Use these links to rapidly review the documentPhase Forward Incorporated INDEX



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

|ý                                                 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended September 30, 2004
|OR                                               
|o                                                 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-50839

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Phase Forward Incorporated(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)           |  | 04-3386549(I.R.S. Employer
Identification No.)
|-------------------------------------------------------------------------------- |  | ----------------------------------------------
|880 Winter Street
Waltham, Massachusetts(Address of principal executive offices) |  | 02451(Zip Code)                               
|(888) 703-1122(Registrant's telephone number, including area code)              

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes
o    No ý

As of October 27, 2004, the registrant had 32,338,409 shares of Common Stock outstanding.



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Phase Forward Incorporated    INDEX



|                             |  |                                                                                                                        |  | Page
Number
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | -----------
|Part IFinancial Information
|Item 1.                      |  | Condensed Consolidated Financial Statements (unaudited)                                                                |  | 3          
|                             |  | Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004                                   |  | 3          
|                             |  | Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2003 and 2004 |  | 4          
|                             |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and September 30, 2004    |  | 5          
|                             |  | Notes to Condensed Consolidated Financial Statements                                                                   |  | 6          
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                  |  | 18         
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                                                             |  | 50         
|Item 4.                      |  | Controls and Procedures                                                                                                |  | 50         
|Part IIOther Information   
|Item 1.                      |  | Legal Proceedings                                                                                                      |  | 51         
|Item 2.                      |  | Change in Securities and Use of Proceeds                                                                               |  | 51         
|Item 3.                      |  | Defaults upon Senior Securities                                                                                        |  | 52         
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                                    |  | 52         
|Item 5.                      |  | Other Information                                                                                                      |  | 52         
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                                       |  | 53         
|Signatures                   |  | 54                                                                                                                    
|Exhibit Index                |  | 55                                                                                                                    

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Part IFinancial Information

Item 1. Condensed Consolidated Financial Statements

Phase Forward Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited)(in thousands, except per share amounts)

|                                                           |                                                                                       | As of
December 31,
2003                                                                                                           |          | As of
September 30,
2004 |   
|---------------------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | -------- | ------------------------ | --
|Assets                                                     |                                                                                       |                                                                                                                                   |          |                          |   
|Current assets:                                            |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Cash and cash equivalents                                                             |                                                                                                                                   | $        | 19,046                   |   
|                                                           | Short-term investments                                                                |                                                                                                                                   |          |                         |   
|                                                           | Accounts receivable, net of allowance of $425 and $470 in 2003 and 2004, respectively |                                                                                                                                   |          | 22,947                   |   
|                                                           | Deferred set up costs, current portion                                                |                                                                                                                                   |          | 1,115                    |   
|                                                           | Prepaid commissions and royalties, current portion                                    |                                                                                                                                   |          | 2,192                    |   
|                                                           | Prepaid expenses and other current assets                                             |                                                                                                                                   |          | 1,434                    |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Total current assets                                       |                                                                                       |                                                                                                                                   | 46,734   |                          |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Property and equipment, net                                |                                                                                       |                                                                                                                                   | 5,299    |                          |   
|Restricted cash, net of current portion                    |                                                                                       |                                                                                                                                   | 1,611    |                          |   
|Deferred set up costs, net of current portion              |                                                                                       |                                                                                                                                   | 697      |                          |   
|Prepaid commissions and royalties, net of current portion  |                                                                                       |                                                                                                                                   | 2,527    |                          |   
|Goodwill                                                   |                                                                                       |                                                                                                                                   | 23,780   |                          |   
|Other assets                                               |                                                                                       |                                                                                                                                   | 196      |                          |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Total assets                                                                          |                                                                                                                                   | $        | 80,844                   |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Liabilities and Stockholders' (Deficit) Equity             |                                                                                       |                                                                                                                                   |          |                          |   
|Current Liabilities:                                       |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Lines of credit                                                                       |                                                                                                                                   | $        | 2,500                    |   
|                                                           | Current portion of notes payable                                                      |                                                                                                                                   |          | 2,218                    |   
|                                                           | Accounts payable                                                                      |                                                                                                                                   |          | 947                      |   
|                                                           | Accrued expenses                                                                      |                                                                                                                                   |          | 10,973                   |   
|                                                           | Restructuring accrual                                                                 |                                                                                                                                   |          | 1,989                    |   
|                                                           | Deferred revenue, current portion                                                     |                                                                                                                                   |          | 33,050                   |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Total current liabilities                                  |                                                                                       |                                                                                                                                   | 51,677   |                          |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Notes payable, net of current portion                      |                                                                                       |                                                                                                                                   | 1,970    |                          |   
|Restructuring accrual, net of current portion              |                                                                                       |                                                                                                                                   | 497      |                          |   
|Deferred revenue, net of current portion                   |                                                                                       |                                                                                                                                   | 4,738    |                          |   
|Deferred rent                                              |                                                                                       |                                                                                                                                   | 288      |                          |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Total liabilities                                                                     |                                                                                                                                   |          | 59,170                   |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Commitments and contingencies (Note 8)                     |                                                                                       |                                                                                                                                   |          |                          |   
|Redeemable convertible preferred stock at redemption value |                                                                                       |                                                                                                                                   | 123,951  |                          |   
|Redeemable convertible preferred stock warrant             |                                                                                       |                                                                                                                                   | 169      |                          |   
|Stockholders' (deficit) equity:                            |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Common stock, $.01 par value:                                                         |                                                                                                                                   |          |                          |   
|                                                           |                                                                                       | Authorized32,804 and 100,000 shares in 2003 and 2004, respectivelyIssued3,602 and 32,372 shares in 2003 and 2004, respectively |          |                          | 36
|                                                           | Additional paid-in capital                                                            |                                                                                                                                   |          |                         |   
|                                                           | Subscription receivable                                                               |                                                                                                                                   |          | (627                     | ) 
|                                                           | Deferred stock-based compensation                                                     |                                                                                                                                   |          | (2,333                   | ) 
|                                                           | Treasury stock, 37 shares at cost in 2003 and 2004                                    |                                                                                                                                   |          | (111                     | ) 
|                                                           | Accumulated other comprehensive loss                                                  |                                                                                                                                   |          | (500                     | ) 
|                                                           | Accumulated deficit                                                                   |                                                                                                                                   |          | (98,911                  | ) 
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|Total stockholders' (deficit) equity                       |                                                                                       |                                                                                                                                   | (102,446 | )                        |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   
|                                                           | Total liabilities and stockholders' (deficit) equity                                  |                                                                                                                                   | $        | 80,844                   |   
|                                                           |                                                                                       |                                                                                                                                   |          |                          |   

See accompanying notes.

3

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Phase Forward Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(unaudited)(in thousands, except per share amounts)

|                                                                                                   |                               | Three Months
Ended
September 30, |        | Nine Months
Ended
September 30, |  
|-------------------------------------------------------------------------------------------------- | ----------------------------- | -------------------------------- | ------ | ------------------------------- | -
|
|Revenues:                                                                                          |                               |                                  |        |                                 |  
|                                                                                                   | License                       |                                  | $      | 5,385                           |  
|                                                                                                   | Service                       |                                  |        | 10,818                          |  
|                                                                                                   |                               |                                  |        |                                 |  
|Total revenues                                                                                     |                               |                                  | 16,203 |                                 |  
|Costs of revenues:                                                                                 |                               |                                  |        |                                 |  
|                                                                                                   | License                       |                                  |        | 553                             |  
|                                                                                                   | Service(1)                    |                                  |        | 7,380                           |  
|                                                                                                   |                               |                                  |        |                                 |  
|Total cost of revenues                                                                             |                               |                                  | 7,933  |                                 |  
|Gross margin:                                                                                      |                               |                                  |        |                                 |  
|                                                                                                   | License                       |                                  |        | 4,832                           |  
|                                                                                                   | Service                       |                                  |        | 3,438                           |  
|                                                                                                   |                               |                                  |        |                                 |  
|Total gross margin                                                                                 |                               |                                  | 8,270  |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|Operating expenses:                                                                                |                               |                                  |        |                                 |  
|                                                                                                   | Sales and marketing(1)        |                                  |        | 3,338                           |  
|                                                                                                   | Research and development(1)   |                                  |        | 2,554                           |  
|                                                                                                   | General and administrative(1) |                                  |        | 2,409                           |  
|                                                                                                   |                               |                                  |        |                                 |  
|Total operating expenses                                                                           |                               |                                  | 8,301  |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|Income (loss) from operations                                                                      |                               |                                  | (31    | )                               |  
|Other income (expense):                                                                            |                               |                                  |        |                                 |  
|                                                                                                   | Interest income               |                                  |        | 28                              |  
|                                                                                                   | Interest expense              |                                  |        | (88                             | )
|                                                                                                   | Other income (expense)        |                                  |        | 99                              |  
|                                                                                                   |                               |                                  |        |                                 |  
|Total other income (expense)                                                                       |                               |                                  | 39     |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|Income (loss) before provision for income taxes                                                    |                               |                                  | 8      |                                 |  
|Provision for income taxes                                                                         |                               |                                  | 116    |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|Net income (loss)                                                                                  |                               |                                  | (108   | )                               |  
|Accretion of preferred stock and dividend declared                                                 |                               |                                  | 1,918  |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|Net loss applicable to common stockholders                                                         |                               | $                                | (2,026 | )                               | $
|                                                                                                   |                               |                                  |        |                                 |  
|Net loss per share applicable to common stockholdersbasic and diluted                             |                               | $                                | (0.60  | )                               | $
|                                                                                                   |                               |                                  |        |                                 |  
|Weighted average number of common shares used in net loss per share calculationsbasic and diluted |                               |                                  | 3,399  |                                 |  
|                                                                                                   |                               |                                  |        |                                 |  
|(1) Amounts include stock-based expenses, as follows:                                              |                               |                                  |        |                                 |  
|                                                                                                   | Costs of service revenues     |                                  | $      | 232                             |  
|                                                                                                   | Sales and marketing           |                                  |        | 70                              |  
|                                                                                                   | Research and development      |                                  |        | 68                              |  
|                                                                                                   | General and administrative    |                                  |        | 36                              |  
|                                                                                                   |                               |                                  |        |                                 |  
|                                                                                                   | Total stock-based expenses    |                                  | $      | 406                             |  
|                                                                                                   |                               |                                  |        |                                 |  

See accompanying notes.

4

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Phase Forward Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)(in thousands)

|                                                                                                   |                                               | Nine Months Ended
September 30,           |       
|-------------------------------------------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------- | ------
|
|Operating activities                                                                               |                                               |                                           |       
|Net income (loss)                                                                                  |                                               | $                                         | (2,785
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                               |                                           |       
|                                                                                                   | Depreciation and amortization                 |                                           |       
|                                                                                                   | Stock-based compensation                      |                                           |       
|                                                                                                   | Foreign currency exchange gain (loss)         |                                           |       
|                                                                                                   | Provision for allowance for doubtful accounts |                                           |       
|                                                                                                   | Non-cash income tax expense                   |                                           |       
|                                                                                                   | Deferred rent                                 |                                           |       
|                                                                                                   | Changes in assets and liabilities:            |                                           |       
|                                                                                                   |                                               | Accounts receivable                       |       
|                                                                                                   |                                               | Deferred costs                            |       
|                                                                                                   |                                               | Prepaid expenses and other current assets |       
|                                                                                                   |                                               | Accounts payable                          |       
|                                                                                                   |                                               | Accrued expenses                          |       
|                                                                                                   |                                               | Deferred revenue                          |       
|                                                                                                   |                                               |                                           |       
|Net cash provided by (used in) operating activities                                                |                                               |                                           | (22   
|                                                                                                   |                                               |                                           |       
|Investing activities                                                                               |                                               |                                           |       
|Purchase of short-term investments                                                                 |                                               |                                           |      
|Purchase of property and equipment                                                                 |                                               |                                           | (2,375
|Decrease in restricted cash, net                                                                   |                                               |                                           | 311   
|Decrease (increase) in other assets                                                                |                                               |                                           | 187   
|                                                                                                   |                                               |                                           |       
|Net cash used in investing activities                                                              |                                               |                                           | (1,877
|                                                                                                   |                                               |                                           |       
|Financing activities                                                                               |                                               |                                           |       
|Proceeds from issuance of notes payable and borrowings under lines of credit                       |                                               |                                           | 2,570 
|Payments on lines of credit and notes payable                                                      |                                               |                                           | (2,823
|Payment of dividend payable                                                                        |                                               |                                           |      
|Stock issuance costs                                                                               |                                               |                                           |      
|Repurchase of restricted common stock                                                              |                                               |                                           | (111  
|Proceeds from issuance of common stock                                                             |                                               |                                           | 112   
|Proceeds from repayment of subscriptions receivable                                                |                                               |                                           |      
|                                                                                                   |                                               |                                           |       
|Net cash provided by (used in) financing activities                                                |                                               |                                           | (252  
|                                                                                                   |                                               |                                           |       
|Effect of exchange rate changes on cash and cash equivalents                                       |                                               |                                           | 626   
|                                                                                                   |                                               |                                           |       
|Net change in cash and cash equivalents                                                            |                                               |                                           | (1,525
|Cash and cash equivalents at beginning of year                                                     |                                               |                                           | 17,960
|                                                                                                   |                                               |                                           |       
|Cash and cash equivalents at end of period                                                         |                                               | $                                         | 16,435
|                                                                                                   |                                               |                                           |       
|Non-cash financing activities                                                                      |                                               |                                           |       
|Accretion of Series B, C, and D redeemable convertible preferred stock to redemption value         |                                               | $                                         | 5,754 
|                                                                                                   |                                               |                                           |       

See accompanying notes.

