and 36%, respectively.  In thethree months ended June 30, 2008, the Company’s effective tax rate waslower than its statutory rate of 37% due to the tax benefits related to the saleof incentive stock options within the period. In the three months ended June 30, 2009, the Company’s effectivetax rate was higher than its statutory rate of 37% due to transaction expensesthat were deducted under SFAS No. 141(R) but are

 

18

----

Tableof Contents

 

not deductible for taxpurposes. In the six months ended June 30, 2009, the Company’s effectivetax rate was lower than its statutory rate of 37% primarily due to the releaseof a portion of its unrecognized tax benefits as a result of the closing of astatute of limitation in a foreign tax jurisdiction.

 

On January 1, 2007,the Company adopted the provisions of Financial Standards Accounting Board(FASB) Interpretation No. 48*Accountingfor Uncertainty in Income Taxes*, an interpretation of SFAS No. 109,*Accounting for Income Taxes*.  As of June 30,2009, the Company had a liability of $1,443 or net unrecognized tax benefits,all of which would favorably impact the Company’s effective tax rate ifrecognized.  The Company recognizes interest and penalties related touncertain tax positions as a component of income tax expense.  As of June 30,2009, the Company had approximately $51 and $39, respectively, of accruedinterest and penalties related to unrecognized tax benefits.  The Companyanticipates a reduction of approximately $291 to the amount of unrecognized taxbenefits over the next twelve months associated with lapsing statutes oflimitations.  The unrecognized tax liability of $1,443 and accruedinterest and penalties of $90 are classified as other long-term liabilities onthe unaudited condensed consolidated balance sheet.

 

**18.     Fair Value Measurements**

 

In September 2006,the FASB issued SFAS No. 157,*FairValue Measurements*, which defines fair value, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles and expands disclosures about fair value measurements.SFAS No. 157 does not require any new fair value measurements, but itsprovisions apply to all other accounting pronouncements that require or permitfair value measurement. SFAS No. 157 was effective for the Company’sfiscal year beginning January 1, 2008 and for interim periods within thatyear. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2,*  EffectiveDate of FASB Statement No. 157*, which delayed for one year theeffective date of SFAS No. 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually). As required,the Company adopted SFAS No. 157 for its financial assets on January 1,2008. Adoption did not have a material impact on the Company’s financialposition or results of operations.

 

SFAS No. 157clarifies that fair value is an exit price, representing the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants based on the highest and best use ofthe asset or liability. As such, fair value is a market-based measurement thatshould be determined based on assumptions that market participants would use inpricing an asset or liability. SFAS No. 157 requires the Company to usevaluation techniques to measure fair value that maximize the use of observableinputs and minimize the use of unobservable inputs. These inputs areprioritized as follows:

 

·                      *Level 1*: Observable inputs such as quoted pricesfor identical assets or liabilities in active markets;

·                      *Level 2*: Inputs, other than the quoted prices inactive markets, that are observable either directly or indirectly such asquoted prices for similar assets or liabilities or market-corroborated inputs;and

·                      *Level 3*: Unobservable inputs for which there islittle or no market data, which require the reporting entity to develop its ownassumptions about how market participants would price the assets or liabilities.

 

The valuation techniquesthat may be used to measure fair value are as follows:

 

A.       *Market approach* - Uses prices and other relevantinformation generated by market transactions involving identical or comparableassets or liabilities

B.       *Income approach* - Uses valuation techniques to convertfuture amounts to a single present amount based on current market expectationsabout those future amounts, including present value techniques, option-pricingmodels and excess earnings method

C.       *Cost approach* - Based on the amount that currentlywould be required to replace the service capacity of an asset (replacementcost)

 

19

----

Tableof Contents

 

The following table setsforth the Company’s financial instruments carried at fair value within the SFASNo. 157 hierarchy and using the lowest level of input as of June 30,2009:

 
| ** **                                 | ** ** | **Quoted  Prices**       | ** ** | **Significant  Other** | ** ** | **Significant**  | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|------------------------|------------|------------------|------------|------------|------------|
| ** **                                 | ** ** | **in  Active Markets**   | ** ** | **Observable**         | ** ** | **Unobservable** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **for  Identical Items** | ** ** | **Inputs**             | ** ** | **Inputs**       | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **(Level  1)**           | ** ** | **(Level  2)**         | ** ** | **(Level  3)**   | ** ** | **Total**  | ** ** |
|                                       |       |                     |       |                   |       |             |       |       |       |
| Assets:                                    |       |                     |       |                   |       |             |       |       |       |
|                                       |       |                     |       |                   |       |             |       |       |       |
| Money market funds                         |       | $                        | 77,571     |                   | $          | —           |       | $          | —     |   | $ | 77,571 |   |
| Restricted cash                            |       | 962                      |       | —                 |       | —           |       | 962        |       |
| Total cash equivalents and restricted cash |       | $                        | 78,533     |                   | —     |             | $          | —     |       | $ | 78,533 |   |
|                                       |       |                     |       |                   |       |             |       |       |       |
| U.S. agency notes                          |       | $                        | —     |                   | $          | 7,746            |       | $          | —     |   | $ | 7,746 |   |
| Corporate bonds                            |       | —                   |       | 17,700                 |       | —           |       | 17,700     |       |
| Securities settlement agreement (1)   |       | —                   |       | —                 |       | 5,336            |       | 5,336      |       |
| Auction rate securities (1)                |       | —                   |       | —                 |       | 18,436           |       | 18,436     |       |
| Total short-term investments               |       | $                        | —     |                   | $          | 25,446           |       | $          | 23,772     |   | $ | 49,218 |   |
|                                       |       |                     |       |                   |       |             |       |       |       |
| U.S. agency notes                          |       | $                        | —     |                   | $          | 13,846           |       | $          | —     |   | $ | 13,846 |   |
| Municipal bonds                            |       | —                   |       | 2,000                  |       | —           |       | 2,000      |       |
| Corporate bonds                            |       | —                   |       | 14,231                 |       | —           |       | 14,231     |       |
| Long-term investments                      |       | $                        | —     |                   | $          | 30,077           |       | $          | —     |   | $ | 30,077 |   |
|                                       |       |                     |       |                   |       |             |       |       |       |
| Total Assets                               |       | $                        | 78,533     |                   | $          | 55,523           |       | $          | 23,772     |   | $ | 157,828 |   |

 

----

|   | (1) | The Company’s investments in ARS and the securities  settlement agreement with UBS are classified within Level 3 because  there are currently no active markets for ARS and the Company is unable to  obtain independent valuations from market sources. Therefore, the ARS were  primarily valued based on an income approach using an estimate of future cash  flows.  For additional information regarding ARS, see Note 8. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The following table setsforth a summary of changes in the fair value of the Company’s Level 3financial assets for the six months ended June 30, 2009:

 
| ** **                                                  | ** ** | **Level 3 Financial** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **Assets**                      | ** ** |
| Balance, beginning of period                                |       | $                               | 23,344     |   |
| Transfers in (out) of Level 3                               |       | —                          |       |
| Sales                                                       |       | (50                             | )          |
| Realized gains (losses)                                     |       | —                          |       |
| Unrealized gains (losses) on securities held at  period end |       | 478                             |       |
| Balance, end of period                                      |       | $                               | 23,772     |   |

 

Realized gains and lossesfrom sales of the Company’s investments are included in “Other income” andunrealized gains and losses are included as a separate component of equity, netof tax, unless the loss is determined to be other-than-temporary.

 

The Company also adoptedthe provisions of SFAS No. 159 in the first quarter of 2008. SFAS No. 159allows companies to choose to measure eligible assets and liabilities at fairvalue with changes in value recognized in earnings. Fair value treatment may beelected either upon initial recognition of an eligible asset or liability or,for an existing asset or liability, if an event triggers a new basis ofaccounting. The Company did not elect to re-measure any of its existingfinancial assets or liabilities under the provisions of this Statement, and didnot elect the fair value option for any financial assets and liabilitiestransacted in the year-ended December 31, 2008, except for the put optionrelated to the Company’s ARS that was recorded in conjunction with a settlementagreement with UBS as more fully described in Note 8.

 

20

----

Tableof Contents

 

**19.****      ****Recently Issued AccountingPronouncements**

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007),*Business Combinations* (“SFAS No. 141(R)”). SFAS No. 141(R) retainsthe fundamental requirements in SFAS No. 141 that the acquisition methodof accounting (which SFAS No. 141 called the purchase method) be used forall business combinations and for an acquirer to be identified for eachbusiness combination. SFAS No. 141(R) requires an acquirer torecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree at the acquisition date, measured at their fair valuesas of that date, with limited exceptions specified in SFAS No. 141(R). This method replaces SFAS No. 141’s cost-allocation method, which requiredthe cost of an acquisition to be allocated to the individual assets acquiredand liabilities assumed based on their estimated fair values.  SFAS No. 141(R) retainsthe guidance in SFAS No. 141 for identifying and recognizing intangibleassets separately from goodwill.  SFAS No. 141(R) will nowrequire the following: acquisition costs to be expensed as incurred,restructuring costs associated with a business combination must be expensedprior to the acquisition date and changes in deferred tax asset valuationallowances and income tax uncertainties after the acquisition date generallywill affect income tax expense.  SFAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008, which is the Company’s 2009 fiscal year.  Earlier adoption isprohibited.  The adoption of SFAS No. 141 (R) is expectedto have a significant impact on the Company’s accounting for futureacquisitions, including its acquisition of Maaguzi and pending acquisition ofthe IVRS/IWRS business unit of Covance.

 

In April 2009, theFASB issued FASB Staff Position No. 141(R)-1 (“FSP FAS 141(R)-1”*), Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies,*which provides additional clarification on the initial recognition andmeasurement of assets acquired and liabilities assumed in a businesscombination that arise from contingencies.  FSP FAS 141(R)-1 iseffective for all fiscal years beginning on or after December 15,2008.  FSP FAS 141(R)-1 may have a material impact on the accountingfor any business acquired.

 

In December 2007,the FASB issued SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51*. SFAS No. 160 was issued to improve therelevance comparability, and transparency of financial information provided infinancial statements by establishing accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15,2008 and will be applied prospectively, except for the presentation anddisclosure requirements which will be applied retrospectively. The adoption ofSFAS No. 160 did not have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

In March 2008, theFASB issued SFAS No. 161,*Disclosuresabout Derivative Instruments and Hedging Activities an amendment of FASBStatement No. 133.*  SFAS No. 161 requires disclosureof how and why an entity uses derivative instruments, how derivative instrumentsand related hedged items are accounted for and how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS No. 161 is effective for fiscal yearsbeginning after November 15, 2008, with early adoption permitted. Theadoption of SFAS No. 161 did not have a material effect on the Company’sconsolidated financial position and results of operations.

 

In May 2008, theFASB issued SFAS No. 162,*The Hierarchyof Generally Accepted Accounting Principles*.  SFAS No. 162identifies the sources of generally accepted accounting principles in theUnited States. SFAS No. 162 is effective sixty days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*.  The adoption of SFASNo. 162 did not have a material effect on the Company’s consolidatedfinancial position and results of operations.

 

In April 2009, theFASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB28-1”),*Interim Disclosures about Fair Valueof Financial Instruments,* which amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*  and APB Opinion No. 28,*Interim Financial Reporting, to require disclosuresabout the fair value of financial instruments for interim reporting periods*.FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periodsending after June 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 didnot have a material effect on the Company’s consolidated financial position andresults of operations.

 

In April 2009, theFASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB StaffPosition No. 124-2 (“FSP FAS 124-2”),*Recognition and Presentation of Other-Than-Temporary Impairments*,which amends the other-than-temporary impairment guidance for debt and equitysecurities. FSP FAS 115-2 and FSP FAS 124-2 shall be effective for interim andannual reporting periods ending after June 15, 2009.  The adoption of FSP FAS 115-2 and FSP FAS124-2 did not have a material effect on the Company’s consolidated financialposition and results of operations..

 

In April 2009, theFASB issued FSP Issue No. FAS No. 157-4 (“FSP FAS 157-4”),*Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions that are not Orderly*. FSP FAS No. 157-4provides additional guidance for estimating fair value in accordance with SFAS No. 157,*Fair Value*

 

21

----

Tableof Contents

 

*Measurements*. This FSP FAS No. 157-4 iseffective in reporting periods ending after June 15, 2009. The adoption ofFSP FAS 157-4 did not have a material effect on the Company’s consolidatedfinancial position and results of operations.

 

In May 2009, theFASB issued SFAS No. 165, *Subsequent Events*.  SFAS  No. 165provides authoritative accounting literature for the evaluation and disclosureof subsequent events.  SFAS No. 165is effective in reporting periods ending after June 15, 2009.  The adoption of SFAS 165 did not have amaterial impact on the Company’s consolidated financial position and results ofoperations.

 

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

** **

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes thereto that appearelsewhere in this Quarterly Report on Form 10-Q and the audited financialstatements and related notes thereto and Management’s Discussion and Analysisof Financial Condition and Results of Operations included in our Annual Reporton Form 10-K for the year ended December 31, 2008, which has beenfiled with the Securities and Exchange Commission (“SEC”).*

 

**Overview**

 

Phase ForwardIncorporated is a provider of integrated enterprise-level software products,services and hosted solutions for use in our customers’ global clinical trialand drug safety monitoring activities. Our customers include pharmaceutical,biotechnology and medical device companies, as well as academic institutions,governmental regulatory agencies, contract research organizations, or CROs, andother entities engaged in clinical trial and drug safety monitoring activities.By automating essential elements of the clinical trial and drug safetymonitoring processes, we believe our products allow our customers to acceleratethe market introduction of new medical therapies and corresponding revenues,reduce overall research and development expenditures, enhance existing dataquality control efforts, increase drug safety compliance and reduce clinicaland economic risk.

 

**Acquisitions**

 

From time to time we haveexpanded our product and service offerings through the acquisition of otherbusinesses or technologies; transactions occurring within the last year aredescribed below.

 

*Maaguzi*

 

On July 27, 2009, weacquired privately held Maaguzi LLC (“Maaguzi”), an innovative provider ofWeb-based, electronic patient reported outcomes (ePRO) and late phasesolutions, for $11.0 million in cash. The acquisition of Maaguzi extends our integrated clinical researchsuite and marks the entry into the increasingly important ePRO andobservational studies markets.  Theacquisition of Maaguzi will be accounted for as a purchase under SFAS No. 141(R),*Business Combinations*. Accordingly, the results of Maaguzi will be included in our consolidatedfinancial statements from the date of acquisition.

 

*Covance*

 

On July 15, 2009, weentered into an agreement to purchase the Interactive Voice & WebResponse Services (IVRS/IWRS) business of Covance Inc. (“Covance”) for $10.0million in cash. As part of this transaction, Covance has also agreed to enterinto a multi-year marketing agreement to provide our InForm electronicdata capture (EDC) solution and Clarix interactive response technology solutionto Covance clients. The acquisition is expected to be completed by the middleof August 2009.  The acquisitionwill be accounted for as a purchase under SFAS No. 141 (R). Accordingly, the results of the acquired IVRS/IWRS business will be included inour consolidated financial statements from the date of acquisition.

 

*Waban*

 

On April 22, 2009,we acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”),a provider of platform solutions for the automation and compliance of clinicaldata analysis.  Waban’s Statistical Computing Environment and ClinicalData Repository (SCE/CDR) solutions provide automation, traceability andcontrol of the key activities involved in the integration, analysis andreporting on clinical trial data.  The aggregate purchase price was $13.8million in cash, as adjusted by any working capital adjustments as of 90 days afterthe acquisition date, and minus any transaction fees or indebtedness ofWaban.  We acquired the technology of Waban to allow us to penetrate themarket for statistical computing and clinical data repository solutions. The acquisition of Waban has been accounted for as a purchase under SFAS No. 141(R).  Accordingly, the results of Waban have been included in ourconsolidated financial statements since the date of acquisition.

 

22

----

Tableof Contents

 

**Sourcesof Revenues**

 

We derive our revenuesfrom software licenses and services.  Our product line is comprised offour general categories that include the following software products:

 

·*Electronic DataCapture (EDC)*

 

·*       **InForm*, our Internet-based electronic data capture solutionfor collection and transmission of patient information in clinical trials; and

 

·*       **LabPas*, our system for Phase I clinic automation.

 

·*Clinical DataManagement*

 

·*       **Clintrial*, our clinical data management solution; and

 

·        *Empirica Study*, our system for validating and reviewingclinical trial data represented in formats meeting industry standards, such asthose established by the Clinical Data Interchange Standards Consortium, orCDISC.

 

·*Drug Safety*

 

·*       **Empirica Trace*, our adverse event management solution for monitoringdrug safety and reporting adverse events that occur during and after conclusionof the clinical trial process;

 

·*       **Empirica Signal*, our data mining and signal detection solution forpost-marketing data; and

 

·*         **CTSD*, our signal detection solution for data from clinicaltrials.

 

·*Interactive ResponseTechnology (IRT)*

 

·        *Clarix*, our Web-integrated interactive responsetechnology.

 

·*Clinical Data AnalysisSystems*

 

·        *Waban CDR*, our controlled clinical data repositoryproduct for storing and managing clinical trials data (both data and metadata).

 

·   *Waban SCE*, our metadata-drivencontrolled clinical data repository product for automation and trackingof routine and repetitious statistical programming and analysis.

 

License revenues arederived principally from the sale of term licenses for our software productsother than*Clarix,* which ispresently available only on a hosted application basis.  Service revenuesare derived principally from our delivery of the hosted solution of our*InForm, Clarix, Empirica Signal*,*CTSD and Empirica Study* softwareproducts, and consulting services and customer support, including training, forall of our products. We generally recognize revenues ratably over the life of alicense or service contract.

 

One customer,GlaxoSmithKline, accounted for approximately 12% of our total revenues in thethree months ended June 30, 2008 and 13% of our total revenues in the sixmonths ended June 30, 2008. The same customer accounted for $863 or 2% of

 

23

----

Tableof Contents

 

accounts receivableoutstanding as of December 31, 2008. In the three and six months ended June 30, 2009, no customeraccounted for 10% or more of our total revenues for the period.  Our top 20 customers accounted forapproximately 63% and 59% of our total revenues, net of reimbursableout-of-pocket expenses, in the three months ended June 30, 2008 and 2009,respectively, and 64% and 61% of our total revenues, net of reimbursableout-of-pocket expenses, in the six months ended June 30, 2008 and 2009,respectively.

 

*LicenseRevenues*

 

We derive our license revenuesprincipally from the sale of term licenses for the following software products:*InForm*, our Internet-based electronicdata capture, or EDC, solution;*Clintrial*and*Empirica Study*, our clinicaldata management solutions; our drug safety solutions, including our*Empirica Trace*,*Empirica Signal* and*CTSD*products, our*LabPas* Phase Iclinic automation solution, and our Waban CDR and Waban SCE products for clinicaldata analysis.  Although each of our software solutions is available as astand-alone enterprise application, we offer integrated enterprise solutionsincorporating certain of our electronic data capture, data management andanalysis, and drug safety products.

 

License revenues for our*InForm *electronic data capturesoftware solution, either on a stand-alone or integrated basis, are determinedprimarily by the number, complexity and duration of the clinical trials and thenumber of participants in each clinical trial. License revenues for our*Clintrial, Empirica Study, Empirica Trace, EmpiricaSignal*,*CTSD* and*LabPas* software solutions are determinedprimarily by the number of users accessing the software solution. Except asdiscussed below, we enter into software license agreements for our*InForm*,*Clintrial* and*Empirica Trace*products with terms generally of three to five years with payment termsgenerally annually in advance. License agreements for our other licensedproducts are generally annual or multi-year with payment terms generallyannually in advance.  License revenues are recognized ratably over theduration of the software term license agreement, to the extent that amounts arefixed or determinable and collectable.

 

Following our acquisitionof Clinsoft Corporation (“Clinsoft”) in August 2001, we began convertingholders of Clinsoft perpetual software licenses to our software term licensearrangements. We continue to sell additional perpetual licenses of theseproducts in certain situations to our existing customers with the option topurchase customer support, and may in the future do so for new customers basedon customer requirements or market conditions. We recognize revenues on theperpetual licenses upon delivery of the software when all other revenuerecognition criteria are met. We continue to provide and charge for maintenanceand support on our products to those customers who do not convert to oursoftware term license arrangements.  We will continue our efforts toconvert the remaining former Clinsoft customer base to software term licensearrangements. However, we anticipate that some customers will not convert andinstead will continue to make annual customer support payments.

 

*ServiceRevenues*

 

*ApplicationHosting Services.*  Inaddition to making our software products other than*Clarix* available to customers through licenses, we offerour*InForm*,*Empirica Signal, CTSD* and*Empirica Study* software as hostedapplication solutions delivered through a standard Web-browser, with customersupport and training services.  Our*Clarix* solution is presently available only on a hosted applicationbasis.  Service revenues from application hosting services are derivedprincipally from our*InForm *hostedsolution.

 

Revenues resulting fromthe*InForm *hosting serviceconsist of three stages for each clinical trial:

 

·                      *First stage—*trial and application set up, includingdesign of electronic case report forms and edit checks, installation and serverconfiguration of the system;

 

·                      *Second stage—*application hosting and related supportservices; and

 

·                      *Third stage—*services required to close out, or lock,the database for the clinical trial.

 

Revenuesresulting from the*Clarix* hostingservice also consist of three stages for each clinical trial:

 

·                      *First stage*—trial and application set up, includingdesign and set up of the subject randomization and medication inventorymanagement, installation and server configuration of the system;

 

·                      *Second stage*—application hosting and related supportservices; and

 

·                      *Third stage*—services required to close out theclinical trial.

 

Services provided for thefirst and third stages of both*InForm *and*Clarix* are provided on a fixed fee basisdepending upon the complexity of the trial and system requirements. Servicesfor the second stage are charged separately as a fixed monthly fee. Werecognize revenues from all stages of the hosting service ratably over thehosting period. Fees charged and costs incurred for the trial

 

24

----

Tableof Contents

 

system design, set up andimplementation are deferred until the start of the hosting period and areamortized and recognized ratably over the estimated hosting period. Thedeferred costs include direct costs related to the trial and application setup. Fees for the first and third stages of the services are billed based uponmilestones. Fees for application hosting and related services in the secondstage are generally billed quarterly in advance. Bundled into this revenueelement are the revenues attributable to the software license used by thecustomer.

 

In the event that anapplication hosting customer cancels a clinical trial and its related statementof work, all deferred revenues are recognized and all deferred set up costs areexpensed.  In addition, certain termination-related fees may be chargedand if so, such fees are recognized in the period of termination.

 

Revenues resulting fromhosting services for our*Empirica Signal*,*CTSD* and*Empirica Study* products consist of installation and serverconfiguration, application hosting and related support services.  Servicesfor these offerings are charged monthly as a fixed fee.  Revenues arerecognized ratably over the period of the service.

 

In addition, applicationhosting service revenues include hosting services associated with term licensecustomers and reimbursable out-of-pocket expenses.

 

*ConsultingServices.  *Consulting services include the designand documentation of the processes related to our customers’ use of ourproducts and services in their clinical trials and safety monitoringactivities. Consulting services also include project planning and managementservices, guidance on best practices in using our software products, datamanagement and configuration services for data mining and reporting, as well asimplementation services consisting of application architecture design, systemsintegration, installation and validation.  Consulting services can be soldon a stand-alone basis or as part of a bundled arrangement.  In somecircumstances, we sell additional follow on consulting services to a customerat a later date even if the customer purchased consulting services at the timeof the initial license purchase under a bundled arrangement.  Revenuesfrom consulting services included in either a multiple element software licenseagreement or in an application hosting agreement are recognized ratably overthe term of the arrangement. The value of our consulting services sold within abundled arrangement is equal to the value of consulting services sold on a stand-alonebasis, as the activities performed under both types of arrangements are similarin nature.  The associated costs are expensed as incurred.  We mayalso enter into arrangements to provide consulting services separate from alicense arrangement. In these situations, revenue is recognized in accordancewith the American Institute of Certified Public Accountants, or AICPA,Statement of Position, or SOP, No. 81-1,*Accounting for Performance of Construction-Type and Certain Production-TypeContracts,* on either a time and materials basis or using theproportional performance method. If we are not able to produce reasonablydependable estimates, revenue is recognized upon completion of the project andfinal acceptance from the customer. If significant uncertainties exist aboutproject completion or receipt of payment, the revenue is deferred until theuncertainty is resolved. Provisions for estimated losses on contracts arerecorded during the period in which they are resolved. Provisions for estimatedlosses on contracts are recorded during the period in which they areidentified.

 

*CustomerSupport.*    Wehave a multinational services organization to support our software products andhosted solutions worldwide. Customer support includes multilingual training services,telephone support and software maintenance. We bundle customer support in oursoftware term licenses and allocate 10% of the value of the license to customersupport revenues. The customer support services rate of 10% for multi-yearterm-based licenses reflects a significant discount from the rate for customersupport services associated with perpetual licenses due to the reduction in thetime period during which the customer can utilize the upgrades andenhancements. We believe this rate is substantive and represents an amount webelieve reasonable to be allocated.  Our customer support revenues alsoconsist of customer support fees paid by perpetual license customers. Customersupport revenues are recognized ratably over the period of the customer supportor term license agreement, with payment terms generally annually in advance.

 

**Cost ofRevenues and Operating Expenses**

 

We allocate overheadexpenses such as rent and occupancy charges and employee benefit costs to alldepartments based on headcount. As such, general overhead expenses arereflected in costs of service revenues and in the sales and marketing, researchand development, and general and administrative expense categories.

 

*Costsof Revenues.*    Costsof license revenues consist primarily of the amortization of royalties paid forcertain modules within our*Clintrial*software product as well as our*InForm *softwareproduct. In addition, costs of revenues include expense for the amortization ofacquired technologies associated with the acquisitions of Lincoln Technology, Inc.(“Lincoln”) in 2005 and Green Mountain Logic, Inc. in 2007.  Thecosts of license revenues vary based upon the mix of revenues from softwarelicenses for our products. We operate our service organization on a global basisas one distinct unit, and do not segment costs for our various service revenueelements. These services include performing application hosting, consulting andcustomer support services. Costs for these services consist primarily ofemployee-related costs associated with these services, amortization of thedeferred clinical trial set up costs, allocated overhead, outside contractors,royalties associated with providing customer support for use with the*Clintrial* and

 

25

----

Tableof Contents

 

*InForm *software products and reimbursableout-of-pocket expenses. Costs of services also include hosting costs thatprimarily consist of hosting facility fees and server depreciation andamortization of acquired technologies associated with the acquisition ofClarix.