5

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Phase Forward Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)(in thousands, except share and per share amounts)

1.     Organization and Basis of Presentation

Organization

Phase Forward Incorporated (the "Company") is a provider of integrated enterprise-level electronic data capture, data management and adverse event reporting
software solutions for use in the clinical trial component of the its customers' global research and development initiatives. The Company offers software products, services and hosted solutions to
pharmaceutical, biotechnology and medical device companies, as well as academic institutions, clinical research organizations and other entities engaged in clinical trials.

The
Company has operations in the United States, United Kingdom, France, Germany, Japan and Australia.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting
principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, the management of the Company believes that the disclosures herein are adequate
to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited
consolidated financial statements and reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial
position of the Company as of September 30, 2004, the results of its operations for the three and nine months ended September 30, 2003 and 2004 and its cash flows for the nine months
ended September 30, 2003 and 2004. These condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Registration Statement No. 333-113594 on Form S-1, as amended. The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the year ending December 31, 2004.

On
July 20, 2004, the Company completed an initial public offering ("IPO") of 5,250,000 shares of common stock at $7.50 per share. In connection with the IPO, all of the
outstanding shares of the Company's preferred stock (and a warrant to purchase preferred stock) were converted into an equal number of shares of common stock (and a warrant to purchase common stock).
On August 19, 2004, the Company sold an additional 330,000 shares of common stock at $7.50 per share as a result of the exercise of the over-allotment option by the underwriters of
the IPO. A summary of the terms of the offering can be found in the Company's Registration Statement No. 333-113594 on Form S-1, as amended, as filed with the
SEC.

The
sale of the 5,580,000 shares of common stock in connection with the IPO resulted in net proceeds to the Company of $36,635 after deducting underwriters' discounts and
offering-related expenses.

6

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2.     Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition and Deferred Setup Costs

The Company derives revenues from software licenses and services. License revenue is derived principally from the sale of multi-year software term
licenses of the Company'sInForm, ClintrialandClintracesoftware products. Service revenue is derived
from the Company's delivery of the hosted solution of itsInFormsoftware product, consulting services and customer support, including training.

The
components of revenue are as follows:

|                             |  | Three Months Ended
September 30, |        | Nine Months Ended
September 30,
|---------------------------- |  | -------------------------------- | ------ | -------------------------------
|
|License                      |  | $                                | 5,385  |                                
|Application hosting services |  |                                  | 5,198  |                                
|Consulting services          |  |                                  | 1,723  |                                
|Customer support             |  |                                  | 3,897  |                                
|                             |  |                                  |        |                                
|Total                        |  | $                                | 16,203 |                                
|                             |  |                                  |        |                                

The
Company recognizes software license revenue in accordance with Statement of Position (SOP) No. 97-2,Software Revenue
Recognition,as amended, while revenues resulting from application hosting services are recognized in accordance with Emerging Issues Task Force (EITF) Issue
No. 00-03,Application of AICPA Statement of Position 97-2 to Arrangements that include the Right to Use Software Stored on Another Entity's
Hardwareand SEC Staff Accounting Bulletin (SAB) Nos. 101 and 104,Revenue Recognition. On August 1, 2003, the Company
adopted EITF Issue No. 00-21,Revenue Arrangements with Multiple Deliverables.This adoption did not have, and is not expected to
have in future reporting periods, a material impact on the Company's financial position or results of operations.

Customers
generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice to the Company. Multiple element
arrangements, including license and services agreements, and certain application hosting services can generally be terminated by either party for material breach of obligations generally not corrected
within 30 days after notice of the breach.

The
Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to
the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

7

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The
Company generally enters into software term licenses with its customers for three to five year periods. These arrangements typically include multiple elements: a software license,
consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills the annual license fee for the first
year of a multi-year contract in advance and bills the license fees for the subsequent years on each anniversary date. The Company's payment terms are generally net 30 days.

The
Company's software license revenue is earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to
delivery to the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are
for trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.

The
Company generally bundles customer support with the software term license for the entire term of the license. As a result, the Company generally recognizes revenues for all elements,
including consulting services, ratably over the term of the software license and support arrangement. The Company allocates the revenue recognized for these arrangements to the different elements
based on management's estimate of the relative fair value of each element. For its term-based licenses, the Company allocates to consulting services the anticipated service effort and
value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The remaining value is allocated to license and
support services, with 10% of this amount allocated to support services. The Company has allocated the estimated fair value to its multiple element arrangements to provide meaningful disclosures about
each of its revenue streams. The costs associated with the consulting and customer support services are expensed as incurred. There are instances in which the Company sells software licenses based on
usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenue is
recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenue is recognized in the period of use. Revenues from certain
follow-on consulting services that are sold separately to customers with existing software licenses, and are not considered part of a multiple element arrangement, are recognized as the
services are performed.

In
addition to making its software products available to customers through licenses, the Company offers itsInFormelectronic data capture
software product through a fully-hosted, turnkey deployment. Revenues resulting from application hosting services consist of three stages for each clinical trial. The first stage includes trial and
application setup, including design of electronic case report forms and edit checks, implementation of the system and server configuration. The second stage consists of application hosting and related
support services. The third stage, database lock, consists of services required to close out, or lock, the database for the clinical trial. Services provided for the first and third stages are
provided on a fixed fee basis, based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. The Company recognizes
revenue from application hosting and related services over the hosting period. Fees charged and costs incurred for the trial system design, setup and implementation are deferred and capitalized as
applicable, until the start of the hosting period. These revenues and costs are recognized and amortized, as applicable, ratably over the estimated hosting period. The capitalized costs include
incremental direct costs with third parties and certain internal direct costs of the trial and application setup, as defined under Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Indirect Costs of Leases.These costs include salary and
benefits associated with direct labor costs incurred during trial setup, as well as third-party subcontract fees and other contract labor costs. Work performed outside the original scope of work is
contracted for separately as an additional fee and is generally recognized over the remaining term of the hosting period.

8

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In
the event that an application hosting customer cancels a clinical trial and its related statement of work, all deferred revenue is recognized and all deferred setup costs are expensed
and certain termination related fees may be charged.

The
Company capitalized $1,139 and $1,331 of deferred setup costs and amortized $1,302 and $1,380 during the nine months ended September 30, 2003 and 2004, respectively. The
amortization of deferred setup costs is a component of cost of services.

The
Company continues to sell theClintrialandClintracesoftware products to certain
existing customers as perpetual software licenses with the option to purchase customer support. The Company does not generally sell perpetual licenses to new customers. The Company has established
vendor specific objective evidence of fair value for the customer support in these arrangements. Accordingly, the license revenue is recognized upon delivery of the software and when all other revenue
recognition criteria are met. The customer support is recognized ratably over the term of the underlying support arrangement. The Company continues to generate customer support and maintenance revenue
from its perpetual license customer base. Training revenue is recognized as earned.

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

Provisions
for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses become
probable and can be reasonably estimated. To date, the Company has not experienced any material losses on uncompleted application hosting contracts.

In
November 2001, the EITF of the Financial Accounting Standards Board (FASB) issued EITF Issue No. 01-14,Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred.EITF Issue No. 01-14 requires reimbursable
out-of-pocket expenses incurred to be characterized as revenue in the income statement. The Company included $831 and $614 of reimbursable out-of-pocket
expenses in service revenue and cost of service revenue in the nine months ended September 30, 2003 and 2004, respectively.

Prepaid Sales Commissions and Royalties

The Company capitalized $2,143 and $2,820 of commissions and amortized to sales and marketing expense $1,223 and $2,002 during the nine months ended
September 30, 2003 and 2004, respectively. The Company capitalized $1,459 and $2,568 of royalties and amortized to cost of revenues $1,511 and $1,841 during the nine months ended
September 30, 2003 and 2004, respectively.

Net Loss Per Share

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the
period. Weighted average shares outstanding exclude unvested restricted common stock. The Company's potentially dilutive shares, which include outstanding common stock options, warrants, and
redeemable convertible preferred stock also have not been included in the computation of diluted net loss per share for all periods as the result would be anti-dilutive. Redeemable
convertible preferred stock is included in the

9

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weighted
average shares outstanding from the date of the conversion into common stock upon the consummation of the IPO. The calculation of basic and diluted net loss per share is as follows:

|                                                                       |  | Three Months Ended
September 30, |           | Nine Months Ended
September 30, |  
|---------------------------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | -
|
|Computation of basic and diluted net loss per share:                   |  |                                  |           |                                 |  
|Net loss applicable to common stockholders                             |  | $                                | (2,026    | )                               | $
|                                                                       |  |                                  |           |                                 |  
|Weighted average shares outstanding                                    |  |                                  | 3,461,673 |                                 |  
|Less: Weighted average unvested restricted common shares outstanding   |  |                                  | (62,587   | )                               |  
|                                                                       |  |                                  |           |                                 |  
|Shares used in computing net loss per share                            |  |                                  | 3,399,086 |                                 |  
|                                                                       |  |                                  |           |                                 |  
|Net loss per share applicable to common stockholdersbasic and diluted |  | $                                | (0.60     | )                               | $
|                                                                       |  |                                  |           |                                 |  

The
following common share equivalents and unvested restricted shares have been excluded from the computation of diluted weighted average shares outstanding as of September 30,
2003 and 2004, as they would be anti-dilutive.

As of September 30,2003

2004Redeemable convertible preferred stock

22,841,157

Options outstanding

4,146,500

4,204,423Unvested restricted shares

57,222

14,305Warrant

34,330

34,330


Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are translated in accordance with SFAS No. 52,Foreign Currency
Translation.The reporting currency for the Company is the U.S. dollar. The functional currency of the Company's subsidiaries in the United Kingdom, France, Japan and Australia
are the local currencies of those countries. Accordingly, the assets and liabilities are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense
accounts are generally translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive loss as a separate
component of stockholders' (deficit) equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be
temporary in nature and cash and accounts receivable denominated in non-functional currencies. The Company has recorded a foreign currency gain of $112 and a foreign currency loss of $103
in the three months ended September 30, 2003 and 2004, respectively, and a gain of $257 and a loss of $65 in the nine months ended September 30, 2003 and 2004, respectively, and such
gains and losses are included in other income (expense) in the accompanying condensed consolidated statements of operations.

Cash, Cash Equivalents and Short-term Investments

The Company accounts for its 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 positive intent and ability to hold to maturity are reported at amortized cost, which approximates
market value, and are classified as held-to-maturity. The Company considers all highly liquid investments with original maturities of 90 days or less at the time of
purchase to be cash equivalents

10

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and
investments with original maturities of between 91 days and one year to be short-term investments. At December 31, 2003 and September 30, 2004, cash equivalents
primarily consisted of money market funds that were readily convertible to cash. At September 30, 2004, short-term investments consisted of a corporate debenture maturing in
February 2005.

At
December 31, 2003, the Company had approximately $1,611 of restricted cash held in certificates of deposit as collateral for letters of credit related to facility leases. The
certificates of deposit matured and the collateral for the letters of credit is now reflected as a reduction in the amount available under the line of credit.

Cash,
cash equivalents and short-term investments as of December 31, 2003 and September 30, 2004 were as follows:

|                                |  | December 31, 2003
|------------------------------- |  | -----------------
|
|Cash and cash equivalents       |  | Demand           
|Money market funds              |  | Demand           
|                                |  |                  
|Total cash and cash equivalents |  |                  
|                                |  |                  

|                                |  | September 30, 2004
|------------------------------- |  | ------------------
|
|Cash and cash equivalents       |  | Demand            
|Investments less than 90 days   |  | 58-85 days        
|Money market funds              |  | Demand            
|Certificate of deposit          |  | 30 days           
|                                |  |                   
|Total cash and cash equivalents |  |                   
|                                |  |                   
|Short-term investments          |  | 172 days          
|                                |  |                   

The
Company has had no realized gains or losses to date on the sale of cash equivalents and short-term investments.

Stock-Based Compensation

In January 2003, the FASB issued SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of FASB Statement No. 123,which provides alternative methods of transition for a voluntary change to a fair-value-based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123,Accounting for Stock-Based
Compensation,to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has determined that it will continue to account for options granted under its stock-based compensation plans for employees under Accounting Principles Board (APB)
Opinion No. 25,Accounting for Stock Issued to Employees, and has elected the disclosure-only alternative under SFAS No. 123
and the enhanced disclosures as required by SFAS No. 148. Under APB Opinion No. 25, when the exercise price of options granted under these plans equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is required.

11

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The following tables illustrate the assumptions used and the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation. The Company has computed the pro forma disclosures required under SFAS No. 123 for all employee stock options granted using the Black-Scholes option pricing model
prescribed by SFAS No. 123.

The
assumptions used and weighted average information are as follows:

|                                          |  | Three Months Ended
September 30, |         | Nine Months Ended
September 30, |  
|----------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|
|Average risk-free interest rate           |  |                                  | 3.69    |                                 | 
|Expected dividend yield                   |  |                                  |        |                                 | 
|Expected life                             |  |                                  | 7 years |                                 | 
|Expected volatility                       |  |                                  |        |                                 | 
|Weighted average fair value at grant date |  | $                                | 4.81    |                                 | 

Had
compensation costs been determined consistent with SFAS No. 123, the Company's net loss would have been the following pro forma amounts:

|                                                                                                              |  | Three Months
Ended
September 30, |        | Nine Months
Ended
September 30, |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | -
|
|Net loss applicable to common stockholders, as reported                                                       |  | $                                | (2,026 | )                               | $
|Add: Stock-based compensation expense included in reported net income (loss)                                  |  |                                  | 406    |                                 |  
|Less: Total stock-based employee compensation expense determined under fair-value-based method for all awards |  |                                  | (833   | )                               |  
|                                                                                                              |  |                                  |        |                                 |  
|Pro forma net loss                                                                                            |  | $                                | (2,453 | )                               | $
|                                                                                                              |  |                                  |        |                                 |  
|Pro forma net loss per share applicable to common stockholders                                                |  | $                                | (0.72  | )                               | $
|                                                                                                              |  |                                  |        |                                 |  

3.     Goodwill

A
rollforward of the net carrying amount of goodwill is as follows:

Nine Months Ended
September 30,
2004Balance as of December 31, 2003

$
23,780Utilization of acquired net operating losses


(1,652
)Balance as of September 30, 2004

$
22,128


The
Company acquired Clinsoft Corporation, which developed and sold theClintrialand Clintraceproducts, on August 14, 2001. The goodwill resulting from
the acquisition is reviewed for impairment on an annual basis in accordance
with SFAS No. 142,Goodwill and Other Intangible Assets.The Company performed its annual impairment test for the year ended December 31,
2003 as of October 1, 2003 and determined that no impairment of goodwill or intangible assets existed. As of September 30, 2004, the Company had no reason to believe that any impairment
had occurred since December 31, 2003.

12

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The
utilization of acquired net operating losses reflects a reduction in cash payments to local taxing authorities for income taxes that are not reflected as a benefit in the income tax
provision for financial statement purposes.

4.     Accrued Expenses

Accrued expenses consist of the following:

As of
December 31, 2003

As of
September 30, 2004Accrued payroll and related benefits

$
4,682

$
4,566Accrued other expenses


4,694


4,844Accrued royalties


1,597


2,641$
10,973

$
12,051


5.     Restructuring Charge

The Company recorded a $4,503 restructuring charge for the year ended December 31, 2003 that related to the relocation of the Company's corporate
headquarters in December 2003. Of this amount, $2,486 represents the loss on a facilities lease and $2,017 is related to the abandonment of the related fixed assets and leasehold improvements.
The facility lease loss represents 15 months of rent remaining under an existing lease and related operating expenses. The Company anticipates that the lease loss will be settled by
March 2005. The Company does not anticipate any sublease income over the remaining term of the lease agreement.

The
rollforward of the restructuring charge is as follows:

Lease
LossBalance as of December 31, 2003

$
2,486Payments made during the nine months ended September 30, 2004


(1,516
)Balance as of September 30, 2004

$
970


6.     Income Taxes

The effective tax rate for 2003 was approximately 7% and represents foreign withholding taxes and income taxes payable in certain foreign locations that could not
be offset through loss carryforwards. The effective tax rate for 2004 is approximately 37% before stock-based compensation and represents income tax expense that cannot be offset through the use of
acquired net operating losses for financial statement purposes. The increase in the effective tax rate is primarily due to the profitability of our U.S. operations and the inability to offset taxable
income for financial statement purposes through the use of net operating loss carryforwards. In utilizing our net operating loss carryforwards, the Company is required to use its oldest net operating
losses first. As a result the Company will first use the net operating losses acquired in the Clinsoft acquisition. The utilization of the acquired net operating losses will reduce the amount of
income taxes payable to local tax authorities but will not reduce the income tax expense required for financial statement purposes. This cash benefit will be reflected as a reduction of goodwill.
Additionally, the Company's effective tax rate exceeds its statutory tax rate due to the current non-deductibility of our stock-based compensation expense.

13

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7.     Debt

Lines of Credit

Between April 2000 and September 2004, the Company entered into several equipment lines of credit with a bank. All advances under these equipment lines of
credit are payable in 30 to 36 equal monthly installments of principal, plus accrued interest. The interest that accrues under these notes ranges from prime rate (4.0% and 4.75% at December 31,
2003 and September 30, 2004, respectively) to prime rate plus 1.0%. As of December 31, 2003 and September 30, 2004, there was a total of $4,188 and $5,189, respectively,
outstanding under all of the Company's equipment lines of credit. At December 31, 2003 and September 30, 2004 there was $2,155 and $3,056 respectively, available under the equipment
lines of credit.

In
2003, the Company renewed its $2,500 working capital line of credit with a bank. Interest accrued at prime rate plus 0.25%. Effective March 31, 2004, the Company renewed its
working capital line of credit with a bank and increased the amount under which it can borrow to $5,000. Interest accrues at prime rate. All advances made under the working capital line shall be
immediately due and payable on March 31, 2006. As of December 31, 2003 and September 30, 2004, respectively, $2,500 and $0 was outstanding under the working capital line of
credit. At September 30, 2004, there was $3,389 available under the line of credit, which reflects amounts used to replace the restricted cash associated with the Company's leased facilities.

Borrowings
under these agreements are secured by substantially all assets of the Company, excluding intellectual property. The Company has entered into a negative pledge agreement that,
subject to certain exceptions, generally prohibits the Company from pledging its intellectual property to others. Under the terms of the agreements, as amended in March 2004, the Company is required
to comply with certain financial covenants, including attainment of minimum revenues, minimum earnings and financial ratios. At December 31, 2003, the Company was in violation of the financial
covenant related to minimum revenue levels in the fourth quarter of 2003 and received a waiver from the bank. At September 30, 2004, the Company was in compliance with all financial covenants.

8.     Contingencies

From time to time and in the ordinary course of business, the Company may be subject to various claims, charges and litigation.

On
April 26, 2004, Datasci, LLC ("Datasci") filed suit (Civil Action No. 04-1328 (MJG)) in the United States District Court for the District of Maryland
(Greenbelt Division) against Phase Forward Incorporated and Quintiles Inc., one of the Company's customers. Datasci had asserted that the Company'sInForm,
ClintrialandClintrial Integration Solutionproducts and its services, and the products and services of Quintiles, infringe a
United States patent claimed to be owned by Datasci (Patent No. 6,496,827). Datasci sought an injunction and unspecified damages from each of the Company and Quintiles.

On
May 4, 2004, the Company filed an Answer and Counterclaim to Datasci's complaint denying that it infringes the patent which Datasci claimed to own. The Answer also challenged
the validity of the patent and asserted numerous affirmative defenses. The Company's Counterclaim sought a declaratory judgment that the Company does not infringe the patent claimed to be owned by
Datasci. Datasci responded by denying all the allegations in the Company's Counterclaim. On or about June 7, 2004, Datasci filed a motion to dismiss its complaint against Phase Forward and
Quintiles. In its filing, Datasci disclosed that it did not exist when its complaint against Phase Forward and Quintiles was filed. That motion was granted and, thus, the entire action was dismissed
on August 5, 2004.

14

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Also
on or about June 7, 2004, Dr. Mark L. Kozam, doing business under the name MLK Software and claiming to be the owner of the patent, filed suit (Civil Action
No. 04-1787 (MJG)) in the same court where Datasci filed its initial complaint against Phase Forward and Quintiles. Dr. Kozam's complaint contains the same allegations and
seeks the same remedies that were contained in the Datasci complaint. On June 22, 2004, the Company filed an Answer and Counterclaim to Dr. Kozam's complaint denying that it infringes
the patent, challenging the validity of the patent, asserting numerous affirmative defenses, and counterclaiming for a declaratory judgment that the Company does not infringe any valid claim of the
patent. Dr. Kozam responded by denying all the allegations in the Company's Counterclaim. The Court has added Datasci as a co-plaintiff with Kozam.

Although
this action is in the early stages of discovery, the Company is prepared to vigorously defend the claims and pursue its Counterclaims and any other remedies available to the
Company. Due to the preliminary nature of this action, the Company is unable to assess whether its outcome will have a material adverse effect on its results of operations.

The
Company accepts standard indemnification provisions in the ordinary course of business, whereby it may be required to indemnify its customers for certain costs and damages arising
from third party claims in connection with alleged or actual infringement of intellectual property. The term of these indemnification provisions generally coincides with the customer's use of the
Company's products. The Company has never incurred significant costs to settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these
provisions is minimal.

9.     Redeemable Convertible Preferred Stock and Warrant

On June 1, 2004, the Company's board of directors declared a special cash dividend of $4,700, which was paid on September 15, 2004, to the holders
of record of Series B, C and D Preferred Stock as of June 15, 2004. This distribution is included in net loss applicable to common stockholders for the nine months ended
September 30, 2004.

Accretion
of Series B, C and D redeemable convertible preferred stock was $1,918 and $417 for the three months ended September 30, 2003 and 2004, and $5,754 and $4,253 for
the nine months ended September 30, 2003 and 2004.

In
connection with the closing of the Company's IPO in July 2004, all outstanding shares of the redeemable convertible preferred stock were converted into 22,841,157 shares of
common stock and the preferred stock warrant automatically converted into a warrant to purchase 34,330 shares of common stock.

10.   Stockholders' Equity

Common Stock

On July 20, 2004, the Company completed its IPO of 5,250,000 shares of common stock at $7.50 per share. In connection with the IPO, all of the outstanding
shares of the Company's preferred stock (and a warrant to purchase preferred stock) were converted into an equal number of shares of common stock (and a warrant to purchase common stock). On
August 19, 2004, the Company sold an additional 330,000 shares of common stock at $7.50 per share as a result of the exercise of the over-allotment option by the underwriters of the
IPO. A summary of the terms of the offering can be found in the Company's Registration Statement No. 333-113594 on Form S-1, as amended, as filed with the SEC.

The
sale of the 5,580,000 shares of common stock in connection with the IPO resulted in net proceeds to the Company of $36,635 after deducting underwriters' discounts and
offering-related expenses.

15

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During
the quarter ended September 30, 2004, the company issued 247,677 shares of common stock resulting in proceeds of $630 from the exercise of common stock options.