 

The costs of servicerevenues vary based upon the number of employees in the service organization,the type of work performed, and royalties associated with revenues derived fromproviding customer support, as well as costs associated with the flexible useof outside contractors to support internal resources. We supplement the trialdesign and set up activity for our*InForm *applicationhosting services through the use of outside contractors. This allows us toutilize outside contractors in those periods where trial design and set upactivity is highest while reducing the use of outside contractors in thoseperiods where trial activity lessens, allowing for a more flexible deliverymodel. The percentage of the services workforce represented by outsidecontractors varies from period to period depending on the volume of specificsupport required. The costs of service revenues is significantly higher as apercentage of revenues as compared to our costs of license revenues primarilydue to the employee-related and outside contractor expenses associated withproviding services.

 

*GrossMargin.*    Ourgross margin on license revenues varies based on the mix of royalty- andnon-royalty-bearing license revenues and the amount of amortization of acquiredtechnologies. Our gross margin on service revenues varies primarily due tovariations in the utilization levels of the professional service team and the timingof expense and revenue recognition under our service arrangements. Insituations where the service revenues are recognized ratably over the softwarelicense term, our costs associated with delivery of the services are recognizedas the services are performed, which is typically during the first 6 to12 months of the contract period. Accordingly, our gross margin on servicerevenues will vary significantly over the life of a contract due to the timing,amount and type of service required in delivering certain projects. Inaddition, consolidated gross margin will vary depending upon the mix of licenseand service revenues.

 

*Salesand Marketing.*    Salesand marketing expenses consist primarily of employee-related expenses,including travel, marketing programs which include product marketing expensessuch as trade shows, workshops and seminars, corporate communications, otherbrand building and advertising, allocated overhead and the amortization ofcommissions. In addition, sales and marketing include expense for theamortization of acquired technologies associated with the acquisition ofLincoln.  We expect that sales and marketing expenses will continue toincrease in absolute dollars as commission expense increases with our revenuesand as we continue to expand sales coverage and to build brand awarenessthrough what we believe are the most cost effective channels available, but mayfluctuate quarter over quarter due to the timing of marketing programs.

 

*Researchand Development.*    Researchand development expenses consist primarily of employee-related expenses,allocated overhead and outside contractors. We focus our research anddevelopment efforts on increasing the functionality, performance and integrationof our software products. We expect that in the future, research anddevelopment expenses will increase in absolute dollars as we continue to addfeatures and functionality to our products, introduce additional integratedsoftware solutions to our product suite and expand our product and serviceoffering.

 

*Generaland Administrative.*    Generaland administrative expenses consist primarily of employee-related expenses,professional fees, primarily consisting of expenses for accounting, compliancewith the Sarbanes-Oxley Act of 2002, and legal services, including litigation,information technology and other corporate expenses and allocated overhead. Weexpect that in the future our general and administrative expenses will increasein absolute dollars as we add personnel and incur additional costs related tothe growth of our business and operations.

 

*Stock-BasedCompensation Expenses. *Our cost of service revenues, sales and marketing,research and development, and general and administrative expenses includestock-based compensation expense. Stock-based compensation expense is the fairvalue of outstanding stock options and restricted stock awards and units, whichare recognized over the respective stock option and award or unit serviceperiods. During the three months ended June 30, 2008 and 2009, we recorded$2.0 million and $3.6 million of stock-based compensation expense,respectively.  During the six monthsended June 30, 2008 and 2009, we recorded $3.7 million and $6.2 million ofstock-based compensation expense, respectively.

 

**ForeignCurrency Translation**

 

       Withregard to our international operations, we frequently enter into transactionsin currencies other than the U.S. dollar. As a result, our revenues, expensesand cash flows are subject to fluctuations due to changes in foreign currencyexchange rates, particularly changes in the euro, British pound, Australiandollar, Indian rupee, Japanese yen and Romanian leu. In the three months ended June 30,2008 and 2009, approximately 45% and 39%, respectively, of our revenues weregenerated in locations outside the United States.  In the six months ended June 30, 2008and 2009, approximately 46% and 39%, respectively, of our revenues weregenerated in locations outside the United States.  The majority of these revenues are incurrencies other than the U.S. dollar, as are

 

26

----

Tableof Contents

 

many of the associatedexpenses. In periods when the U.S. dollar declines in value as compared to theforeign currencies in which we conduct business, our foreign currency-basedrevenues and expenses generally increase in value when translated into U.S.dollars.

 

**CriticalAccounting Policies and Estimates**

 

Our unaudited condensedconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting periods. On an ongoingbasis, we evaluate our estimates and assumptions with our audit committee,including those related to revenue recognition, deferred set up costs,commissions and royalties, accounts receivable reserves, stock-basedcompensation expenses, long-lived assets, intangibles assets and goodwill,income taxes, restructuring, contingencies and litigation. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. There have beenno material changes to these estimates for the periods presented in thisQuarterly Report on Form 10-Q. Our actual results may differ from theseestimates under different assumptions or conditions.

 

We believe that of oursignificant accounting policies, which are described in Note 1 and Note 2of the notes to our consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2008, thefollowing accounting policies involve a greater degree of judgment andcomplexity. Accordingly, these are the policies we believe are the mostcritical to aid in fully understanding and evaluating our consolidatedfinancial condition and results of operations.

 

*RevenueRecognition and Deferred Set Up Costs.*    We recognize software licenserevenues in accordance with SOP No. 97-2,*Software Revenue Recognition,* as amended, issued by the AICPA, whilerevenues resulting from application services are recognized in accordance withEmerging Issues Task Force, or EITF, Issue No. 00-3,*Application of AICPA Statement of Position 97-2 toArrangements that Include the Right to Use Software Stored on Another Entity’sHardware*, the Securities and Exchange Commission, or SEC, StaffAccounting Bulletin, or SAB, No. 104,*Revenue Recognition*, and EITF Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables.*

 

Customers generally havethe ability to terminate application hosting, consulting and training serviceagreements upon 30 days notice. License agreements, multiple elementarrangements, including license and services agreements and certain applicationhosting services can generally be terminated by either party for materialbreach of obligations not corrected within 30 days after notice of thebreach.

 

We recognize revenueswhen all of the following conditions are satisfied: (1) there ispersuasive evidence of an arrangement; (2) the product or service has beenprovided to the customer; (3) the collection of our fees is probable; and (4) theamount of fees to be paid by the customer is fixed or determinable.

 

We generally enter intosoftware term licenses for our*InForm*,*Clintrial, Empirica Trace Waban CDR and Waban SCE*products with our customers for 3- to 5-year periods. License agreements forour*Empirica Signal, CTSD* and*Empirica Study* products are generallyannual or multi-year terms.  We do not license our*Clarix* product, which is presentlyoffered only on a hosted application basis.  These arrangements typicallyinclude multiple elements: software license, consulting services and customersupport. We bill our customers in accordance with the terms of the underlyingcontract. Generally, we bill license fees annually in advance for each year ofthe license term. Our payment terms are generally net 30 days.

 

Our software licenserevenues are earned from the sale of off-the-shelf software requiring nosignificant modification or customization subsequent to delivery to thecustomer. Consulting services, which can also be performed by third-partyconsultants, are deemed to be non-essential to the functionality of thesoftware and typically are for trial configuration, implementation planning,loading of software, building simple interfaces and running test data anddocumentation of procedures.

 

Customer support includestraining services, telephone support and software maintenance. Wegenerally bundle customer support with the software license for the entire termof the arrangement. As a result, we generally recognize revenues for allelements, including consulting services, ratably over the term of the softwarelicense and support arrangement. We allocate the revenues recognized for thesearrangements to the different elements based on management’s estimate of therelative fair value of each element. For our term-based licenses, we allocateto consulting services the anticipated service effort and value throughout theterm of the arrangement at an amount that would have been allocated had thoseservices been sold separately to the customer. The value of our consultingservices sold within a bundled arrangement is equal to the value of consultingservices sold on a stand-alone basis, as the activities performed under bothtypes of arrangements are similar in nature.  The remaining value isallocated to license and support services, with 10% of this amount allocated tosupport services. The customer support services rate of 10% for multi-

 

27

----

Tableof Contents

 

year term-based licensesreflects a significant discount from the rate for customer support servicesassociated with perpetual licenses due to the reduction in the time periodduring which the customer can utilize the upgrades and enhancements. We believethis rate is substantive and represents a reasonable basis of allocation. Wehave allocated the estimated fair value to our multiple element arrangements toprovide meaningful disclosures about each of our revenue streams. The costsassociated with the consulting and customer support services are expensed asincurred. There are instances in which we sell software licenses based on usagelevels. These software licenses can be based on estimated usage, in which casethe license fee charged to the customer is fixed based on this estimate. Whenthe fee is fixed, the revenues are generally recognized ratably over thecontractual term of the arrangement. If the fee is based on actual usage, andtherefore variable, the revenues are recognized in the period of use. Revenuesfrom certain follow-on consulting services, which are sold separately tocustomers with existing software licenses and are not considered part of amultiple element arrangement, are recognized as the services are performed.

 

We continue to selladditional perpetual licenses for the*Clintrial, Empirica Trace, Waban CDR and Waban SCE*software productsin certain situations to our existing customers with the option to purchasecustomer support and may in the future do so for new customers based on customerrequirements or market conditions. We have established vendor specificobjective evidence of fair value for the customer support. Accordingly, licenserevenues are recognized upon delivery of the software and when all otherrevenue recognition criteria are met.  Customer support revenues arerecognized ratably over the term of the underlying support arrangement. Wecontinue to generate customer support and maintenance revenues from ourperpetual license customer base. Training revenues are recognized as earned.

 

In addition to making oursoftware products other than*Clarix*available to customers through licenses, we offer our*InForm, Empirica Signal*,*CTSD and Empirica Study* software solutions through a hostedapplication solution delivered through a standard Web-browser.  Our*Clarix* solution is presently availableonly on a hosted application basis.

 

Revenues resulting from*InForm *and*Clarix *application hosting services consist of threestages for each clinical trial: the first stage involves application set up,including design, implementation of the system and server configuration; thesecond stage involves application hosting and related support services; and thethird stage involves services required to close out the clinical trial.Services provided for the first and third stages are provided on a fixed feebasis based upon the complexity of the trial and system requirements. Servicesfor the second stage are charged separately as a fixed monthly fee. Werecognize revenues from all stages of the*InForm *and*Clarix *hosting service ratably overthe hosting period. Fees charged and costs incurred for the trial systemdesign, set up and implementation are deferred as applicable, until the startof the hosting period and then amortized and recognized, as applicable, ratablyover the estimated hosting period. The deferred costs include incrementaldirect costs with third parties and certain internal direct costs related tothe trial and application set up, as defined under SFAS No. 91,*Accounting for Nonrefundable Fees and CostsAssociated with Originating or Acquiring Loans and Indirect Costs of Leases*.These costs include salary and benefits associated with direct labor costsincurred during trial set up, as well as third-party subcontract fees and othercontract labor costs. Work performed outside the original scope of work iscontracted for separately as an additional fee and is generally recognizedratably over the remaining term of the hosting period. Fees for the first andthird stages of the services are billed based upon milestones. Fees forapplication hosting and related services in the second stage are billedquarterly in advance. Bundled into this revenue element are the revenuesattributable to the software license used by the customer.

 

Revenues resulting fromhosting services for our*Empirica Signal*,*CTSD* and*Empirica Study* products consist of installation and serverconfiguration, application hosting and related support services.  Servicesfor this offering are charged monthly as a fixed fee.  Revenues arerecognized ratably over the period of the service.

 

In the event that anapplication hosting customer cancels a clinical trial and its related statementof work, all deferred revenues are recognized and all deferred set up costs areexpensed.  In addition, certain termination related fees may becharged and if so, such fees are recognized in the period of termination.

 

We deferred $1.0 millionand $1.3 million of set up costs and amortized $0.9 million and $1.0 million inthe three months ended June 30, 2008 and 2009, respectively, and deferred$2.3 million and $2.6 million of set up costs and amortized $1.7 million and$1.9 million in the six months ended June 30, 2008 and 2009,respectively.  The amortization ofdeferred set up costs is a component of cost of services.

 

We may also enter intoarrangements to provide consulting services separate from a licensearrangement. In these situations, revenue is recognized in accordance with SOP No. 81-1on either a time and materials basis or using the proportional performancemethod. If we are not able to produce reasonably dependable estimates, revenueis recognized upon completion of the project and final acceptance from thecustomer. If significant uncertainties exist about project completion or receiptof payment, the revenue is deferred until the uncertainty is resolved.Provisions for estimated losses on contracts are recorded during the period inwhich they are identified.

 

Deferred revenuesrepresent amounts billed or cash received in advance of revenue recognition.

 

28

----

Tableof Contents

 

*Accountingfor Prepaid Sales Commissions and Royalties*. For arrangements where we recognize revenueover the relevant contract period, we defer related commission payments to ourdirect sales force and software license royalties paid to third parties andamortize these amounts over the same period that the related revenues arerecognized. This is done to better match commission and royalty expenses withthe related revenues. Commission payments are nonrefundable unless amounts duefrom a customer are determined to be uncollectible or if the customersubsequently changes or terminates the level of service, in which casecommissions which were paid are recoverable by us.