On
March 11, 2004, the Board of Directors approved an increase to the number of authorized shares of the capital stock to 105 million shares, consisting of
100 million shares of common stock and 5 million shares of preferred stock. Also on March 11, 2004, the Board of Directors approved the 2004 Stock Option and Incentive Plan and
the 2004 Employee Stock Purchase Plan, each to become effective upon the closing of the Company's IPO, and an amendment to the 2003 Non-Employee Director Stock Option Plan, all of which
were approved by the stockholders on April 20, 2004. The 2004 Employee Stock Purchase Plan is available to all eligible employees, who may individually purchase a maximum of 10,000 shares
annually at a price equal to 85 percent of the lower of the fair market value at the start date of the offering or fair market value on the semi-annual purchase dates. The Company
has reserved for issuance an aggregate of 320,000 shares of common stock for this plan. The Company has reserved for issuance an aggregate of 1,500,000 shares of common stock under the 2004 Stock
Option and Incentive Plan which will be the successor equity incentive program to the 1997 Stock Option Plan. For the 2003 Non-Employee Director Stock Option Plan, the Company has reserved
for issuance an aggregate of 562,000 shares of common stock.

During
November and December 2001, the Company executed full recourse notes receivable in consideration for the payment of the exercise of options. The notes are reflected as
subscriptions receivable, a component of stockholders' (deficit) equity. There was $627 and $113 of these notes receivable outstanding at December 31, 2003 and September 30, 2004,
respectively.

11.   Deferred Compensation

The Company records deferred stock-based compensation in the amount by which the exercise price of an option is less than the deemed fair value of its common
stock at the date of grant. Because there had been no public market for the Company stock prior to July 15, 2004, the Company's Board of Directors had determined the fair value of the common
stock on the date of grant based upon several factors, including, but not limited to, the Company's operating and financial performance, the issuances of convertible preferred stock, the rights and
preferences of all securities senior to common stock and the anticipated offering price of the common stock in connection with the Company's IPO. During 2003, all stock options were granted with an
exercise price of $3.00 per share, while the estimated per share fair value of the Company's common stock ranged from $3.00 to $4.00 in the first quarter of 2003, $4.00 to $5.00 in the second quarter
of 2003, $5.00 to $7.50 in the third quarter of 2003 and $7.50 to $9.00 in the fourth quarter of 2003. During the six months ended June 30, 2004, options were granted at exercise prices ranging
from $4.50 to $6.00 per share while the estimated fair value of the Company's common stock was $10.00 per share. No options were granted in the three months ended September 30, 2004. The
Company recorded deferred compensation of $3,060 and $1,480 in the year ended December 31, 2003 and the nine months ended September 30, 2004, respectively. In the three month period
ended March 31, 2004, the Company granted options to purchase 205,000 shares of common stock that vest upon the earlier of 7 years from date of grant or the attainment of specified
milestones. As a result of the Company's IPO completed on July 20, 2004, 61,250 of these options were accelerated and became vested and exercisable, resulting in the acceleration of $264,300 in
stock-based compensation expense in the three and nine month periods ended September 30, 2004. The Company amortized $406 and $684 of deferred stock-based compensation to expense in the three
months ended September 30, 2003 and 2004, respectively. The Company amortized $474 and $1,603 to expense in the nine months ended September 30, 2003 and 2004, respectively. As of
September 30, 2004, there was an aggregate of $2,210 of deferred stock-based compensation remaining to be amortized approximately as follows: $374 in the year ending December 31, 2004;
$961 in the year ending December 31, 2005; $531 in the year ending December 31, 2006; $234 in the year ending December 31, 2007 and $110 through December 31, 2011. The
Company

16

---



amortizes
the deferred compensation charges over the vesting period of the underlying option awards in accordance with FASB Interpretation No. (FIN) 28.

12.   Comprehensive Income (Loss)

Comprehensive income (loss) consisted of the following:

|                                  |  | Three Months Ended
September 30, |      | Nine Months Ended
September 30, |  
|--------------------------------- |  | -------------------------------- | ---- | ------------------------------- | -
|
|Net income (loss)                 |  | $                                | (108 | )                               | $
|Cumulative translation adjustment |  |                                  | (78  | )                               |  
|                                  |  |                                  |      |                                 |  
|Comprehensive income (loss)       |  | $                                | (186 | )                               | $
|                                  |  |                                  |      |                                 |  

17

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

Forward Looking Statements May Prove Inaccurate

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated financial
information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on
Form 10-Q.

Overview

We are a provider of integrated, enterprise-level electronic data capture, management and adverse event reporting software solutions for use in the clinical trial
component of our customers' global research and development initiatives. We offer software products, services and hosted solutions to pharmaceutical, biotechnology and medical device companies, as
well as academic institutions, clinical research organizations and other entities engaged in clinical trials. By automating essential elements of the clinical trial process, we believe our products
allow our customers to accelerate the market introduction of new medical therapies and corresponding revenue, reduce overall research and development expenditures, enhance existing data quality
control efforts and reduce clinical and economic risk.

Initial Public Offering

On July 20, 2004, the Company completed an initial public offering of 5,250,000 shares of common stock at $7.50 per share. In connection with the offering,
all of the outstanding shares of the Company's preferred stock (and a warrant to purchase preferred stock) were converted into an equal number of shares of common stock (and a warrant to purchase
common stock). On August 19, 2004, the Company sold an additional 330,000 shares of common stock at $7.50 per share as a result of the exercise of the over-allotment option by the
underwriters of the offering. A summary of the terms of the offering can be found in the Company's Registration Statement No. 333-113594 on Form S-1, as amended,
as filed with the Securities and Exchange Commission ("SEC").

The
sale of the 5,580,000 shares of common stock in connection with the initial public offering resulted in net proceeds to the Company of $36.6 million after deducting
underwriters' discounts and offering-related expenses.

Sources of Revenues

We derive our revenues from software licenses and services. License revenue is derived principally from the sale of multi-year software term licenses
for ourInForm, ClintrialandClintracesoftware products. Service revenue is derived from our delivery
of the hosted solution of ourInFormsoftware product, consulting services and customer support, including training. We generally recognize revenues
ratably over the life of a license or service contract. This allows us to maintain a backlog that provides multi-year visibility in revenue. As our backlog grows, we believe that the
predictability of our future revenues will increase. One customer, Eli Lilly and Company, the holder of record of approximately one percent of our common stock, accounted for approximately 9% and 12%
of our total revenues in the nine months ended September 30, 2003 and 2004, respectively. Our top 20 customers accounted for approximately 66% and 69% of our total revenues in the nine months
ended September 30, 2003 and 2004, respectively, net of reimbursable out-of-pocket expenses.

18

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License Revenue

We derive our license revenues from our three major software products:InForm, our Internet based electronic data
capture solution;Clintrial, our clinical data management solution; andClintrace, our adverse event
reporting solution. Although each of ourInForm, ClintrialandClintracesoftware solutions are
available as stand-alone enterprise applications, we offer integrated enterprise solutions incorporating certain of our electronic data capture, data management and adverse event reporting products.

License
revenues for ourInFormelectronic data capture software solution, either on a stand-alone or integrated basis, are determined
primarily by the number, complexity and duration of the clinical trials and the number of participants in each clinical trial. License revenues for our ClintrialandClintracesoftware solutions are determined primarily by the number of users accessing the
software solution. Except as discussed below, we enter into software license agreements with terms generally of three to five years with payment terms generally annually in advance. License revenues
are recognized ratably over the duration of the software term license agreement, to the extent that amounts are fixed or determinable and collectable.

In
August 2001, we acquired Clinsoft Corporation, which developed, marketed and sold theClintrialclinical data management and Clintraceadverse event
reporting and tracking products. Historically, Clinsoft sold theClintrialand Clintracesoftware products as a perpetual software license with the option
to purchase customer support. Following the acquisition and subsequent
integration of our software products, we began converting holders of Clinsoft perpetual software licenses to our software term license arrangements. We continue to sell perpetual licenses of these
products in certain situations to our existing customers. We recognize revenue on the perpetual licenses upon delivery of the software. Perpetual license revenue represented less than one percent of
total revenue for the nine months ended September 30, 2003 and 2004. We continue to provide and charge for maintenance and support on our products to those customers who do not convert to our
software term license arrangements. We generally charge 18% of the perpetual license fee for customer support. We will continue our efforts to convert the remaining former Clinsoft customer base to
software term license arrangements.

Service Revenue

Application Hosting Services.In addition to making our software products available to customers through licenses, we offer
ourInFormelectronic data capture software as a hosted application solution delivered through a standard web-browser, with customer support
and training services. Revenue resulting from this hosting service consists of three stages for each clinical trial:



Services
provided for the first and third stages are provided on a fixed fee basis depending upon the complexity of the trial and system requirements. Services for the second stage are
charged separately as a fixed monthly fee. We recognize revenue from all stages of the hosting service over the second and third stages. Fees charged and costs incurred for the trial system design,
setup and implementation are deferred until the start of the second stage and then amortized ratably over the estimated hosting period. The deferred costs include direct costs related to the trial and
application setup. Fees for the first and third stages of the services are billed based upon milestones. Fees for application hosting and related services in the second stage are billed quarterly in
advance. Bundled into this revenue element is the revenue attributable to the software license used by the customer.

19

---



In
the event that an application hosting customer cancels a clinical trial and its related statement of work, all deferred revenue is recognized and all deferred setup costs are expensed
and certain termination-related fees may be charged. In addition, application hosting services revenue includes hosting services associated with term license arrangements and reimbursable
out-of-pocket expenses.

Consulting Services.Consulting services include the design and documentation of the processes related to our customers' use
of our products and services in their clinical trials. Consulting services also include project planning and management services, guidance on best practices in using our software products, as well as
implementation services consisting of application architecture design, systems integration, installation and validation. In addition, consulting services revenue includes reimbursable
out-of-pocket expenses. Revenues from consulting services included in a multiple element software license agreement or in a hosted solution are recognized ratably over the term
of the arrangement. The associated costs are expensed as incurred. Revenues from consulting services that are not included in a multiple element software license arrangement are recognized as
services are performed. Fixed priced arrangements are billed based upon contractual milestones, and time-and-materials arrangements are billed monthly.

Customer Support.We have a multinational services organization to support our software products and hosted solutions
worldwide. Customer support includes telephone support, software maintenance and training. We bundle customer support in our software term licenses and allocate 10% of the value of the license to
customer support revenue. Our customer support revenue also consists of customer support fees paid by theClintrialand Clintraceperpetual license
customers. Customer support revenue is recognized ratably over the period of the customer support or term license agreement,
with payment terms generally annually in advance.

Cost of Revenues and Operating Expenses

We allocate overhead expenses such as rent and occupancy charges and employee benefit costs to all departments based on headcount. As such, general overhead
expenses are reflected in cost of service revenues and in the sales and marketing, research and development, and general and administrative expense categories.

Cost of Revenues.Cost of license revenues consists primarily of the amortization of royalties paid for certain modules
within ourClintrialsoftware product and the amortization of acquired technologies. The cost of license revenue varies based upon the mix of revenue
from software licenses for our products. We operate our service organization on a global basis as one distinct unit, and do not segment costs for our various service revenue elements. These services
include performing application hosting, consulting and customer support services, and costs consist primarily of employee-related costs associated with these services, amortization of the deferred
clinical trial setup costs, allocated overhead, outside contractors, royalties associated with providing customer support for third-party modules licensed to our customers for use with the Clintrialsoftware product and reimbursable out-of-pocket expenses. Cost of services also includes hosting costs that primarily
consist of hosting facility fees and server depreciation. The cost of service revenue varies based upon employee utilization levels in the service organization and royalties associated with revenue
derived from providing customer support, as well as costs associated with the flexible use of outside contractors to support internal resources. We supplement the trial design and setup activity for
application hosting services through the use of outside contractors. This allows us to utilize outside contractors in those periods where trial design and setup activity is highest while reducing the
use of outside contractors in those periods where trial activity lessens, allowing for a more flexible delivery model. The percentage of the services workforce represented by outside contractors
varies from period to period depending on the volume of specific support required. The cost of services is significantly higher as a percentage of revenue as compared to

20

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our
cost of license revenue primarily due to the employee-related and outside contractor expenses associated with providing services.

Gross Margin.Our gross margin on license revenue varies based on the mix of royalty-and
non-royalty-bearing license revenue and the amount of amortization of acquired technologies. Our gross margin on service revenue varies primarily due to variations in the utilization
levels of the professional service team and the timing of expense and revenue recognition under our service arrangements. In situations where the service revenue is recognized ratably over the
software license term, typically three to five years, our costs associated with delivery of the services are recognized as the services are performed, which is typically during the first 9 to
12 months of the contract period. Accordingly, our gross margin on service revenue may vary depending upon the length of these arrangements.

Sales and Marketing.Sales and marketing expenses consist primarily of employee-related expenses, including travel, marketing
programs (which include product marketing expenses such as trade shows, workshops and seminars, corporate communications, other brand building and advertising), allocated overhead and the amortization
of commissions. We expect that sales and marketing expenses will increase as we expand and further penetrate our customer base, expand our domestic and international selling and marketing activities
associated with existing and new product and service offerings, build brand awareness and sponsor additional marketing events.

Research and Development.Research and development expenses consist primarily of employee-related expenses, allocated
overhead and outside contractors. We have historically focused our research and development efforts on increasing the functionality, performance and integration of our software products. We expect
that in the future, research and development expenses will increase as we introduce additional integrated software solutions to our product suite.

General and Administrative.General and administrative expenses consist primarily of employee-related expenses, professional
fees, other corporate expenses and allocated overhead. We expect that in the future, general and administrative expenses will increase as we add personnel and incur additional professional fees and
insurance costs related to the growth of our business and operations, as well as professional fees associated with ongoing legal proceedings.

Stock-Based Expenses.Our cost of service revenues and operating expenses, excluding our restructuring charges, include
stock-based expenses related to the fair value of options issued to non-employees and option grants to employees in situations where the exercise price is determined to be less than the
deemed fair value of our common stock at the date of grant.

Foreign Currency Translation

With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenues, expenses
and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound sterling, Australian dollar and Japanese yen. In the nine
months ended September 30, 2003 and 2004, approximately 38% and 41%, respectively, of our revenues were generated in locations outside the United States. In the three months ended
September 30, 2003 and 2004, approximately 37% and 44%, respectively, of our revenues were generated in locations outside the United States. The majority of these revenues were in currencies
other than the U.S. dollar. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses
increase in value when translated into U.S. dollars.

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Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related
disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates.

We
believe that of our significant accounting policies, which are described in Note 2 of the condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition and Deferred Setup Costs.We recognize software license revenue in accordance with Statement of Position
(SOP) No. 97-2,Software Revenue Recognition,as amended, issued by the American Institute of Certified Public Accountants, while
revenues resulting from application services are recognized in accordance with Emerging Issues Task Force (EITF) Issue No. 00-03,Application of AICPA
Statement of Position 97-2 to Arrangements that include the Right to Use Software Stored on Another Entity's Hardwareand the SEC's Staff Accounting Bulletin (SAB)
Nos. 101 and 104,Revenue Recognition. On August 1, 2003, we adopted EITF Issue No. 00-21,Revenue
Arrangements with Multiple Deliverables.The adoption did not have a material impact on our financial position or results of operations.

Our
customers generally have the ability to terminate service agreements upon 30 days notice to us. License and services agreements can be terminated by either party for material
breach of obligations generally not corrected within 30 days after notice of the breach.

We
recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the
customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

We
generally enter into software term licenses with our customers for three to five year periods. These arrangements typically include multiple elements: software license, consulting
services and customer support. We bill our customers in accordance with the terms of the underlying contract. Generally, we bill the annual license fee for the first year of the multi-year
contract in advance and bill license fees for subsequent years on the anniversary date. Our payment terms are generally net 30 days.

Our
software license revenue is earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to delivery to
the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are for trial
configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.

We
generally bundle customer support with the software license for the entire term of the arrangement. As a result, we generally recognize revenue for all elements ratably over the term
of the multiple element arrangement. We allocate the revenue for these arrangements to the different elements based on management's estimate of the relative fair value of each element. For our
contracts accounted for ratably under SOP 97-2, we allocate to consulting services the anticipated service level throughout the term of the arrangement at an amount equal to what it would
have been had those services been sold separately to the customer. The remaining value is allocated to license and support services, with a 10% value allocated to support services. The costs
associated with the consulting and customer support services are expensed as incurred. There are instances in which we sell software licenses based on usage levels. These software licenses can be
based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the

22

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revenue
is recognized over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenue is recognized in the period of use. Revenue from certain
follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are generally
recognized as the services are performed.

Revenue
from perpetual software licenses represented less than one percent of total revenues for the nine months ended September 30, 2003 and September 30, 2004. We
continue to sell perpetual licenses for theClintrialandClintracesoftware products in certain
situations to our existing customers with the option to purchase customer support. We have established vendor specific objective evidence of fair value for the customer support. Accordingly, the
perpetual license revenue is recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the
underlying support arrangement.

In
addition to making our software products available to customers through licenses, we offer ourInFormelectronic data capture software
solution through a hosted application solution delivered through a standard web-browser. Revenue resulting from application hosting services consist of three stages for each clinical
trial: the first stage involves application setup, including design of electronic case report forms and edit checks, implementation of the system and server configuration; the second stage involves
application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the first and third
stages are provided on a fixed fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. We recognize
revenue from all stages of the hosting service over the second and third stages. Fees charged and costs incurred for the trial system design, setup and implementation are deferred and capitalized as
applicable, until the start of the second stage and then amortized and recognized, as applicable, ratably over the estimated hosting period. The capitalized costs include incremental direct costs with
third parties and certain internal direct costs related to the trial and application setup, as defined under Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Indirect Costs of Leases. These costs include salary and
benefits associated with direct labor costs incurred during trial setup, as well as third-party subcontract fees and other contract labor costs. Work performed outside the original scope of work is
contracted for separately as an additional fee and is generally recognized over the remaining term of the hosting period. Fees for the first and third stages of the services are billed based upon
milestones. Fees for application hosting and related services in the second stage are billed quarterly in advance. Bundled into this revenue element is the revenue attributable to the software license
used by the customer.

We
capitalized $1.1 million and $1.3 million of deferred setup costs and amortized $1.3 million and $1.4 million during the nine months ended
September 30, 2003 and 2004, respectively. The amortization of deferred setup costs is a component of cost of services.

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

Accounting for Commission Payments and Royalties.For arrangements where we recognize revenue over the relevant contract
period, we defer related commission payments to our direct sales force and software license royalties paid to third parties and amortize these amounts over the same period that the related revenues
are recognized. This is done to better match commission and royalty expense with the related revenues. During the nine months ended September 30, 2003 and 2004, respectively, we deferred
$2.1 million and $2.8 million, respectively, of commissions and amortized $1.2 million and $2.0 million, respectively, to sales and marketing expenses. Royalties are paid
on a percentage of billings basis for certain of our products. During the nine months ended September 30, 2003 and 2004,

23

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we
deferred $1.5 million and $2.6 million, respectively, of royalty expenditures and amortized $1.5 million and $1.8 million, respectively, to cost of license and service
revenue.

Accounting for Stock-Based Awards.We record deferred stock-based compensation charges in the amount by which the exercise
price of an option is less than the deemed fair value of our common stock at the date of grant. Because there had been no public market for our stock prior to the July 2004 initial public
offering of our common stock, our board of directors had determined the fair value of our common stock based upon several factors, including, but not limited to, our operating and financial
performance, sales of convertible preferred stock to third parties, the rights and preferences of securities senior to common stock and the anticipated offering price of our common stock in connection
with our July 2004 initial public offering.

We
have not historically engaged unrelated third parties to prepare valuations of our common stock. In connection with our July 2004 initial public offering, management and the
board of directors retroactively assessed the fair value of our common stock during 2003 and the six months ended June 30, 2004.

During
2003, all stock options were granted with an exercise price of $3.00 per share, while the estimated per share fair value of our common stock ranged from $3.00 to $4.00 in the
first quarter of 2003, $4.00 to $5.00 in the second quarter of 2003, $5.00 to $7.50 in the third quarter of 2003 and $7.50 to $9.00 in the fourth quarter of 2003.

At
the beginning of 2003, we determined the value of our common stock based principally on the per share amounts that would have been distributed to the common stockholders, after all
required distributions to the preferred stockholders, in the event of a sale of the Company at the value established in our January 2002 preferred stock financing. We chose this valuation
methodology based on our operating performance during 2002 and the limited, if any, access we had to the public equity markets at the time.

The
increase in our estimated per share fair value of common stock since the beginning of 2003 reflects a number of significant factors, including an improvement in our operating
results, especially in the
second half of the year, changes to our management team throughout 2003, additions to our board of directors in the second half of 2003 and an overall improvement in stock market indices and
increasing volume of initial public offerings of common stock throughout 2003.

We
improved our operating results during each of the four quarters of 2003. In the first, second and third quarters, we incurred operating losses of $1.4 million,
$1.1 million and $31,000, respectively. In the fourth quarter, we had an operating profit of $432,000, excluding a restructuring charge in the fourth quarter. Our increasing per share fair
value of common stock throughout 2003 reflects this positive trend in operating results. In addition, in the second half of 2003, because of our improved operating performance and the improving equity
markets, we began to contemplate an initial public offering of our common stock.

During
the six months ended June 30, 2004, options were granted at exercise prices ranging from $4.50 to $6.00 per share while the estimated fair value of our common stock was
$10.00 per share. The fair value of our common stock in the six months ended June 30, 2004 was based on the high end of the range of estimated offering prices of common stock as contemplated in
the preliminary prospectus for our initial public offering that was filed with the Securities and Exchange Commission. No options were granted in the three month period ended September 30,
2004.

In
the three month period ended March 31, 2004, we granted options to purchase 205,000 shares of common stock that vest upon the earlier of 7 years from date of grant or
the attainment of specified milestones. Upon completion of our July 2004 initial public offering, 61,250 options automatically vested, which accelerated $264,300 in stock-based expense
compensation in the three and nine month periods ended September 30, 2004.

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As of September 30, 2004, there was an aggregate of $2.2 million of deferred stock-based compensation remaining to be amortized approximately as follows: $374,000 in the
year ending December 31, 2004; $961,000 in the year ending December 31, 2005; $531,000 in the year ending December 31, 2006; $234,000 in the year ending December 31, 2007
and $110,000 through December 31, 2011. We have elected not to record the fair value of employee stock-based awards. The impact of recording employee stock-based awards at fair value, using the
Black-Scholes option-pricing model, is further described in Note 2 of the notes to our 2003 audited consolidated financial statements contained in our Registration Statement
No. 333-113594 on Form S-1, as amended, filed with the Securities and Exchange Commission.

In
the past, we have awarded a limited number of stock options to non-employees. For these options, we recognize the stock-based compensation over the vesting periods of the
underlying awards, based on an estimate of their fair value on the vesting dates using the Black-Scholes option-pricing model.

Other Significant Estimates

Goodwill Impairment.We review the carrying value of goodwill periodically based upon the expected future discounted
operating cash flows of our business. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future markets and operating conditions. Actual results may
differ materially from these estimates. The timing and size of impairment charges involves the application of management's judgment and could significantly affect our operating results.

Accounting for Income Taxes.In connection with preparing our financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This process involves the assessment of our net operating loss carryforwards and credits, as well as estimating the actual current tax liability
together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We then assess the likelihood that
deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Based on historical results, we do
not believe that it is more likely than not that we will realize the value of our deferred tax assets and therefore have provided a full valuation allowance against our net deferred tax assets.

Restructuring Expenses.In December 2003, we recorded a $4.5 million restructuring charge related to the
relocation of our corporate headquarters. Approximately $2.5 million of this charge represents the estimated future obligation under a non-cancelable lease and approximately
$2.0 million related to the write-off of the related abandoned leasehold improvements and fixed assets. These estimates are reviewed annually and, if revised, may result in changes
to our restructuring expense should different conditions prevail than were anticipated in our original estimates.

Overview of Results of Operations for the Three Months Ended June 30, 2003 and 2004

License revenue increased by approximately 37% in the three months ended September 30, 2004 as compared to the three months ended September 30,
2003. Service revenue increased by approximately 8% in the three months ended September 30, 2004 as compared to the three months ended September 30, 2003.

Our
gross margin increased by approximately 40% or $3.3 million in the quarter ended September 30, 2004 to $11.6 million, compared to $8.3 million for the
same period in 2003, primarily due to the increase in license and application hosting services revenues and decrease in cost of products and services, resulting from decreases in amortization
expenses, stock-based compensation, and royalty expense.

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Operating
income increased by $1.0 million from an operating loss of $37,000 in the three months ended September 30, 2003 to an operating income of $975,000 for the three
months ended September 30, 2004. The operating income (loss) in the three months ended September 30, 2003 and 2004 included approximately $406,000 and $684,000 of stock-based
compensation. As of September 30, 2004, we had $60.1 million of cash, cash equivalents and marketable securities, an increase of $41.1 million from $19.0 million at
December 31, 2003.