 

During the three monthsended June 30, 2008 and 2009, we deferred $2.4 million and$3.1 million, respectively, of commissions and amortized $2.0 million and$2.0 million, respectively, to sales and marketing expense.  During the six months ended June 30,2008 and 2009, we deferred $4.4 million and $5.1 million, respectively, ofcommissions and amortized $3.8 million and $3.7 million, respectively, to salesand marketing expense.  Royalties arepaid on a percentage of billings basis for certain of our products, and we havethe right to recover royalties in the event an arrangement is cancelled. Duringthe three months ended June 30, 2008 and 2009, we deferred $0.5 millionand $0.6 million, respectively, of royalty expenditures and amortized $0.6million and $0.8 million, respectively, to cost of license and servicerevenues.  During the six months ended June 30,2008 and 2009, we deferred $1.6 million and $1.7 million, respectively, ofroyalty expenditures and amortized $1.3 million and $1.5 million, respectively,to cost of license and service revenues.

 

*AccountsReceivable Reserve.*    Wemaintain allowances for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments. We regularly evaluatethe collectability of our trade receivables based on a combination of factors,which may include dialogue with the customer to determine the cause ofnon-payment, the use of collection agencies, and/or the use of litigation. Inthe event it is determined that the customer may not be able to meet its fullobligation to us, we record a specific allowance to reduce the relatedreceivable to the amount that we expect to recover given all informationavailable to us. We continuously monitor collections from our customers andmaintain a provision for estimated credit losses based upon our historicalexperience and any specific customer collection issues that we have identified.While such credit losses have historically been within our expectations and theprovisions established, we cannot guarantee that we will continue to experiencethe same credit loss rates in the future. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.  Our accountsreceivable reserves were $0.6 million and $0.7 million as of December 31,2008 and June 30, 2009, respectively.

 

*Accountingfor Income Taxes.*   Weare subject to income taxes in both the United States and foreignjurisdictions, and we use estimates in determining our provision for incometaxes.  We account for income taxes in accordance with SFAS No. 109,*Accounting for Income Taxes*, which is theasset and liability method for accounting and reporting for income taxes. We adopted the provisions of FASB Interpretation No., or FIN, 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109* on January 1,2007.  Under SFAS No. 109, deferred tax assets and liabilities arerecognized based on temporary differences between the financial reporting andincome tax bases of assets and liabilities using statutory rates. This processrequires that we project our current tax liability and estimate our deferredtax assets and liabilities, including net operating loss and tax creditcarryforwards. In assessing the need for a valuation allowance, we haveconsidered our recent operating results, future taxable income projections andall prudent and feasible tax planning strategies.

 

*Accountingfor Stock-Based Awards. * On January 1, 2006, we adopted theprovisions of SFAS No. 123(R),*Share-based Payment*, which requires us to recognize expense relatedto the fair value of stock-based compensation awards. We elected to use themodified prospective transition method as permitted by SFAS No. 123(R) andtherefore have not restated our financial results for prior periods. Under thistransition method, stock-based compensation expense includes compensationexpense for all stock-based compensation awards granted on or after March 15,2004 (the filing date for the initial registration statement for our initialpublic offering), based on the grant-date fair value estimated in accordancewith the provisions of SFAS No. 123(R).

 

Stock options grantedprior to March 15, 2004 are minimum value options pursuant to SFAS No. 123,*Accounting for Stock-Based Compensation*.Under the provisions of SFAS No. 123(R), the value of these optionswill not be recorded in the statement of income subsequent to the date of ouradoption of SFAS No. 123(R). Instead, we will continue to account forthese options using Accounting Principles Board (APB) Opinion No. 25,*Accounting for Stock Issued to Employees*,and related interpretations.

 

For service-basedoptions, accounted for under SFAS No. 123(R), we recognizecompensation expense on a straight-line basis over the requisite service periodof the award.  For performance-based options, we recognize expense overthe estimated performance period. In addition, SFAS 123(R) requiresthe benefits of tax deductions in excess of recognized stock-based compensationto be reported as a financing activity rather than an operating activity in thestatements of cash flows. This requirement can have the effect of reducing ournet operating cash flows and increasing our net financing cash flows in certainperiods.  To date, we have not recorded these benefits as they have notbeen realized.

 

29

----

Tableof Contents

 

Effective with theadoption of SFAS No. 123(R), we use the Black-Scholes option pricing modelto determine the weighted average fair value of options granted.

 

During the three monthsending June 30, 2008 and 2009, we recorded $2.0 million and $3.6 millionof aggregate stock-based compensation expense, respectively.  During thesix months ending June 30, 2008 and 2009, we recorded $3.7 million and$6.2 million of aggregate stock-based compensation expense, respectively. For the three months ending June 30, 2008 and 2009, stock-basedcompensation expense reduced basic earnings per share by $0.03 and $0.05,respectively, and diluted earnings per share by $0.03 and $0.05, respectively. For the six months ending June 30, 2008 and 2009, stock-based compensationexpense reduced basic earnings per share by $0.06 and $0.09, respectively, anddiluted earnings per share by $0.05 and $0.09, respectively.  As of June 30, 2009, we had $29.3million of unrecognized stock-based compensation expense related tomarket-based share awards that we expect to recognize over a weighted averageperiod of 2.57 years.

 

*OtherSignificant Estimates*

 

*Goodwilland Intangible Assets Impairment.  *We review the carrying value of goodwill andintangible assets periodically based upon the expected future discountedoperating cash flows of our business. Our cash flow estimates are based onhistorical results adjusted to reflect our best estimate of our operatingresults in future periods. Actual results may differ materially from theseestimates. The timing and size of impairment charges, if any, involves theapplication of management’s judgment regarding the estimates and couldsignificantly affect our operating results.

 

**Overviewof Results of Operations in the Three Months Ended June 30, 2008 and 2009**

 

Total revenues increasedby 29%, or $11.7 million, in the three months ended June 30, 2009 comparedto the same period in 2008, primarily due to an increase in service revenues of$10.0 million, or 36%.  In addition,license revenues increased by $1.6 million, or 12%.

 

Our gross marginincreased by 32%, or $7.4 million, in the three months ended June 30, 2009compared to the same period in 2008, primarily due to the increase in servicerevenues.

 

Operating income for thethree months ended June 30, 2009 of $3.1 million decreased 26%, or $1.1million, compared to the same period in 2008. The operating income for the three months ended June 30, 2008 and2009 also included $2.0 million and $3.6 million of stock-based compensationexpense, respectively.

 

The results for the threemonths ended June 30, 2009 when compared to the same period in 2008 wereimpacted by foreign exchange rate fluctuations, resulting in decreases inrevenue of $1.4 million, or 4%, and decreases in expense of $1.8 million, or5%.

 

As of June 30,2009, we had $138.6 million of unrestricted cash, cash equivalents andshort-term investments, a decrease of $20.8 million from $159.4 million atDecember 31, 2008.  As of June 30,2009, we had $30.1 million of long-term investments.  As of June 30, 2009, we had nooutstanding debt.

 

*Revenues*

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** | ** **                   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **2008**                             | ** ** | **2009**                     | ** ** | **Change** | ** ** |
| **Revenues by Product Line (in thousands) (1)** | ** ** | **Amount**                           | ** ** | **Percentage  of  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                            |       |                                 |       |                         |       |       |       |   |   |   |   |   |   |
| Electronic data capture                         |       | $                                    | 31,332     |                         | 77         | %          | $          | 38,377 |   | 73 | % | $ | 7,045 |   | 23 | % |
| Clinical data management                        |       | 5,642                                |       | 14                           |       | 5,822      |       | 11 |   | 180 |   | 3 |   |
| Safety                                          |       | 3,877                                |       | 9                            |       | 6,079      |       | 12 |   | 2,202 |   | 57 |   |
| Interactive Response Technology                 |       | —                               |       | —                       |       | 2,223      |       | 4 |   | 2,223 |   | NM | * |
| Total                                           |       | $                                    | 40,851     |                         | 100        | %          | $          | 52,501 |   | 100 | % | $ | 11,650 |   | 29 | % |

 

----

|   | (1) Revenues by Product Line include product license revenues and  product-related service revenues. |
|--------|------------------------------------------------------------------------------------------------------|
|   |                                                                                                 |
|   | * Not meaningful                                                                                     |

 

The increase in electronicdata capture revenues is primarily due to increases in application hostingservices and license revenues of $6.0 million and $0.9 million,respectively.  The increase in safety wasdue to increases in consulting revenues, license revenues and applicationhosting services revenues of $1.3 million, $0.5 million and $0.3 million,respectively.  The inclusion of 

 

30

----

Tableof Contents

 

interactive responsetechnology revenues is due to the introduction of a new offering following theacquisition of Clarix on September 5, 2008.

 
| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2008**                                            | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Revenues by Type (in thousands)** | ** ** | **Amount**                                          | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                     |       |                                                |       |                             |       |       |       |   |   |   |   |   |   |
| License                                  |       | $                                                   | 13,087     |                             | 32         | %          | $          | 14,695 |   | 28 | % | $ | 1,608 |   | 12 | % |
| Application  hosting services            |       | 21,234                                              |       | 52                               |       | 29,810     |       | 57 |   | 8,576 |   | 40 |   |
| Consulting  services                     |       | 3,604                                               |       | 9                                |       | 4,701      |       | 9 |   | 1,097 |   | 30 |   |
| Customer support                         |       | 2,926                                               |       | 7                                |       | 3,295      |       | 6 |   | 369 |   | 13 |   |
| Total                                    |       | $                                                   | 40,851     |                             | 100        | %          | $          | 52,501 |   | 100 | % | $ | 11,650 |   | 29 | % |

 

Total revenues increasedin the three months ended June 30, 2009 as compared to the same period in2008, primarily due to increases in application hosting and licenserevenues.  The increase in revenues associated with our applicationhosting services in the three months ended June 30, 2009 was partially dueto an approximately 19% increase in production trials under management fromapproximately 810 as of June 30, 2008 to approximately 968 as of June 30,2009, which include both application hosting services trials as well as trialshosted for our*InForm *licensecustomers.  The increase in production trials relates to customers whopurchase all trial-related services from us, customers who license *Inform* and build their own studies and an increase in theaverage fee per trial.  Our applicationhosting services also increased due to the impact of additional trials undermanagement as a result of our recent acquisition of Clarix.  The increasein license revenues was primarily the result of additional*InForm *revenue from new and existingcustomers and, to a lesser extent, growth in sales relating to our clinicaldata management and safety products.  The increase in consulting revenueswas primarily attributable to an increase in consulting revenue related tosafety which were related to both new and existing customers, partially offsetby a decrease in consulting revenue related to electronic data capture revenueand clinical data management revenue.  The increase in customer supportrevenues in the three months ended June 30, 2009 was due primarily to anincrease in support revenues related to electronic data capture, primarily*InForm*.  Our revenues were notsignificantly impacted by price increases or decreases.  Inflation hadonly a nominal impact on our revenues.

 
| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2008**                                            | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Revenues by Geography (in thousands)** | ** ** | **Amount**                                          | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                    |       |                                                |       |                             |       |       |       |   |   |   |   |   |   |
| North America                                           |       | $                                                   | 22,238     |                             | 55         | %          | $          | 31,726 |   | 61 | % | $ | 9,488 |   | 43 | % |
|                                                    |       |                                                |       |                             |       |       |       |   |   |   |   |   |   |
| United Kingdom                                          |       | 12,810                                              |       | 31                               |       | 14,202     |       | 27 |   | 1,392 |   | 11 |   |
| France                                                  |       | 3,429                                               |       | 8                                |       | 4,284      |       | 8 |   | 855 |   | 25 |   |
| Asia Pacific                                            |       | 2,374                                               |       | 6                                |       | 2,289      |       | 4 |   | (85 | ) | (4 | ) |
| International  subtotal                                 |       | 18,613                                              |       | 45                               |       | 20,775     |       | 39 |   | 2,162 |   | 12 |   |
| Total                                                   |       | $                                                   | 40,851     |                             | 100        | %          | $          | 52,501 |   | 100 | % | $ | 11,650 |   | 29 | % |

 

The increase in revenuesworldwide was primarily due to an increase in electronic data capture revenues,as well as increases in safety revenues and theintroduction of our new interactive response technology revenue following the acquisition of Clarix. Theincrease in U.S. revenues is primarily due to an increase in electronic datacapture of $5.2 million, as well as the inclusion of interactive responsetechnology revenues of $2.2 million due to the introduction of our newinteractive response technology offering following the acquisition ofClarix.  To a lesser, extent the increasein U.S. revenue was also due to an increase in safety revenues of $1.7 million.The increase in international revenues is primarily the result of electronicdata capture revenues and safety revenue of $1.9 million and $0.5 million,respectively.  These increases wereslightly offset by a decrease in clinical data management revenue of $0.2million.