Revenues

|                             |       | For the Three Months Ended September 30, |       |        |    |     |  
|---------------------------- | ----- | ---------------------------------------- | ----- | ------ | -- | --- | -
|
|
|
|
|
|License                      |       | $                                        | 5,385 |        | 33 | %   | $
|Application hosting services |       |                                          | 5,198 |        | 32 |     |  
|Professional services        |       |                                          | 1,723 |        | 11 |     |  
|Customer support             |       |                                          | 3,897 |        | 24 |     |  
|                             |       |                                          |       |        |    |     |  
|                             | Total |                                          | $     | 16,203 |    | 100 | %
|                             |       |                                          |       |        |    |     |  

Total
revenues increased in the three months ended September 30, 2004 as compared to the same period in 2003 due to an increase in license revenue across all products, primarily InFormas well as an
increase inInFormapplication hosting services. The increase in license revenue in
the three months ended September 30, 2004 was primarily due to an increase in sales ofInForminto our existing Clintrialcustomer base and, to a
lesser extent, an increase in sales of bothClintrialand Clintraceproducts. This increase was a result of our continued strategy to expand the usage of
our software products by cross selling theInForm,ClintrialandClintraceproducts to our existing
customer base, additional utilization of our products within our customer base and sales to new customers. The increase in revenue associated with the hosted-application version of our InFormproduct in
the three months ended September 30, 2004 was due to an increase in clinical trials under management. Consulting services
revenue for the three months ended September 30, 2004 decreased compared to the same period in 2003. The decrease in consulting services revenue was due primarily to the completion of certain
projects associated with integrated enterprise solutions of our products, and, to a lesser extent the completion of certainClintracerelated projects.
The decrease in customer support revenue for the three months ended September 30, 2004 was due primarily to a reduction in theClintrialand Clintracemaintenance renewal base as a result of the conversion of the former Clinsoft customers to term-based licenses that have a lower
customer support fee, partially offset by an increase inInFormsupport

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revenue
due to an increase inInFormlicense revenue. In the future, we anticipate that license revenue will become a more significant component of
total revenues.

|               |                        | For the Three Months Ended September 30, |        |       |    |        |  
|-------------- | ---------------------- | ---------------------------------------- | ------ | ----- | -- | ------ | -
|
|
|
|
|
|North America  |                        | $                                        | 10,267 |       | 63 | %      | $
|               |                        |                                          |        |       |    |        |  
|United Kingdom |                        |                                          | 3,539  |       | 22 |        |  
|France         |                        |                                          | 1,504  |       | 9  |        |  
|Asia-Pacific   |                        |                                          | 893    |       | 6  |        |  
|               |                        |                                          |        |       |    |        |  
|               | International subtotal |                                          |        | 5,936 |    | 37     |  
|               |                        |                                          |        |       |    |        |  
|               |                        |                                          | Total  |       | $  | 16,203 |  
|               |                        |                                          |        |       |    |        |  

The
increase in revenues worldwide was due primarily to the increase in sales of both ourInFormproduct and application hosting services,
which we believe reflects a continued increase in the worldwide adoption of our products.

Cost of Revenues

|         |       | For the Three Months Ended September 30, |       |       |    |    |  
|-------- | ----- | ---------------------------------------- | ----- | ----- | -- | -- | -
|
|
|
|
|
|License  |       | $                                        | 553   |       | 10 | %  | $
|Services |       |                                          | 7,380 |       | 68 |    |  
|         |       |                                          |       |       |    |    |  
|         | Total |                                          | $     | 7,933 |    | 49 | %
|         |       |                                          |       |       |    |    |  

The
cost of license revenue decreased in the three months ended September 30, 2004 primarily due to a $200,000 decrease in amortization expense from acquired technologies
partially offset by an increase in royalty expense of $131,000 as revenue increased on certain modules of theClintrialsoftware product, and to a
lesser extent, the Japanese version of ourInFormsoftware product. Cost of services for the three months ended September 30, 2004 decreased by
$489,000 due to lower stock-based compensation of $206,000, royalty of $174,000, due to the decrease in customer support revenues from certain modules of the Clintrialproduct, and reimbursable
out-of-pocket expenses of $115,000.

Gross Margin

|         |       | For the Three Months Ended September 30, |       |       |    |    |  
|-------- | ----- | ---------------------------------------- | ----- | ----- | -- | -- | -
|
|
|
|
|
|License  |       | $                                        | 4,832 |       | 90 | %  | $
|Services |       |                                          | 3,438 |       | 32 |    |  
|         |       |                                          |       |       |    |    |  
|         | Total |                                          | $     | 8,270 |    | 51 | %
|         |       |                                          |       |       |    |    |  

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The
license gross margin percentage increased in the three months ended September 30, 2004 primarily due to an increase inInFormandClintriallicense revenue and a reduction in amortization expense associated with acquired technology, partially offset by an increase in royalty
expense as revenue grew
for certain modules of theClintrialsoftware product. The services gross margin percentage increased for the three months ended September 30,
2004 due to the increase inInFormapplication hosting services revenues while the overall cost base decreased due to a reduction in stock-based
compensation and royalty expense. It is likely that gross margin, as a percentage of revenue, will fluctuate, quarter by quarter, due to the timing, amount and type of service required in delivering
certain projects.

Operating Expenses

|                           |       | For the Three Months Ended September 30, |       |       |    |    |  
|-------------------------- | ----- | ---------------------------------------- | ----- | ----- | -- | -- | -
|
|
|
|
|
|Sales and marketing        |       | $                                        | 3,338 |       | 21 | %  | $
|Research and development   |       |                                          | 2,554 |       | 16 |    |  
|General and administrative |       |                                          | 2,409 |       | 15 |    |  
|                           |       |                                          |       |       |    |    |  
|                           | Total |                                          | $     | 8,301 |    | 52 | %
|                           |       |                                          |       |       |    |    |  

Sales and Marketing.Sales and marketing expenses increased for the three months ended September 30, 2004 primarily
due to a $270,000 increase in commission expense resulting from an increase in revenues and an increase in the effective commission rate and a $145,000 increase in salary and related expenses while
headcount remained relatively constant during these periods. This was partially offset by a $129,000 decrease in marketing programs, a $66,000 decrease in travel expenses and a $39,000 reduction in
stock-based compensation expense. We expect that our sales and marketing expenses will continue to increase in absolute dollars as commission expense increases with our revenues and we continue to
build our brand awareness through what we believe are the most cost-effective channels available. However, sales and marketing expenses may fluctuate, quarter by quarter, due to the timing
of marketing programs.

Research and Development.Research and development expenses increased in the three months ended September 30, 2004
primarily due to an increase in employee related expenses of $760,000 as we hired 25 additional people to improve our quality assurance and product development team. This was partially offset by a
$131,000 decrease in outside consultant expense as we brought certain research and development activities in-house. We expect that our research and development costs will continue to
increase in absolute dollars as we continue to add features and functionality to our products and expand our product and service offerings.

General and Administrative.General and administrative expenses increased in the three months ended September 30, 2004
primarily due to a $660,000 increase in professional fees primarily relating to legal expenses associated with actions defending our intellectual properties, an increase in stock-based compensation of
$522,000, and an increase in employee related expenses of $196,000, while headcount remained relatively constant during these periods and an increase in insurance of $105,000 due to additional
requirements relating to being a public company. We expect our general and administrative expenses to increase in absolute dollars as we continue to incur additional costs associated with being a
public company.

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Operating Income (Loss), Other Income (Expense)

|                        |       | For the Three Months Ended September 30, |     |    |    |   
|----------------------- | ----- | ---------------------------------------- | --- | -- | -- | --
|
|
|
|
|
|Operating income (loss) |       | $                                        | (31 | )  | (0 | )%
|                        |       |                                          |     |    |    |   
|Other Income (expense)  |       |                                          |     |    |    |   
|Interest income         |       | $                                        | 28  |    | 0  | % 
|Interest expense        |       |                                          | (88 | )  | (1 | ) 
|Other income (expense)  |       |                                          | 99  |    | 1  |   
|                        |       |                                          |     |    |    |   
|                        | Total |                                          | $   | 39 |    | 0 
|                        |       |                                          |     |    |    |   

Operating Income (Loss).The increase in operating income in the three months ended September 30, 2004 was primarily
due to an increase in gross margins from both license and services, partially offset by increased operating expenses, resulting from increases in employee related expenses, commission expense,
stock-based compensation, and professional fees. It is likely that operating income (loss), as a percentage of revenue, will fluctuate, quarter by quarter, due to the timing, amount and type of
service required in delivering certain projects, as well as the timing of operating expense activities.

Other Income (Expense).The increase in interest income in the three months ended September 30, 2004 was primarily due
to an increase in cash and cash equivalents available for investment and short-term investments. The decrease in interest expense in the three months ended September 30, 2004 was
primarily due to a decrease in outstanding borrowings. Other income (expense) decreased due to an increase in the foreign exchange losses related to exchange rate movements on both
non-U.S. dollar denominated accounts receivable and intercompany balances, partially offset by lower non-U.S. dollar denominated accounts receivable and intercompany balances.



|                           |  | For the Three Months Ended September 30, |     |  |   |  
|-------------------------- |  | ---------------------------------------- | --- |  | - | -
|
|
|
|
|
|Provision for income taxes |  | $                                        | 116 |  | 1 | %
|                           |  |                                          |     |  |   |  

Provision for Income Taxes.The effective tax rate for 2003 was approximately 7% and represents foreign withholding taxes and
income taxes payable in certain foreign locations that could not be offset through loss carryforwards. The effective tax rate for 2004 is approximately 37% before stock-based compensation and
represents income tax expense that cannot be offset through the use of acquired net operating losses for financial statement purposes. The increase in the effective tax rate is primarily due to the
profitability of our U.S. operations and the inability to offset taxable income for financial statement purposes through the use of net operating loss carryforwards. In utilizing our net operating
loss carryforwards, we are required to use our oldest net operating losses first. As a result we will first use the net operating losses acquired in the Clinsoft acquisition. The utilization of the
acquired net operating losses will reduce the amount of income taxes payable to local tax authorities but will not

29

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reduce
the income tax expense required for financial statement purposes. This cash benefit will be reflected as a reduction of goodwill. Additionally, our effective tax rate exceeds our statutory tax
rate due to the current non-deductibility of our stock-based compensation expense.

Overview of Results of Operations for the Nine Months Ended September 30, 2003 and 2004

License revenue increased by approximately 30% in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003.
Service revenue increased by approximately 11% in the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003.

Our
gross margin increased by approximately 42% or $9.4 million in the nine months ended September 30, 2004 to $31.8 million, as compared to $22.4 million for
the same period in 2003, primarily due to the increase in license and application hosting services revenues.

Operating
income increased by $5.4 million from an operating loss of $2.6 million in the nine months ended September 30, 2003 to an operating income of
$2.8 million for the nine months ended September 30, 2004. The operating income (loss) in the nine months ended September 30, 2003 and 2004 included $474,000 and
$1.6 million of stock-based compensation, respectively.

Revenues

|                             |       | For the Nine Months Ended September 30, |        |        |    |     |  
|---------------------------- | ----- | --------------------------------------- | ------ | ------ | -- | --- | -
|
|
|
|
|
|License                      |       | $                                       | 15,315 |        | 33 | %   | $
|Application hosting services |       |                                         | 15,300 |        | 33 |     |  
|Professional services        |       |                                         | 4,042  |        | 9  |     |  
|Customer support             |       |                                         | 11,169 |        | 24 |     |  
|                             |       |                                         |        |        |    |     |  
|                             | Total |                                         | $      | 45,826 |    | 100 | %
|                             |       |                                         |        |        |    |     |  

Total
revenues increased in the nine months ended September 30, 2004 as compared to the same period in 2003 due to an increase in license revenue across all products, primarily Clintrial, as well as an
increase inInFormapplication hosting services. The increase in license
revenue in the nine months ended September 30, 2004 was primarily due to an increase in sales ofClintrialinto our existing InFormcustomer base.
This increase was a result of our continued strategy to expand the usage of our software products by cross selling the InForm,ClintrialandClintraceproducts to our existing
customer base, additional utilization of our products within our customer base and sales to new customers. The increase in revenue associated with the InFormapplication hosting services in the nine
months ended September 30, 2004 was due an increase in clinical trials under management.
Consulting services revenue for the nine months ended September 30, 2004 was relatively unchanged compared to the same period in 2003. The decrease in customer support revenue for the nine
months ended September 30, 2004 was due primarily to a reduction in theClintrialandClintracemaintenance renewal base as a result of the conversion of the former Clinsoft customers to term-based licenses that have a lower customer support fee, partially offset by an increase in InFormsupport
revenue due to an

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increase
inInFormlicense revenue. In the future, we anticipate that license revenue will become a more significant component of total revenues.

|               |                        | For the Nine Months Ended September 30, |        |        |    |        |  
|-------------- | ---------------------- | --------------------------------------- | ------ | ------ | -- | ------ | -
|
|
|
|
|
|North America  |                        | $                                       | 28,416 |        | 62 | %      | $
|               |                        |                                         |        |        |    |        |  
|United Kingdom |                        |                                         | 9,801  |        | 21 |        |  
|France         |                        |                                         | 5,356  |        | 12 |        |  
|Asia-Pacific   |                        |                                         | 2,253  |        | 5  |        |  
|               |                        |                                         |        |        |    |        |  
|               | International subtotal |                                         |        | 17,410 |    | 38     |  
|               |                        |                                         |        |        |    |        |  
|               |                        |                                         | Total  |        | $  | 45,826 |  
|               |                        |                                         |        |        |    |        |  

The
increase in revenues worldwide was due primarily to the increase in sales of ourClintrialand InFormproducts andInFormapplication hosting services, which we believe reflects a continued increase
in the worldwide adoption of our products.

Cost of Revenues

|         |       | For the Nine Months Ended September 30, |        |        |    |    |  
|-------- | ----- | --------------------------------------- | ------ | ------ | -- | -- | -
|
|
|
|
|
|License  |       | $                                       | 1,882  |        | 12 | %  | $
|Services |       |                                         | 21,567 |        | 71 |    |  
|         |       |                                         |        |        |    |    |  
|         | Total |                                         | $      | 23,449 |    | 51 | %
|         |       |                                         |        |        |    |    |  

The
cost of license revenue decreased in the nine months ended September 30, 2004 primarily due to a $1.0 million decrease in amortization expense from acquired
technologies partially offset by an increase in royalty expense of $509,000 as revenue increased on certain modules of theClintrialsoftware product,
and to a lesser extent, the Japanese version of ourInFormsoftware product. The decrease in
the cost of services for the nine months ended September 30, 2004 was due primarily to a $224,000 reduction in expense resulting from the incremental capitalization of deferred setup costs
related to an increase in the number of new clinical trials in the trial design, setup and implementation phase. This increase was associated with an increase in new clinical trial activity from both
existing and new customers. The cost of services also decreased for the nine months ended September 30, 2004 due to a decrease in depreciation, facilities and telephone expense of $251,000,
$295,000 and $119,000, respectively, primarily resulting from cost savings associated with the relocation of our corporate headquarters in the fourth quarter of 2003. In addition, the costs for
royalties decreased by $175,000, due to the decrease in customer support revenues from certain modules of theClintrialproduct, and reimbursable
out-of-pocket expenses decreased by $115,000. This was partially offset by a $255,000 increase in employee and related expenses, while the employee headcount decreased by eight
during this period.

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Gross Margin

|         |       | For the Nine Months Ended September 30, |        |        |    |    |  
|-------- | ----- | --------------------------------------- | ------ | ------ | -- | -- | -
|
|
|
|
|
|License  |       | $                                       | 13,433 |        | 88 | %  | $
|Services |       |                                         | 8,944  |        | 29 |    |  
|         |       |                                         |        |        |    |    |  
|         | Total |                                         | $      | 22,377 |    | 49 | %
|         |       |                                         |        |        |    |    |  

The
license gross margin percentage increased in the nine months ended September 30, 2004 primarily due to an increase inClintrialandInFormlicense revenue and a reduction in amortization expense associated with acquired technology, partially offset by an increase in royalty
expense as revenue increased for certain modules of theClintrialsoftware product as well as the Japanese version of our InFormsoftware product. The
services gross margin percentage increased for the nine months ended September 30, 2004 due to the increase in InFormapplication hosting revenues and lower overall cost of services revenue.

Operating Expenses

|                           |       | For the Nine Months Ended September 30, |       |        |    |    |  
|-------------------------- | ----- | --------------------------------------- | ----- | ------ | -- | -- | -
|
|
|
|
|
|Sales and marketing        |       | $                                       | 9,769 |        | 21 | %  | $
|Research and development   |       |                                         | 7,746 |        | 17 |    |  
|General and administrative |       |                                         | 7,451 |        | 16 |    |  
|                           |       |                                         |       |        |    |    |  
|                           | Total |                                         | $     | 24,966 |    | 54 | %
|                           |       |                                         |       |        |    |    |  

Sales and Marketing.While head count remained stable during these periods, sales and marketing expenses increased for the
nine months ended September 30, 2004 primarily due to a $281,000 increase in employee related expenses, an $830,000 increase in commission expense due to both an increase in revenues and an
increase in the effective commission rate, and a $15,000 increase in stock-based compensation, which was partially offset by a $233,000 decrease in marketing programs, a $152,000 decrease in travel
expense, as well as a $78,000 decrease in depreciation and a $76,000 decrease in facility related expenses primarily resulting from cost savings associated with the relocation of our corporate
headquarters in the fourth quarter of 2003. The decline in marketing programs reflects the transition from the participation in trade shows to more cost-effective workshops and seminars,
as well as a reduction in advertising expense.

Research and Development.Research and development expenses increased in the nine months ended September 30, 2004
primarily due to an increase in employee related expenses of $1.9 million as we hired 25 additional people to improve our quality assurance and product development team and a $139,000 increase
in stock-based compensation. This was partially offset by a $448,000 decrease in outside consultant expense as we brought certain research and development activities in-house and a
$181,000 decrease in depreciation expense from cost savings associated with the relocation of our corporate headquarters in the fourth quarter of 2003.

General and Administrative.General and administrative expenses increased for the nine months ended September 30, 2004
primarily due to a $1.1 million increase in stock-based compensation, an

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increase
in professional fees of $654,000 primarily relating to legal expenses associated with actions defending our intellectual properties, and an increase in employee related expenses of $390,000,
while the headcount remained stable during these periods, and an increase in insurance of $81,000 due to additional requirements relating to being a public company. This was partially offset by a
$181,000 decrease in depreciation expense from cost savings associated with the relocation of our corporate headquarters in the fourth quarter of 2003.

Operating Income (Loss), Other Income (Expense)

|                        |       | For the Nine Months Ended September 30, |        |    |    |    |  
|----------------------- | ----- | --------------------------------------- | ------ | -- | -- | -- | -
|
|
|
|
|
|Operating Income (Loss) |       | $                                       | (2,589 | )  | (6 | )% | $
|                        |       |                                         |        |    |    |    |  
|Other Income (Expense)  |       |                                         |        |    |    |    |  
|Interest income         |       | $                                       | 87     |    | 0  | %  | $
|Interest expense        |       |                                         | (273   | )  | (1 | )  |  
|Other income (expense)  |       |                                         | 242    |    | 1  |    |  
|                        |       |                                         |        |    |    |    |  
|                        | Total |                                         | $      | 56 |    | 0  | %
|                        |       |                                         |        |    |    |    |  

Operating Income (Loss).The increase in operating income in the nine months ended September 30, 2004 was primarily
due to an increase in gross margins from both software and services, partially offset by increased operating expenses, resulting from increases in employee related expenses, stock-based compensation,
and professional fees.

Other Income (Expense).The increase in interest income in the nine months ended 2004 was primarily due to $84,000 of
interest received in connection with the repayment of a subscription receivable during the period and an increase in cash and cash equivalents available for investment. The decrease in interest
expense in the nine months ended September 30, 2004 was primarily due to a decrease in outstanding borrowings. Other income (expense) decreased due to an increase in the foreign exchange losses
related to exchange rate movements on both non-U.S. dollar denominated accounts receivable and intercompany balances partially offset by lower non-U.S. dollar denominated
accounts receivable and intercompany balances.

Provision for Income Taxes

|                           |  | For the Nine Months Ended September 30, |     |  |   |  
|-------------------------- |  | --------------------------------------- | --- |  | - | -
|
|
|
|
|
|Provision for income taxes |  | $                                       | 252 |  | 1 | %
|                           |  |                                         |     |  |   |  

Provision for Income Taxes.The effective tax rate for 2003 was approximately 7% and represents foreign withholding taxes and
income taxes payable in certain foreign locations that could not be offset through loss carryforwards. The effective tax rate for 2004 is approximately 37% before stock-based compensation and
represents income tax expense that cannot be offset through the use of acquired net operating losses for financial statement purposes. The increase in the effective tax rate is primarily due to the
profitability of our U.S. operations and the inability to offset taxable income for financial statement purposes through the use of net operating loss carryforwards. In utilizing our net operating
loss carryforwards, we are required to use our oldest net operating losses first. As a result we will first

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use
the net operating losses acquired in the Clinsoft acquisition. The utilization of the acquired net operating losses will reduce the amount of income taxes payable to local tax authorities but will
not reduce the income tax expense required for financial statement purposes. This cash benefit will be reflected as a reduction of goodwill. Additionally, our effective tax rate exceeds our statutory
tax rate due to the current non-deductibility of our stock-based compensation expense.

Liquidity and Capital Resources

At December 31, 2003 and September 30, 2004, our principal sources of liquidity were cash, cash equivalents, restricted cash, lines or credit and
short term investments totaling $20.7 million and $60.1 million and accounts receivable of $22.9 million and $14.3 million, respectively.

From
our inception, we funded our operations primarily through issuances of convertible preferred stock for aggregate net cash proceeds of $79.7 million, including net cash
acquired in our Clinsoft acquisition, the proceeds from the initial public offering and exercise of the over-allotment option resulting in net proceeds of $36.6 million, and the
issuance of notes payable for an aggregate of $17.3 million.

Net
cash generated from operating activities was $10.0 million for the nine months ended September 30, 2004, which was greater than net income of $1.1 million. This
difference is primarily due to $6.5 million of non-cash depreciation, amortization, deferred rent, stock-based compensation and non-cash income tax expense and changes
in working capital, which primarily consisted of a $8.4 million decrease in accounts receivable offset partially by an increase in deferred costs of $1.5 million and decreases in
deferred revenue of $3.8 million.

Cash
provided by and used in operating activities has historically been affected by changes in working capital accounts, primarily deferred revenue, accounts receivable and accrued
expenses, and add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation. Fluctuations within accounts receivable and deferred
revenue are primarily related to the timing of billings of our term license customers and the associated revenue recognition. Movements in deferred costs are related to the volume and stages of hosted
clinical trials and movements in accrued expenses and accounts payable are due to the timing of certain transactions.

Net
cash used by investing activities was $2.1 million for the nine months ended September 30, 2004, consisting primarily of capital expenditures associated with computer
equipment and furniture and fixtures in support of expanding our infrastructure and work force of $2.4 million and the purchase of short term investments of $1.3 million, partially
offset by a $1.6 million reduction of restricted cash.

Net
cash provided by financing activities was $31.9 million for the nine months ended September 30, 2004, consisting primarily of $36.6 million of net proceeds from
the initial public offering and proceeds from the issuance of notes payable for $2.9 million, partially offset by a special dividend to our Series B, C and D stockholders for
$4.7 million and payments on notes payable and line of credit borrowings for $4.4 million.

At
December 31, 2003, we had approximately $1.6 million of restricted cash held in certificates of deposits as collateral for letters of credit related to our facilities.
The certificates of deposit matured and the collateral for the letters of credit is now reflected as a reduction in the amount available under the line of credit.

Substantially
all of our long-lived assets as of December 31, 2003 and September 30, 2004 are located in the United States.

We
do not have any special purpose entities or any other off balance sheet financing arrangements. We have operating leases for office space and computer equipment, which are described
in our Registration Statement No. 333-113594 on Form S-1, as amended, as filed with the SEC.

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We
generally do not enter into binding purchase commitments. Our principal commitments consist of obligations under our lines of credit and leases for office space.

Between
April 2000 and September 2004 we entered into several equipment lines of credit with a bank. All advances under these equipment lines of credit are payable in 30 to
36 equal monthly installments of principal, plus accrued interest. The interest that accrues under these credit lines ranges from prime to prime plus 1%. At December 31, 2003 and
September 30, 2004, respectively, we had $4.2 million and $5.2 million outstanding under all of our equipment lines of credit. As of September 30, 2004, there was
$3.1 million available under the equipment line of credit.

On
March 31, 2004 we amended our working capital line of credit with a bank and increased the amount under which we can borrow up to $5.0 million. Interest accrues at the
prime rate. The line expires March 31, 2006 at which time all advances will be immediately due and payable. As of December 31, 2003 and September 30, 2004, respectively, we had
$2.5 million and $0 outstanding under the working capital line of credit. As of September 30, 2004, there was $3.4 million available under the working capital line of credit.