 

*Cost ofRevenues*

 
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | ** **                                | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2008**                                            | ** ** | **2009**                                  | ** ** | **Change** | ** ** |
| **Costs of Revenues (in thousands)** | ** ** | **Amount**                                          | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                |       |                                                |       |                                      |       |       |       |   |   |   |   |   |   |
| License                                             |       | $                                                   | 626        |                                      | 5          | %          | $          | 785 |   | 5 | % | $ | 159 |   | 25 | % |
| Services                                            |       | 17,191                                              |       | 62                                        |       | 21,245     |       | 56 |   | 4,054 |   | 24 |   |
| Total                                               |       | $                                                   | 17,817     |                                      | 44         | %          | $          | 22,030 |   | 42 | % | $ | 4,213 |   | 24 | % |

 

31

----

Tableof Contents

 

The cost of licenserevenues increased in the three months ended June 30, 2009 primarily dueto a $0.1 million increase in the cost of royalties associated with our*InForm* software product as well a slightincrease in amortization of intangible assets.  The increase in cost ofservices in the three months ended June 30, 2009 was primarily due toincreases in employee-related expense of $1.7 million, related to a headcountincrease of 157 people, and increases in facilities expense and depreciationexpense of $1.2 million and $0.4 million, respectively.  Other increasesinclude amortization, computer related expenses and contractor expense of $0.3million, $0.2 million and $0.2 million, respectively.

 

*GrossMargin*

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** **   | ** **                                | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|--------------|-------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                            | ** **   | **2009**                                  | ** ** | **Change** | ** ** |
| **Gross Margin (in thousands)** | ** ** | **Amount**                                          | ** **   | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                      |       |                                                |         |                                      |       |       |       |   |   |   |   |   |   |
| License                                   |       | $                                                   |  12,461 |                                      | 95         | %          | $          |  13,910 |   | 95 | % | $ |  1,449 |   | 12 | % |
| Services                                  |       | 10,573                                              |         | 38                                        |       | 16,561     |       | 44 |   | 5,988 |   | 57 |   |
| Total                                     |       | $                                                   |  23,034 |                                      | 56         | %          | $          |  30,471 |   | 58 | % | $ |  7,437 |   | 32 | % |

 

The license gross marginpercentage remained the same in the three months ended June 30, 2009 ascompared to the three months ended June 30, 2008.  The services grossmargin percentage increased during 2009 due to lower services expenses as apercentage of related revenues.  This was due to increased efficienciesresulting in a decrease in services expense per services employee.  Theoverall gross margin percentage increased in three months ended June 30,2009 due to the higher services gross margin percentage.  It is likelythat gross margin, as a percentage of revenues, will fluctuate quarter byquarter due to the timing and mix of license and service revenues, and thetype, amount and timing of service required in delivering certain projects.

 

*OperatingExpenses*

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** **   | ** **                       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|--------------|----------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **2008**                                            | ** **   | **2009**                         | ** ** | **Change** | ** ** |
| **Operating Expenses (in thousands)** | ** ** | **Amount**                                          | ** **   | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                            |       |                                                |         |                             |       |       |       |   |   |   |   |   |   |
| Sales and  marketing                            |       | $                                                   |  6,783  |                             | 17         | %          | $          |  8,216 |   | 15 | % | $ |  1,433 |   | 21 | % |
| Research and  development                       |       | 6,021                                               |         | 15                               |       | 9,425      |       | 18 |   | 3,404 |   | 57 |   |
| General and  administrative                     |       | 6,045                                               |         | 15                               |       | 9,715      |       | 19 |   | 3,670 |   | 61 |   |
| Total                                           |       | $                                                   |  18,849 |                             | 47         | %          | $          |  27,356 |   | 52 | % | $ |  8,507 |   | 45 | % |

 

*Salesand Marketing.*    Salesand marketing expenses increased in the three months ended June 30, 2009primarily due to increases in employee-related expense of $0.5 million, relatedto a headcount increase of 16 people, as well as increases in facilitiesexpense, amortization expense and marketing expense of $0.3 million, $0.3million and $0.2 million, respectively. We expect that our sales and marketing expense will continue to increasein absolute dollars as commission expense increases with our revenues and as wecontinue to expand sales coverage and to build brand awareness through what webelieve are the most cost effective channels available.  We expect thatsuch increases may fluctuate, however, due to the timing of marketing programs.

 

*Researchand Development.*    Researchand development expenses increased in the three months ended June 30, 2009primarily due to employee-related expenses of $2.0 million related to aheadcount increase of 73 people.  We also had expense increases related tofacilities expense, stock-based compensation and travel expense of $0.8million, $0.4 million and $0.2 million, respectively.  We expect that ourresearch and development costs will continue to increase in absolute dollars aswe continue to add features and functionality to our products, introduceadditional integrated software solutions to our product suite and expand ourproduct and service offerings.

 

*Generaland Administrative.*    Generaland administrative expenses increased in the three months ended June 30,2009 primarily due to increases in employee-related expenses of $1.2 millionrelated to a headcount increase of 47 people, as well as increases instock-based compensation, phone and internet expense and depreciation expensesof $1.1 million, $0.8 million and $0.7 million, respectively. We expect that inthe future our general and administrative expenses will increase in absolutedollars as we add personnel and incur additional costs related to the growth ofour business and operations.

 

32

----

Tableof Contents

 

*OtherIncome*

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** **  | ** **                       | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|-------------|----------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2008**                                            | ** **  | **2009**                         | ** ** | **Change** | ** ** |
| **Other income (in thousands)** | ** ** | **Amount**                                          | ** **  | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                 |       |                                                |        |                             |       |       |       |   |   |   |   |   |   |
| Interest income                      |       | $                                                   |  1,386 |                             | 3          | %          | $          |  502 |   | 1 | % | $ |  (884 | ) | (64 | )% |
| Other income                         |       | 115                                                 |        | —                           |       | 56         |       | — |   | (59 | ) | (51 | ) |
| Total other  income                  |       | $                                                   |  1,501 |                             | 3          | %          | $          |  558 |   | 1 | % | $ |  (943 | ) | (63 | )% |

 

The decrease in interestincome in the three months ended June 30, 2009 was primarily due to thedecrease in cash and cash equivalents and short and long term investments aswell as a decline in interest rates.

 

*Provisionfor Income Taxes*

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** **  | ** **                       | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|-------------|----------------------------------|------------|------------|------------|
| ** **                                         | ** ** | **2008**                                            | ** **  | **2009**                         | ** ** | **Change** | ** ** |
| **Provision for income taxes (in thousands)** | ** ** | **Amount**                                          | ** **  | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                               |       |                                                |        |                             |       |       |       |   |   |   |   |   |   |
| Provision for  income taxes                        |       | $                                                   |  1,992 |                             | 5          | %          | $          |  1,446 |   | 3 | % | $ |  (546 | ) | (27 | )% |
|                                                    |            |                                                     |             |                                  |            |            |            |  |  |  |  |  |  |  |  |  |

 

Our effective tax ratesfor the three months ended June 30, 2008 and 2009 were 35% and 39%,respectively.  In the three months ended June 30, 2008 our effectivetax rate was lower than our statutory rate of 37% due to the tax benefitsrelated to the sale of incentive stock options within the period.  In the three months ended June 30, 2009,our effective tax rate was higher than our statutory rate of 37% due totransaction expenses that were deducted under SFAS No. 141(R), but are notdeductible for tax purposes.

 

**Overviewof Results of Operations in the Six Months Ended June 30, 2008 and 2009**

 

Total revenues increasedby 29%, or $22.4 million, in the six months ended June 30, 2009 compared tothe same period in 2008 primarily due to an increase in service revenues of36%, or $19.3 million.  Additionally,license revenues increased by 12%, or $3.1 million, in the six months ended June 30,2009 compared to the same period in 2008.

 

Our gross marginincreased by 31%, or $14.0 million, in the six months ended June 30, 2009compared to the same period in 2008, primarily due to the increase in servicesrevenues.

 

Operating income in thesix months ended June 30, 2009 of $8.3 million decreased 4%, or $0.3million, compared to the same period in 2008. The operating income in the six months ended June 30, 2008 and 2009also included $3.7 million and $6.2 million of stock-based compensationexpense, respectively.

 

The results for the sixmonths ended June 30, 2009 were impacted by foreign exchange ratefluctuations, resulting in decreases in revenue of $1.9 million, or 2%, anddecreases in expenses of $4.2 million, or 6%.

 

33

----

Tableof Contents

 

*Revenues*

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** **   | ** **                   | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------------------------|--------------|------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **2008**                           | ** **   | **2009**                     | ** ** | **Change** | ** ** |
| **Revenues by Product Line (in thousands) (1)** | ** ** | **Amount**                         | ** **   | **Percentage  of  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                            |       |                               |         |                         |       |       |       |   |   |   |   |   |   |
| Electronic data capture                         |       | $                                  |  60,283 |                         | 76         | %          | $          |  74,903 |   | 74 | % | $ |  14,620 |   | 24 | % |
| Clinical data management                        |       | 11,172                             |         | 14                           |       | 11,440     |       | 11 |   | 268 |   | 2 |   |
| Safety                                          |       | 7,416                              |         | 10                           |       | 11,462     |       | 11 |   | 4,046 |   | 55 |   |
| Interactive Response Technology                 |       | —                             |         | —                       |       | 3,512      |       | 4 |   | 3,512 |   | NM | * |
| Total                                           |       | $                                  |  78,871 |                         | 100        | %          | $          |  101,317 |   | 100 | % | $ |  22,446 |   | 28 | % |

 

----

(1) Revenuesby Product Line include product license revenues and product-related servicerevenues.

 

* Not meaningful

 

The increase inelectronic data capture revenues is primarily due to an increase in applicationhosting services of $12.1 million.  In addition, there were increases inlicense revenues, support services revenues and consulting services of $1.7million, $0.6 million and $0.2 million, respectively.  The increase insafety was primarily due to increases in consulting services, license revenueand application hosting services of $2.6 million, $0.9 million and $0.4million, respectively.  The inclusion ofinteractive response technology revenues is due to the introduction of a newoffering following the acquisition of Clarix on September 5, 2008.

 
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                               | ** ** | **2008**                                          | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Revenues by Type (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                     |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| License                                  |       | $                                                 | 25,701     |                             | 33         | %          | $          | 28,811 |   | 29 | % | $ | 3,110 |   | 12 | % |
| Application  hosting services            |       | 40,420                                            |       | 51                               |       | 56,438     |       | 56 |   | 16,018 |   | 40 |   |
| Consulting  services                     |       | 7,170                                             |       | 9                                |       | 9,561      |       | 9 |   | 2,391 |   | 33 |   |
| Customer support                         |       | 5,580                                             |       | 7                                |       | 6,507      |       | 6 |   | 927 |   | 17 |   |
| Total                                    |       | $                                                 | 78,871     |                             | 100        | %          | $          | 101,317 |   | 100 | % | $ | 22,446 |   | 28 | % |

 

Total revenues increasedin the six months ended June 30, 2009 as compared to the same period in2008, primarily due to increases in application hosting and licenserevenues.  The increase in revenues associated with our applicationhosting services in the six months ended June 30, 2009 was partially dueto the approximately 19% increase in production trials under management fromapproximately 810 as of June 30, 2008 to approximately 968 as of June 30,2009, which include both application hosting services trials as well as trialshosted for our*InForm *licensecustomers.  The increase in production trials relates to customers whopurchase all trial-related services from us, customers who license *Inform* and build their own studies and an increase inaverage fee per trial.  Our application hosting services also increaseddue to the impact of additional trials under management as a result of ourrecent acquisition of Clarix.  The increase in license revenues wasprimarily the result of additional electronic data capture revenues from bothnew and existing customers, and to a lesser extent, growth in sales relating toour clinical data management and safety products.  The increase inconsulting services was primarily attributable to additional revenue related toconsulting services provided for our safety products for both new and existingcustomers.  The increase in customer support revenues was primarily due toincreases in electronic data capture revenue and safety product.  Ourrevenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2008**                                          | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Revenues by Geography (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                    |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| North America                                           |       | $                                                 | 42,432     |                             | 54         | %          | $          | 62,065 |   | 61 | % | $ | 19,633 |   | 46 | % |
|                                                    |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| United Kingdom                                          |       | 24,903                                            |       | 31                               |       | 26,821     |       | 27 |   | 1,918 |   | 8 |   |
| France                                                  |       | 7,016                                             |       | 9                                |       | 7,935      |       | 8 |   | 919 |   | 13 |   |
| Asia Pacific                                            |       | 4,520                                             |       | 6                                |       | 4,496      |       | 4 |   | (24 | ) | (1 | ) |
| International  subtotal                                 |       | 36,439                                            |       | 46                               |       | 39,252     |       | 39 |   | 2,813 |   | 8 |   |
| Total                                                   |       | $                                                 | 78,871     |                             | 100        | %          | $          | 101,317 |   | 100 | % | $ | 22,446 |   | 28 | % |

 

34

----

Tableof Contents

 

The increase in revenuesworldwide was primarily due to an increase in electronic data capture revenuesand safety revenue of $14.6 million and $4.0 million, respectively.  Theincrease in U.S. revenues is primarily related to an increase in electronicdata capture revenues of $12.3 million, the inclusion of interactive responsetechnology revenues of $3.5 million due to the introduction of a new offeringfollowing the acquisition of Clarix on September 5, 2008, and an increasein safety revenue of $3.3 million.  Theincrease in international revenues is primarily the result of increases inelectronic data capture revenues and safety revenue of $2.3 million and $0.8million, respectively.  These increaseswere partially offset by a decrease in clinical data management revenue of $0.2million.

 

*Costsof Revenues*

 
| ** **                                               | ** ** | **Six Months Ended June 30,** | ** ** | ** **                                | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2008**                                          | ** ** | **2009**                                  | ** ** | **Change** | ** ** |
| **Costs of Revenues (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                     |       |                                              |       |                                      |       |       |       |   |   |   |   |   |   |
| License                                                  |       | $                                                 | 1,281      |                                      | 5          | %          | $          | 1,351 |   | 5 | % | $ | 70 |   | 6 | % |
| Services                                                 |       | 32,719                                            |       | 62                                        |       | 41,144     |       | 57 |   | 8,425 |   | 26 |   |
| Total                                                    |       | $                                                 | 34,000     |                                      | 43         | %          | $          | 42,495 |   | 42 | % | $ | 8,495 |   | 25 | % |

 

The increase in cost ofservices in the six months ended June 30, 2008 was primarily due toincreases in employee-related expenses of $3.1 million, related to a headcountincrease of 157 people, and increases in facility expense and contractorexpense of $2.5 million and $0.9 million, respectively.  We also had expense increases fordepreciation, amortization, hosting and travel expenses of $0.7 million, $0.5million, $0.4 million and $0.3 million, respectively.

 

*GrossMargin*

 
| ** **                                | ** ** | **Six Months Ended June 30,** | ** ** | ** **                                | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                          | ** ** | **2009**                                  | ** ** | **Change** | ** ** |
| **Gross Margin (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Related  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                      |       |                                              |       |                                      |       |       |       |   |   |   |   |   |   |
| License                                   |       | $                                                 | 24,420     |                                      | 95         | %          | $          | 27,460 |   | 95 | % | $ | 3,040 |   | 12 | % |
| Services                                  |       | 20,451                                            |       | 38                                        |       | 31,362     |       | 43 |   | 10,911 |   | 53 |   |
| Total                                     |       | $                                                 | 44,871     |                                      | 57         | %          | $          | 58,822 |   | 58 | % | $ | 13,951 |   | 31 | % |

 

The license gross marginpercentage remained the same in 2009 as compared to 2008.  The servicesgross margin percentage increased during 2009 due to lower services expenses asa percentage of related revenues.  This was due to increased efficienciesresulting in a decrease in services expense per services employee.  Theoverall gross margin percentage increased in 2009 due to the higher servicesgross margin percentage.  It is likely that gross margin, as a percentageof revenues, will fluctuate quarter by quarter due to the timing and mix oflicense and service revenues, and the type, amount and timing of servicerequired in delivering certain projects.

 

*OperatingExpenses*

 
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2008**                                          | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Operating Expenses (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                 |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| Sales and  marketing                                 |       | $                                                 | 12,934     |                             | 16         | %          | $          | 15,422 |   | 15 | % | $ | 2,488 |   | 19 | % |
| Research and  development                            |       | 11,579                                            |       | 15                               |       | 17,605     |       | 17 |   | 6,026 |   | 52 |   |
| General and  administrative                          |       | 11,745                                            |       | 15                               |       | 17,519     |       | 17 |   | 5,774 |   | 49 |   |
| Total                                                |       | $                                                 | 36,258     |                             | 46         | %          | $          | 50,546 |   | 49 | % | $ | 14,288 |   | 39 | % |

 

*Salesand Marketing.*    Salesand marketing expenses increased in the six months ended June 30, 2009primarily due to increases in employee-related expense of $0.7 million, relatedto a headcount increase of 16 people, as well as increases in facilitiesexpense, amortization expense and marketing programs expenses of $0.5 million,$0.5 million and $0.4 million, respectively. We expect that our sales and marketing expense will continue to increasein absolute dollars as commission expense increases with our revenues and as wecontinue to expand sales coverage and to build brand awareness through what webelieve are the most cost effective channels available.  We expect thatsuch increases may fluctuate, however, due to the timing of marketing programs.

 

35

----

Tableof Contents

 

*Researchand Development.*    Researchand development expenses increased in the six months ended June 30, 2009primarily due to employee-related expenses of $3.1 million related to aheadcount increase of 73 people.  We also had expense increases related tofacilities expense, stock-based compensation and contractor expense of $1.7 million,$0.7 million and $0.5 million, respectively.  We expect that our researchand development costs will continue to increase in absolute dollars as wecontinue to add features and functionality to our products, introduceadditional integrated software solutions to our product suite and expand ourproduct and service offerings.

 

*Generaland Administrative.*    Generaland administrative expenses increased in the six months ended June 30,2009 primarily due to increases in employee-related expenses of $2.1 millionrelated to a headcount increase of 47 people, as well as increases instock-based compensation, phone & internet related expense anddepreciation expense of $1.4 million, $1.4 million and $1.0 million,respectively. We expect that in the future our general and administrativeexpenses will increase in absolute dollars as we add personnel and incuradditional costs related to the growth of our business and operations.

 

*OtherIncome*

 
| ** **                                     | ** ** | **Six Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2008**                                          | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Other income (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage of  Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                           |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| Interest income                                |       | $                                                 | 3,287      |                             | 4          | %          | $          | 1,142 |   | 1 | % | $ | (2,145 | ) | (65 | )% |
| Other, net                                     |       | 249                                               |       | —                           |       | 465        |       | — |   | 216 |   | 87 |   |
| Total other  income                            |       | $                                                 | 3,536      |                             | 4          | %          | $          | 1,607 |   | 1 | % | $ | (1,929 | ) | (55 | )% |

 

The decrease in interestincome in the six months ended June 30, 2009 was primarily due to thedecrease in cash and cash equivalents and short and long term investments aswell as a decline in interest rates.

 

*Provisionfor Income Taxes*

 
| ** **                                          | ** ** | **Six Months Ended June 30,** | ** ** | ** **                       | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2008**                                          | ** ** | **2009**                         | ** ** | **Change** | ** ** |
| **Provision  for income taxes (in thousands)** | ** ** | **Amount**                                        | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **Percentage  of Revenues** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                |       |                                              |       |                             |       |       |       |   |   |   |   |   |   |
| Provision for  income taxes                         |       | $                                                 | 4,453      |                             | 6          | %          | $          | 3,578 |   | 4 | % | $ | (875 | ) | (20 | )% |
|                                                     |            |                                                   |            |                                  |            |            |            |  |  |  |  |  |  |  |  |  |

 

Our effective tax ratesfor the six months ended June 30, 2008 and 2009 were 37% and 36%,respectively.  In the six months ended June 30,2009 our effective tax rate was lower than its statutory rate of 37% primarilydue to the release of a portion of its unrecognized tax benefits as a result ofthe closing of a statue of limitation in a foreign tax jurisdiction.

 

**Liquidityand Capital Resources**

 

Our principal sources ofliquidity were unrestricted cash, cash equivalents, short and long-term investmentstotaling $177.5 million and $168.7 million at December 31, 2008 and June 30,2009, respectively, and accounts receivable of $40.0 million and$40.5 million, respectively.

 

Cash provided by and usedin operating activities has historically been affected by changes in workingcapital accounts, primarily deferred revenues, accounts receivable and accruedexpenses, and add-backs of non-cash expense items such as depreciation andamortization and stock-based compensation expense. Fluctuations within accountsreceivable and deferred revenues are primarily related to the timing ofbillings of our term license customers and the associated revenue recognition.Movements in deferred costs are related to the volume and stages of hostedclinical trials and movements in accrued expenses and accounts payable are dueto the timing of certain transactions.

 

Net cash provided byoperating activities was $15.2 million in the six months ended June 30,2009, which was more than net income of $6.3 million. The difference isprimarily due to non-cash adjustments of $7.7 million of depreciation andamortization expense, $6.2 million of stock-based compensation expense, and$2.2 million of deferred income tax expense. Cash provided by working capital and other activities primarilyreflected an increase in deferred revenues of $1.6 million and deferred rent of$1.2 

 

36

----

Tableof Contents

 

million. These increaseswere partially offset by decreases in accrued expenses of $5.3 million,accounts payable of $2.9 million, and deferred costs of $2.0 million.

 

Net cash used ininvesting activities was $52.2 million during the six months ended June 30,2009, which was primarily due to the purchase of short-term and long-terminvestments of $47.1 million, cash paid for the acquisition of Waban of $13.6million and capital expenditures of $11.5 million.  These decreases incash were partially offset by $19.4 million of proceeds from maturities ofshort-term and long-term investments.

 

Net cash used infinancing activities was $0.2 million in the six months ended June 30,2009, due to the payment of withholding taxes associated with the vesting ofrestricted stock awards of $1.7 million, partially offset by the proceedsreceived from the exercise of stock options of $1.5 million.

 

Substantially all of ourlong-lived assets at December 31, 2008 and June 30, 2009 are locatedin the United States.

 

We generally do not enterinto long-term binding purchase commitments. Our principal commitments consistof obligations under non-cancelable operating leases for office space.

 

The following table ofour material contractual obligations as of December 31, 2008 summarizesthe aggregate effect that these obligations are expected to have on our cashflows in the periods indicated:

 
| ** **                                 | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations (in thousands)** | ** ** | **Total**                  | ** ** | **1 year or less** | ** ** | **2-3 years** | ** ** | **4-5 years** | ** ** | **More than  5 years** | ** ** |
|                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Operating lease obligations                |       | $                          | 73,029     |   | $ | 7,357 |   | $ | 14,925 |   | $ | 13,424 |   | $ | 37,323 |   |
| Total                                      |       | $                          | 73,029     |   | $ | 7,357 |   | $ | 14,925 |   | $ | 13,424 |   | $ | 37,323 |   |

 

On February 13,2008, we entered into a lease with BP Fourth Avenue, L.L.C. to secure officespace for our current corporate headquarters at 77 Fourth Avenue, Waltham,Massachusetts. The commencement date for occupancy under the lease was December 2008.The lease for our prior corporate headquarters at 880 Winter Street in Walthamexpired in February 2009.

 

The lease for our currentheadquarters provides for the rental of 165,129 rentable square feet of spaceand has an initial term of 10 years and three months. We can, subject tocertain conditions, extend this term by exercising up to two consecutive fiveyear options. We are not required to pay any rent for the first three months ofthe initial lease term. Thereafter, the annual rent on the new lease for yearsone through five is $6.6 million, or approximately $0.5 million permonth.  For years six through ten, the annual rent will be $7.2 million,or approximately $0.6 million per month.  The total base rent payable inthe initial term is $69.1 million.

 

In addition to base rent,commencing on January 1, 2010, the lease for our current headquartersrequires us to pay our proportionate share of the amount by which definedoperating expenses incurred by the landlord exceed the base year (2009)operating expenses, as defined in the lease. The lease also requires us to payour proportionate share of the amount by which real estate taxes paid orincurred by the landlord exceed the tax base year (fiscal 2010), as defined inthe lease.  In addition, we are receiving lease incentives, including freerent for the first three months of occupancy which totaled approximately $1.6million and allowances for tenant improvements totaling approximately $8.1million. The allowances for tenant improvements are being amortized on astraight-line basis over the lease term as a reduction of rental expense.

 

In connection with thesigning of the lease for our current headquarters, we have deposited with thelandlord an unconditional, irrevocable letter of credit in the landlord’s favorin the amount of $1.0 million.

 

At December 31,2008, we had $30.4 million of net operating loss carryforwards that may be usedto offset future U.S. federal taxable income.  These attributes may reduceour future cash tax liability.  In addition, we had $18.3 million of netoperating losses resulting from excess tax deductions related to stock-basedcompensation.  We will realize the benefit of these excess tax deductionsthrough increases to stockholders’ equity in the periods in which the lossesare utilized to reduce tax payments.  In addition, we had $2.4 million offederal research and development tax credit carryforwards that may be utilizedto offset future U.S. taxes.  The net operating loss and tax creditcarryforward periods extend through 2028.  In addition, we had $1.2million of foreign net operating loss carryforwards that may be used to offsetfuture foreign taxable income. These foreign net operating loss carryforwardshave an unlimited carryforward period. We also had $3.8 million of research anddevelopment tax credit carryforwards that may be utilized to offset futureMassachusetts state taxable income.  The Massachusetts tax creditcarryforward period extends through 2023.  The federal and state netoperating loss carryforwards and research and development tax credits aresubject to review and possible adjustment by the taxing authorities. Also, the Internal Revenue Code contains provisions that may limit the netoperating loss and tax credit carryforwards available in any given year in theevent of certain changes in the ownership interests of significantstockholders.  We currently expect to realize the benefit of recordeddeferred tax assets as of December 31, 2008 of $20.0 million.

 

37

----

Tableof Contents

 

Our conclusion that suchassets will be recovered is based upon our expectation that our future earningscombined with tax planning strategies available to us will provide sufficienttaxable income to realize recorded tax assets.

 

We may be required tomake cash outlays related to our unrecognized tax benefits.  However, dueto the uncertainty of the timing of future cash flows associated with ourunrecognized tax benefits, we are unable to make reasonably reliable estimatesof the period of cash settlement, if any, with the respective taxingauthorities.  Accordingly, unrecognized tax benefits of $1.4 million as ofDecember 31, 2008 have been excluded from the contractual obligationstable above.  For further information on unrecognized tax benefits, seeNote 6 in the notes to our 2008 consolidated financial statements included inour Annual Report on Form 10-K for the year ended December 31, 2008.

 

We believe our existingcash, cash equivalents, short-term investments and cash provided by operatingactivities will be sufficient to meet our working capital and capitalexpenditure needs over at least the next 12 months. Our future capitalrequirements will depend on many factors, including our rate of revenue growth,the expansion of our marketing and sales activities, the timing and extent ofspending to support product development efforts, the timing of introductions ofnew products and services and enhancements to existing products and servicesand the continuing market acceptance of our products and services. From time totime, we may also enter into agreements with respect to potential investmentsin, or acquisitions of, businesses, services or technologies, which could alsorequire us to seek additional equity or debt financing.  To the extentthat existing cash and securities and cash from operations are insufficient tofund our future activities, we may need to raise additional funds throughpublic or private equity or debt financing.

 

Included within ourinvestment portfolio at December 31, 2008 and June 30, 2009 were$24.1 million and $24.0 million of auction rate securities, or ARS, at parvalue, which are classified as long-term investments and short-term investments,respectively, on our unaudited condensed consolidated balance sheets, andrecorded at fair market value. These ARS are debt instruments issued by variousstates throughout the United States to finance student loans. The types of ARSthat we own are backed by student loans, 95% of which are guaranteed under theFederal Family Education Loan Program, and all had credit ratings of AAA (orequivalent) from a recognized rating agency. Historically, the carrying valueof ARS approximated fair value due to the frequent resetting of the interestrates. With the liquidity issues experienced in the global credit and capitalmarkets, our ARS have experienced multiple failed auctions. While we continueto earn and receive interest on these investments at the maximum contractualrate, the estimated fair value of these ARS no longer approximates par value.

 

In November 2008, weaccepted an offer from UBS AG, or UBS, with respect to all of our ARS held atthat time. Under our agreement with UBS, we received certain rights whichentitle us to sell our ARS to UBS affiliates during the period from June 30,2010 to July 20, 2012, for a price equal to par value. In accepting theoffer, we granted UBS the authority to sell or auction the ARS at par at anytime up until the expiration date of our agreement with UBS and released UBSfrom any claims relating to the marketing and sale of the ARS. UBS’sobligations under the agreement are not secured by its assets and do notrequire UBS to obtain any financing to support its performance obligations. UBShas disclaimed any assurance that it will have sufficient financial resourcesto satisfy its obligations under the agreement. If UBS has insufficient fundingto buy back the ARS and the auction process continues to fail, then we mayincur further losses on the carrying value of the ARS.

 

In prior periods and upthrough the execution of our signed settlement agreement with UBS in November 2008,the ARS were classified as available-for-sale securities and were reported atfair value, with temporary unrealized gains (losses) excluded from earnings andreported in a separate component of stockholders’ equity andother-than-temporary unrealized losses included in earnings. Upon the executionof the settlement agreement with UBS, we elected to make a one-time transfer ofthe ARS from available-for-sale securities to trade securities. Accordingly, ona prospective basis, all unrealized gains (losses) for these trading securitieswill be included in earnings.

 

We performed a fair valuecalculation of our ARS as of December 31, 2008 and June 30, 2009.Fair value was determined using a secondary market indications method (directdiscounts) and a discounted cash flow method as recent auctions of thesesecurities were not successful, resulting in our continuing to hold thesesecurities and issuers paying interest at the maximum contractual rate. Thisvaluation technique considers the following: time left to maturity, the rate ofinterest paid on the securities, the amount of principal to be repaid to theholders of the securities; the credit worthiness of the issuer and guarantors(if any) and the sufficiency of the collateral; trading characteristics of thesecurities; ability to borrow against the ARS; evidence from secondary marketsales; and the market-clearing yield for the securities. Based upon thevaluation performed, we concluded that the fair value of these ARS at December 31,2008 was $18.0 million, a decline of $6.0 million from par value. Asour settlement agreement with UBS indicates that we intend to sell our ARS toUBS affiliates before their stated maturity under the ARS terms, thedecline in fair value is deemed other-than-temporary. Accordingly, we recordeda loss on these securities of $6.0 million in our consolidated statement ofincome for the year ended December 31, 2008.  As of June 30,2009, it is our intent to sell the ARS on June 30, 2010 in accordance withour rights under the settlement agreement, and accordingly they werereclassified from long-term investments to short-term investments in theaccompanying unaudited condensed consolidated balance sheets.  As of June 30, 2009, we concluded thatthe fair 

 

38

----

Tableof Contents

 

value of these ARS was$18.4 million and therefore, we recorded a change in fair value of thesecurities of $0.4 million in our unaudited condensed consolidated statement ofincome for the six months ended June 30, 2009.

 

We elected to measure thefair value of the settlement agreement (the “put option”) under the fair valueoption of SFAS No. 159,*The Fair ValueOption for Financial Assets and Liabilities—including an amendment of FASBStatement No. 115.*  Fair value was determined using adiscounted cash flow method which considered the following factors: the term ofthe agreement, the availability to borrow against the ARS, the creditworthinessof UBS and current market interest rates. Based on the valuation performed, weconcluded that the fair value of the put option was $5.3 million.Accordingly, we recorded a gain of $5.3 million in the consolidatedstatement of income for the year ended December 31, 2008 with acorresponding long term asset, “securities settlement agreement” in theconsolidated balance sheet at December 31, 2008.  As of June 30, 2009, it is our intent tosell the ARS on June 30, 2010 in accordance with our rights under thesettlement agreement, and accordingly we reclassified the fair value of the “securitiessettlement agreement” from long-term-assets to current assets in theaccompanying unaudited condensed consolidated balance sheets and concluded thatthe fair market value of the securities settlement agreement was $5.3 million,resulting in an slight increase in fair value being recorded in ouraccompanying unaudited condensed consolidated statement of income for the threeand six months ended June 30, 2009, respectively.

 

We believe that, based onour cash, cash equivalents and short-term marketable securities balances of$120.2 million at June 30, 2009, excluding fair market value of ARS of$18.4 million, the current lack of liquidity in the credit and capital marketswill not have a material impact on our liquidity, cash flow or the ability tofund our operations for the next 12 months.

 

**Recently Issued AccountingPronouncements**

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007),*Business Combinations* (“SFAS No. 141(R)”)*.  * SFAS No. 141(R) retainsthe fundamental requirements in SFAS No. 141 that the acquisition methodof accounting (which SFAS No. 141 called the “purchase method”) be usedfor all business combinations and for an acquirer to be identified for eachbusiness combination. SFAS No. 141(R) requires an acquirer torecognize the assets acquired, the liabilities assumed, and any noncontrollinginterest in the acquiree at the acquisition date, measured at their fair valuesas of that date, with limited exceptions specified in the Statement. Thisapproach replaces SFAS No. 141’s cost-allocation process, which requiredthe cost of an acquisition to be allocated to the individual assets acquiredand liabilities assumed based on their estimated fair values. SFAS No. 141(R) retainsthe guidance in SFAS No. 141 for identifying and recognizing intangibleassets separately from goodwill. SFAS No. 141(R) will now requireacquisition costs to be expensed as incurred; restructuring costs associatedwith a business combination must generally be expensed prior to the acquisitiondate and changes in deferred tax asset valuation allowances and income taxuncertainties after the acquisition date generally will affect income taxexpense. SFAS No. 141(R) applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008,which is our 2009 fiscal year. Earlier adoption is prohibited. The adoption ofSFAS No. 141 (R) is expected to have a significant impact on theaccounting for future acquisitions, including our acquisition of Maaguzi andour pending acquisition of the IVRS/IWRS business unit of Covance in the thirdquarter.

 

In April 2009, theFASB issued FASB Staff Position No. 141(R)-1 (“FSP FAS 141(R)-1”*), Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies,*which provides additional clarification on the initial recognition andmeasurement of assets acquired and liabilities assumed in a businesscombination that arise from contingencies.  FSP FAS 141(R)-1 iseffective for all fiscal years beginning on or after December 15,2008.  FSP FAS 141(R)-1 may have a material impact on the accountingfor any business acquired.

 

In December 2007,the FASB released SFAS No. 160,*Noncontrolling Interests in Consolidated Financial Statements—an amendment ofARB No. 51 (“SFAS No. 160”)*. SFAS No. 160 was issuedto improve the relevance comparability, and transparency of financialinformation provided in financial statements by establishing accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. SFAS No. 160 is effective for fiscalyears beginning after December 15, 2008 and will be applied prospectively,except for the presentation and disclosure requirements which will be appliedretrospectively. The adoption of SFAS No. 160 did not have a materialeffect on our consolidated financial position or results of operations.

 

In March 2008, theFASB issued SFAS No. 161,*Disclosuresabout Derivative Instruments and Hedging Activities an amendment of FASBStatement No. 133* (“SFAS No. 161”)*.* SFAS No. 161 requires disclosures of how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for and how derivative instruments and related hedged items affect anentity’s financial position, financial performance, and cash flows. SFAS No. 161is effective for fiscal years beginning after November 15, 2008, withearly adoption permitted. The adoption of SFAS No. 161 did not have amaterial effect on our consolidated financial position and results ofoperations.

 

39

----

Tableof Contents

 

In May 2008, theFASB issued SFAS No. 162,*The Hierarchyof Generally Accepted Accounting Principles* (“SFAS No. 162”).SFAS No. 162 identifies the sources of generally accepted accountingprinciples in the United States and prioritizes the generally acceptedaccounting principles thereunder. SFAS No. 162 is effective sixty daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411,*TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples*. The adoption of SFAS No. 162 did not have amaterial effect on our consolidated financial position and results ofoperations.

 

In April 2009, theFASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB28-1”),*Interim Disclosures about Fair Valueof Financial Instruments,* which amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*  and APB Opinion No. 28,*Interim Financial Reporting, to require disclosuresabout the fair value of financial instruments for interim reporting periods*.FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periodsending after June 15, 2009. The adoption of FSP FAS 107-1 and APB 28-1 didnot have a material effect on our consolidated financial position and resultsof operations.

 

In April 2009, theFASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB StaffPosition No. 124-2 (“FSP FAS 124-2”),*Recognition and Presentation of Other-Than-Temporary Impairments*,which amends the other-than-temporary impairment guidance for debt and equitysecurities. FSP FAS 115-2 and FSP FAS 124-2 shall be effective for interim andannual reporting periods ending after June 15, 2009. The adoption of FSPFAS 115-2 and FSP FAS 124-2 did not have a material effect on the Company’sconsolidated financial position and results of operations.

 

In April 2009, theFASB issued FSP Issue No. FAS No. 157-4 (“FSP FAS 157-4”),*Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions that are not Orderly*. FSP FAS No. 157-4provides additional guidance for estimating fair value in accordance with SFAS No. 157.This FSP No. 157-4 is effective in reporting periods ending after June 15,2009.  The adoption of FSP FAS 157-4 did not have a material effect on ourconsolidated financial position and results of operations.

 

In May 2009, theFASB issued SFAS No. 165, *Subsequent Events*.  SFAS  No. 165provides authoritative accounting literature for the evaluation and disclosureof subsequent events.  SFAS No. 165is effective in reporting periods ending after June 15, 2009.  The adoption did not have a material impacton our consolidated financial position and results of operations.

 

**Off-Balance Sheet Arrangements**

 

We do not have anyspecial purpose entities or off-balance sheet arrangements.

 

**SpecialNote Regarding Forward-Looking Statements**

 

In addition to historicalconsolidated financial information, this Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securitiesand Exchange Act of 1934, as amended, and are intended to be covered by the “safeharbor” created by those sections.  All statements, other than statementsof historical facts, included in this Quarterly Report on Form 10-Qregarding our strategy, future operations, future financial position, futurenet sales, projected costs, projected expenses, prospects and plans andobjectives of management are forward-looking statements. The words “anticipates,”“believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,”“would” and similar expressions are intended to identify forward-looking statements,although not all forward-looking statements contain these identifying words.

 

We may not actuallyachieve the plans, intentions or expectations disclosed in our forward-lookingstatements and you should not place undue reliance on our forward-lookingstatements. We have based these forward-looking statements on our currentexpectations and projections about future events. Although we believe that theexpectations underlying any of our forward-looking statements are reasonable,these expectations may prove to be incorrect, and all of these statements aresubject to risks and uncertainties. We discuss many of the risks that webelieve could cause actual results or events to differ materially from theseforward-looking statements in greater detail in the section entitled “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2008.  We urge you to consider the risks and uncertainties described inItem 1A of our Annual Report on Form 10-K for the year ended December 31,2008 in evaluating our forward-looking statements. Should one or more of theserisks and uncertainties materialize, or should underlying assumptions,projections or expectations prove incorrect, actual results, performance orfinancial condition may vary materially and adversely from those anticipated,estimated or expected. Our forward-looking statements do not reflect thepotential impact of any future acquisitions, mergers, dispositions, jointventures or investments we may make.

 

We caution readers not toplace undue reliance upon any such forward-looking statements, which speak onlyas of the date made. Except as otherwise required by the federal securitieslaws, we disclaim any obligation or undertaking to publicly release any 

 

40

----

Tableof Contents

 

updates or revisions toany forward-looking statement contained herein (or elsewhere) to reflect anychange in our expectations with regard thereto or any change in events,conditions or circumstances on which any such statement is based.

** **

**Item 3.      *Quantitative and Qualitative Disclosuresabout Market Risk***

* *

*ForeignCurrency Exchange Risk*

 

Our results of operationsand cash flows are subject to fluctuations due to changes in foreign currencyexchange rates, particularly changes in the euro, British pound, Australiandollar, Indian rupee and Japanese yen. During the six months ended June 30, 2008 and 2009, 46% and 39%,respectively, of our revenues were generated in locations outside the UnitedStates.  During the same periods, 34% and23%, respectively, of revenues were in currencies other than the U.S.dollar.  During the six months ended June 30,2009, 12% of our revenues were in euros, 7% were in the British pound and 4% inJapanese yen.  During the three monthsended June 30, 2008 and 2009, 33% and 25%, respectively, of revenues werein currencies other than the U.S. dollar. During the three months ended June 30, 2009, 14% of our revenueswere in euros, 7% were in the British pound and 4% in Japanese yen. Except forrevenue transactions in Japan, we enter into transactions directly withsubstantially all of our foreign customers. During the three months ended June 30, 2008 and 2009, 27% and 21%, respectively,of expenses were in currencies other than the U.S. dollar. During the threemonths ended June 30, 2009, 11% of our expenses were in British pound, 4%in euro, 4% in Japanese yen and 1% in Australian dollar and Indian rupee,respectively.  During the six months ended June 30,2008 and 2009, 28% and 21%, respectively, of expenses were in currenciesother than the U.S. dollar.  During thesix months ended June 30, 2009, 11% of our expenses were in British pound,4% in euro and Japanese yen, respectively, and 1% in Australian dollar andIndian rupee, respectively.

 

As of June 30, 2009,we had $9.9 million of receivables denominated in currencies other than theU.S. dollar.  We also maintain cashaccounts denominated in currencies other than the local currency which exposeus to foreign exchange rate movements.

 

In addition, although ourforeign subsidiaries have intercompany accounts that eliminate uponconsolidation, such accounts expose us to foreign currency rate movements.Exchange rate fluctuations on short-term intercompany accounts are recorded inour consolidated statements of operations under “other income”, while exchangerate fluctuations on long-term intercompany accounts are recorded in ourconsolidated balance sheets under “accumulated other comprehensive loss” instockholders’ equity, as they are considered part of our net investment andhence do not give rise to gains or losses.

 

We have implemented arisk management program under which we measure foreign currency exchange riskmonthly and manage those exposures through the use of various operatingstrategies as more fully described in Note 16 in the notes to the accompanyingunaudited condensed consolidated financial statements included in thisQuarterly Report, we regularly purchase short-term foreign currency forwardcontracts, designed to hedge fluctuation in the non-functional currencies ofthe Company and its subsidiaries against the U.S. dollar. This process isdesigned to minimize foreign currency translation exposures that could otherwiseaffect consolidated results of operations. The terms of these contracts are forperiods generally for one month.

 

Currently, our largestforeign currency exposures are the British pound and euro, primarily becauseour European operations have a higher proportion of our local currencydenominated expenses. Relative to foreign currency exposures existing at December 31,2008 and June 30, 2009, a 10% unfavorable movement in foreign currencyexchange rates would not expose us to significant losses in earnings or cashflows or significantly diminish the fair value of our foreign currencyfinancial instruments. This is primarily due to the short lives of the affectedfinancial instruments that effectively hedge substantially all of ourperiod-end exposures against fluctuations in foreign currency exchange rates.

 

As of June 30, 2009,we entered into forward foreign exchange contracts to hedge approximately $6.0million of receivables, intercompany accounts and cash balances denominated incurrencies other than the U.S. dollar.  For the three months ended June 30,2009, we recorded $0.2 million of foreign exchange losses in other income andaccrued expenses as a result of the outstanding forward foreign exchangecontracts.  For the six months ended June 30,2009, we recorded less than $0.1 million of foreign exchange losses in otherincome and accrued expenses as a result of the outstanding forward foreignexchange contracts.

 

*InterestRate Sensitivity*

 

We had unrestricted cash,cash equivalents, short-term and long-term investments totaling $168.7 millionat June 30, 2009.  These amounts were invested primarily in moneymarket funds, corporate bonds and government agency securities, and are heldfor working capital purposes.  We do not use derivative financialinstruments in our investment portfolio.  We have established investmentguidelines relative to credit quality, diversification, marketability andperformance measurement designed to maintain safety and liquidity.  Withthe exception of auction rate securities, investments in securities areinvested primarily in high quality securities of a short duration andhistorically have not been materially affected by fluctuations in interestrates. With the exception of auction rate securities, which are recorded atfair value, investments are reported at amortized cost.  We considered thehistorical volatility of short-term and long-term interest rates and determinedthat, due to the size and duration of our investment portfolio, a 

 

41

----

Tableof Contents

 

100-basis-point increasein interest rates would not have any material exposure to changes in the fairvalue of our portfolio at June 30, 2009.  A decline in interestrates, however, would reduce future investment income.

 

We believe that, based onour unrestricted cash, cash equivalents and short-term marketable securitiesbalances of $120.2 million at June 30, 2009, which exclude the fair marketvalue of ARS of $18.4 million and the fair value of the securities settlementagreement with UBS of $5.3 million, the current lack of liquidity in the creditand capital markets will not have a material impact on our liquidity, cash flowor our ability to fund our operations.

** **

**Item 4.**                   *Controls and Procedures*

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Securities Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, as ours are designed to do, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

As of June 30, 2009,we carried out an evaluation, under the supervision and with the participationof our management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures are effective at that reasonable assurance level in (i) enablingus to record, process, summarize and report information required to be includedin our periodic SEC filings within the required time period and (ii) ensuringthat information required to be disclosed in the reports that we file or submitunder the Securities Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officers and Chief Financial Officer,to allow timely decisions regarding required disclosure.

 

There have been nochanges in our internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**Part II—Other Information**

 

**Item 1.      *Legal Proceedings***

 

From time to time and inthe ordinary course of business, we are subject to various claims, charges andlitigation.  The outcome of litigation cannot be predicted with certaintyand some lawsuits, claims or proceedings may be disposed of unfavorably to us,which could materially affect our financial condition or results of operations.

 

**Item 1A.****         *****Risk Factors***

 

**Certain Factors Which May Affect Future Results**

 

*Weoperate in a rapidly changing environment that involves a number of risks, someof which are beyond our control.  The risks and uncertainties that webelieve are most important for you to consider are described under the title “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2008.  There are no material changes to the risk factors described in the “RiskFactors” section in our Annual Report on Form 10-K for the year ended December 31,2008.  Additional risks and uncertainties not presently known to us, whichwe currently deem immaterial or which are similar to those faced by other companiesin our industry or business in general, may also impair our businessoperations.  If any of the foregoing risks or uncertainties actuallyoccurs, our business, financial condition and operating results would likelysuffer.*

 

**Item 2.****                  *****UnregisteredSale of Equity Securities and Use of Proceeds***

 

Under the terms of our2004 Stock Option and Incentive Plan, or 2004 Plan, we have issued shares ofrestricted stock and restricted stock units to our employees.  On the datethat these restricted shares vest, we withhold, via a net exercise provisionpursuant to our applicable restricted stock agreements and the 2004 Plan, thenumber of vested shares (based on the closing price of our common stock on suchvesting date) equal to tax withholdings required by us. The shares withheldfrom the grantees to settle their tax liability are reallocated to the numberof shares available for issuance under the 2004 Plan. For the six month periodending June 30, 2009, we withheld an aggregate of 122,961 commonshares under restricted stock units at a price of $13.97 per share.

 

42

----

Tableof Contents

 

**Item4.      *Submissionof Matters to a Vote of Security Holders***

 

At the annual meeting ofour stockholders held May 8, 2009, our stockholders took the followingactions:

 

Our stockholders electedAxel Bichara, Paul A. Bleicher, Richard D’Amore, Gary E. Haroian, Paul G.Joubert, Kenneth I. Kaitin, Dennis R. Shaughnessy, and Robert K. Weiler asdirectors, each to serve for a one-year term and until their successors havebeen duly elected and qualified or until their earlier death, resignation orremoval. The directors were elected by a plurality of the votes cast at the2009 annual meeting, as follows:

 
| **Nominee**            | ** ** | **Votes  For** | ** ** | **Shares  Withheld** | ** ** |
|------------------------|------------|----------------|------------|----------------------|------------|
|                   |       |           |       |                 |       |
| Axel Bichara           |       | 39,015,364     |       | 458,800              |       |
| Paul A. Bleicher       |       | 38,714,653     |       | 759,511              |       |
| Richard D’Amore   |       | 38,410,052     |       | 1,064,112            |       |
| Gary E. Haroian        |       | 39,068,972     |       | 405,192              |       |
| Paul G. Joubert        |       | 39,068,105     |       | 406,059              |       |
| Kenneth I.  Kaitin     |       | 38,781,884     |       | 692,280              |       |
| Dennis R.  Shaughnessy |       | 38,731,427     |       | 742,737              |       |
| Robert K. Weiler       |       | 38,451,628     |       | 1,022,536            |       |

 

No other persons werenominated, nor received votes, for election as a director at the 2009 annualmeeting.

 

Our stockholders approvedthe selection of Ernst & Young LLP as our independent registeredpublic accounting firm for the fiscal year ending December 31, 2009. Thevotes cast at the 2009 annual meeting were as follows: 39,390,625 shares votedfor, 83,345 shares voted against and 194 shares abstained from voting.

 

At the annual meeting,our stockholders approved an amendment and restatement of the Phase Forward2004 Stock Option and Incentive Plan. The votes cast at the 2009 annual meetingwere as follows: 28,473,736 shares voted for, 8,939,391 shares voted againstand 33,081 shares abstained from voting. There were 2,027,956 broker non-votes.

 

**Item 5.      *Other Information***

 

Our policy governingtransactions in our securities by directors, officers and employees permits ourofficers, directors and certain other persons to enter into trading planscomplying with Rule 10b5-1 under the Securities Exchange Act of 1934, asamended. We have been advised that our Senior Vice President and GeneralCounsel, D. Ari Buchler, our Vice President, Corporate Development, MartinYoung, and our Senior Vice President, Worldwide Sales, Stephen J. Powell, haveeach entered into a trading plan covering periods after the date of thisQuarterly Report in accordance with Rule 10b5-1 and our policy governingtransactions in our securities.  Generally, under these trading plans, theindividual relinquishes control over the transactions once the trading plan isput into place.  Accordingly, sales under these plans may occur at anytime, including possibly before, simultaneously with, or immediately aftersignificant events involving our company.

 

We anticipate that, aspermitted by Rule 10b5-1 and our policy governing transactions in oursecurities, some or all of our officers, directors and employees may establishtrading plans in the future. We intend to disclose the names of executiveofficers and directors who establish a trading plan in compliance with Rule 10b5-1and the requirements of our policy governing transactions in our securities inour future quarterly and annual reports on Form 10-Q and 10-K filed withthe Securities and Exchange Commission. However, we undertake no obligation toupdate or revise the information provided herein, including for revision ortermination of an established trading plan, other than in such quarterly andannual reports.

 

43

----

Tableof Contents

 

**Item 6.****     *****Exhibits*****.**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                         |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                                                                                                    |
| 3.1         |       | Amendment No. 1 to the Amended and Restated By-laws  (Incorporated by reference herein to Exhibit 3.1 to the Company’s Current  Report on Form 8-K filed with the SEC on May 13, 2009)        |
| 10.1        |       | Amended and Restated 2004 Stock Option and Incentive  Plan (Incorporated by reference herein to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed with the SEC on May 13, 2009) |
| 31.1        | *          | Certification of CEO pursuant to  Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934.                                                                          |
| 31.2        | *          | Certification of CFO pursuant to  rules 13a-14(a) and 15d-14(a) under the Securities Exchange  Act of 1934.                                                                         |
| 32.1        | *          | Certification of CEO pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |
| 32.2        | *          | Certification of CFO pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |

 

----

*** Filedherewith.**

 

44

----

Tableof Contents

 

**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** **                | **PHASE FORWARD INCORPORATED** |
|---------------------------|--------------------------------|
|                      |                           |
|                      | By:                            | /s/ ROBERT K. WEILER |
|                      |                           | Robert K. Weiler*Chief Executive Officer  (Duly authorized officer)* |
|                      |                           |   |
|                      | By:                            | /s/ CHRISTOPHER MENARD |
|                      |                           | Christopher A. Menard *Chief Financial Officer   (Duly authorized officer and   principal financial officer)* |
| Date: August 6, 2009 |                           |   |

 

45

----

Tableof Contents

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                         |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Description**                                                                                                                                                                                    |
| 3.1         |       | Amendment No. 1 to the Amended and Restated By-laws  (Incorporated by reference herein to Exhibit 3.1 to the Company’s Current  Report on Form 8-K filed with the SEC on May 13, 2009)        |
| 10.1        |       | Amended and Restated 2004 Stock Option and Incentive  Plan (Incorporated by reference herein to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed with the SEC on May 13, 2009) |
| 31.1        | *          | Certification of CEO pursuant to  Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act  of 1934.                                                                          |
| 31.2        | *          | Certification of CFO pursuant to  rules 13a-14(a) and 15d-14(a) under the Securities Exchange  Act of 1934.                                                                         |
| 32.1        | *          | Certification of CEO pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |
| 32.2        | *          | Certification of CFO pursuant to 18 U.S.C. 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                       |

 

----

*Filed herewith.

 

46

----