Borrowings
are secured by substantially all of our assets other than our intellectual property. We have also entered into a negative pledge agreement that, subject to certain exceptions,
generally prohibits us from pledging our intellectual property to others. Under the terms of these credit lines, as amended, we are required to comply with certain financial covenants. At
December 31, 2003, we were in violation of the financial covenant requiring $16.0 million for fourth quarter 2003 revenue, net of reimbursable out-of-pocket
expenses, for which we received a waiver from the bank.
That waiver, however, did not remove or limit the financial covenants we must satisfy under the credit agreement in the future. At September 30, 2004, we were in compliance with all financial
covenants. Although the financial covenants were amended in connection with the March renewal, to the extent we are unable to satisfy those covenants in the future, we will need to obtain additional
waivers to avoid being in default of the terms of these credit lines. If an unwaived default occurs, the bank may require that we repay all amounts then outstanding. We currently expect that we will
have sufficient resources to fund any amounts which may become due under these credit lines as a result of a default by us or otherwise. However, any amounts which we may be required to repay prior to
a scheduled repayment date would reduce funds that we could otherwise allocate to other opportunities that we consider desirable.

At
December 31, 2003, we had net operating loss carryforwards of approximately $82.6 million, which may be used to offset future U.S. federal taxable income, if any, and
$4.0 million of federal tax credit carryforwards. In addition, we had $6.9 million of net operating losses relating to our non-U.S. jurisdictions. Of these amounts,
approximately $29.2 million and $2.7 million of net operating loss carryforwards and tax credit carryforwards, respectively, relate to amounts acquired as part of our Clinsoft
acquisition. These tax carryforwards may reduce our future cash payments to the taxing authorities. Our carryforwards expire through 2022 and are subject to review and possible adjustment by tax
authorities. Due to our history of operating losses, there is significant uncertainty surrounding our ability to utilize our net operating loss and tax credit carryforwards and other deferred tax
assets. Accordingly, we have provided a full valuation allowance against our net deferred tax assets as of December 31, 2003 and September 30, 2004.

We
believe our existing cash, cash equivalents, short-term investments and cash provided by operating activities and our various debt facilities will be sufficient to meet
our working capital and capital expenditure needs over the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of
our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new services and enhancements to existing services, and the
continuing market acceptance of our services. For the remainder of 2004, we intend to spend approximately $1.0 million for the purchase of computer equipment for our hosting services and for
general corporate purposes. To the extent that

35

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existing
cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although
we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, businesses, services or technologies, we may enter into these types of
arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Certain Factors Which May Affect Future Results

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of
factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such
factors, among others, may have a material adverse effect upon our business, results of operations and financial condition.

Risks Related to Our Industry

We depend primarily on the pharmaceutical, biotechnology and medical device industries and are therefore subject to risks relating to changes in these
industries.

Our business depends on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies and other entities conducting
clinical research. General economic downturns, increased consolidation or decreased competition in the industries in which these companies operate could result in fewer products under development or
decreased pressure to accelerate product approval which, in turn, could materially adversely impact our revenues. Our operating results may also be adversely impacted by other developments that affect
these industries generally, including:



Any
decrease in research and development expenditures or in the size, scope or frequency of clinical trials conducted or sponsored by pharmaceutical, biotechnology or medical device
companies or other entities as a result of the foregoing or other factors could materially adversely affect our operations or financial condition.

We operate in a highly competitive industry and if we are not able to compete effectively, our business and operating results will be harmed.

The market for our software products, services and hosted solutions is characterized by rapidly changing technologies, evolving industry standards and frequent
new product and service introductions and enhancements that may render existing products and services obsolete. Accordingly, we are susceptible to rapid and significant declines in market share due to
unforeseen changes in the features, functions or pricing of competing products. Barriers to entry are relatively low and, with the

36

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introduction
of new technologies and new market entrants, we expect that competition will increase. Increased competition is likely to result in pricing pressures, which could negatively impact our
sales, gross margins or market share. Our failure to compete effectively could materially adversely affect our business, financial condition or results of operations.

Some
of our current competitors, as well as many of our potential competitors, have greater name recognition, longer operating histories and significantly greater resources. As a result,
our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In addition, current and potential
competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their products
to the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, larger customer bases, more widely adopted proprietary technologies, greater marketing
expertise and larger sales forces
than we have, which could put us at a competitive disadvantage. Further, in light of these advantages, even if our products and services are more effective than the product or service offerings of our
competitors, current or potential customers might accept competitive products and services in lieu of purchasing our software products, services and hosted solutions. We cannot assure you that we can
maintain or enhance our competitive position against current and future competitors.

Changes in regulations and regulatory guidance applicable to our customers or potential customers and the approval process for their products may result
in our inability to continue to do business.

Demand for our software products, services and hosted solutions is largely a function of regulation and regulatory guidance associated with the approval of new
drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. federal government and related regulatory authorities such as the U.S. Food and Drug Administration,
or FDA, and by foreign governments. In recent years, efforts have been made to streamline the FDA approval process and coordinate U.S. standards with those of other developed countries. Any change in
the scope of applicable regulations and regulatory guidance could alter the type or amount of clinical trial spending or negatively impact interest in our software products, services and hosted
solutions. Any regulatory reform that limits or reduces the research and development spending of entities conducting clinical research upon which our business depends could have a material adverse
effect on our revenues or gross margins.

In
addition, any failure to conform our software products, services and hosted solutions to domestic or international changes in regulations and regulatory guidance applicable to our
customers or potential customers and the approval process for their products may result in our inability to continue to do business. Changing our software products, services and hosted solutions to
allow our customers to comply with future changes in regulation or regulatory guidance, either domestically or internationally, could cause us to incur substantial costs. We cannot assure you that our
product and service offerings will allow our customers and potential customers to stay in compliance with regulations and regulatory guidance as they develop. If our product and service offerings fail
to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and regulatory guidance, clinical trial sponsors and other entities conducting
clinical research may be unwilling to use our software products, services and hosted solutions.

If entities engaged in clinical trials do not shift from traditional paper-based methods of collecting clinical trial data to electronic systems, we may
not achieve the market penetration necessary to obtain or maintain profitability.

If entities engaged in clinical trials are unwilling to use our electronic data capture solutions or to change the way of collecting clinical trial data, our
future growth and market share may be limited. Most clinical trials today rely on pre-printed, three-part paper case report forms for data collection. Our efforts to establish
an electronic process to capture clinical trial data are a significant departure

37

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from
the traditional paper-based methods of collecting clinical trial data. As is typical for new and rapidly evolving industries, customer demand for recently introduced technology is highly
uncertain. We may not be successful in persuading entities engaged in clinical trials to change the manner in which they have traditionally collected clinical trial data and to accept our software
products, services and hosted solutions. If we fail to convince entities engaged in clinical trials to use our methods of capturing clinical trial data, our revenues may be limited and we may fail to
be profitable.

Changing customer or prospective customer requirements could decrease the demand for our products and services, which would adversely affect our
revenues and operating results.

Our future success will depend in large part on our ability to enhance and broaden our software products, services and hosted solutions to meet the evolving needs
of our customers and prospective customers. To achieve our goals, we need to effectively respond to our customers' and prospective customers' needs, technological changes and new industry standards
and developments in a timely manner. If we are unable to enhance our existing product and service offerings or develop new products and services to meet changing requirements, demand for our software
products, services and hosted solutions could suffer and our revenues and operating results could be materially adversely affected. We could also incur substantial costs if we need to modify our
products or services, or information technology infrastructure, to adapt to technological changes or new industry standards or developments.

Risks Related to Our Company

We have incurred substantial losses in the past and may not be profitable in the future.

We have incurred significant losses in each fiscal year since our inception in June 1997, and we may incur significant operating losses in the future. As a
result of our operating losses and accretion of preferred dividends, we had an accumulated deficit of $105 million at September 30, 2004. You should not consider recent quarterly revenue
growth as indicative of our future performance as our operating results may fluctuate significantly from quarter to quarter. In addition, we expect our development, sales and other operating expenses
to increase in the future. If our revenue does not grow to offset these expected increased expenses, we may not be profitable. In fact, in future quarters we may not have any revenue growth and our
revenue could decline. Furthermore, if our operating expenses exceed our expectations, our financial performance will be adversely affected.

We operate in an emerging market, which makes it difficult to evaluate our business and future prospects.

We were incorporated in June 1997 and operate in an emerging market. Accordingly, our business and future prospects are difficult to evaluate. You should
consider the challenges, risks and uncertainties frequently encountered by companies using new and unproven business models in rapidly evolving markets. These challenges include our ability to:



38

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We cannot be certain that we will successfully address these and other challenges, risks and uncertainties or that our business model will be successful. Failure to do so could adversely
affect our business, results of operations or financial condition.

Our software products and hosted solutions are at varying stages of market acceptance and the failure of any of our products to achieve wide acceptance
would harm our operating results.

We began offering ourInFormelectronic data capture software solution for clinical trials in
December 1998. Although theClintrialandClintraceproducts were introduced over 10 years
ago, we did not begin offering these products until after our acquisition of Clinsoft Corporation in 2001. Continued use of ourClintrialand Clintracesoftware products, and broad and timely acceptance of ourInFormproduct, as well as
integrated solutions combining one or more of our software products, is critical to our future success and is subject to a number of significant risks, some of which are outside our control. These
risks include:



Our
failure to address, mitigate or manage these risks would seriously harm our business, particularly if the failure of any or all of our software products or hosted solutions to
achieve market acceptance negatively affects our sales of our other products and services.

Our operating results may fluctuate significantly and could cause the market price of our common stock to fall rapidly and without notice.

Our
revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter, particularly because of the rapidly evolving market in which we
operate and our term license model. For instance, our quarterly results ranged from an operating loss of $4.1 million for the quarter ended December 31, 2003 to operating income of
$976,000 for the quarter ended September 30, 2004. Our results of operations in any given quarter will be based on a number of factors, including:



39

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A
significant portion of our operating expense is relatively fixed in nature and planned expenditures are based in part on expectations regarding future revenues. Accordingly, unexpected
revenue shortfalls may decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. Results of operations in any quarterly period should not be
considered indicative of the results to be expected for any future period. In addition, our future quarterly operating results may fluctuate and may not meet the expectations of securities analysts or
investors. If this occurs, the trading price of our common stock could fall substantially either suddenly or over time.

We may be required to spend substantial time and expense before we recognize a significant portion of the revenues, if any, attributable to our customer
contracts.

The
sales cycle for some of our software solutions frequently takes in excess of nine months from initial customer contact to contract execution. During this time, we may expend
substantial time, effort and financial resources without realizing any revenue with respect to the potential sale. In addition, in the case of our hosted electronic data capture solutions, we do not
begin recognizing revenue until implementation cycles are complete. Moreover, while we begin recognizing revenue upon the execution of our software term licenses, it may be difficult for us to rapidly
increase our revenue through additional sales in any period, as revenue from new customers is recognized over the applicable license term, typically three to five years. As a result, we may not
recognize significant revenues, if any, from some customers despite incurring considerable expense related to our sales and implementation process. Even if we do realize revenues from a contract, our
term license pricing model may keep us from recognizing a significant portion of these revenues during the same period in which sales and implementation expenses were incurred. For example, pursuant
to our recently announced contract with
GlaxoSmithKline, we expect to incur significant up-front implementation and other expenses associated with delivery of services under the contract, whereas the revenue under the contract
will be recognized ratably over an approximately 5-year period. Those timing differences could cause our gross margins and profitability to fluctuate significantly from quarter to quarter.
Similarly, a decline in new or renewed software term licenses in any one quarter will not necessarily be fully reflected in the revenue in that quarter and may negatively affect our revenue in future
quarters. This could cause our operating results to fluctuate significantly from quarter to quarter.

The loss of one or more major customers could materially and adversely affect our results of operations and financial condition.

Our
top five customers accounted for approximately 37% of our revenues during 2002, approximately 32% of our revenues during 2003 and approximately 37% of our revenues during the three
months ended September 30, 2004. Moreover, sales to two customers, Eli Lilly and Company, a holder of approximately one percent of our outstanding common stock, and GlaxoSmithKline, accounted
for approximately 10% and 7%, respectively of our revenues for the fiscal year ended December 31, 2003, and 11% and 11%, respectively for the three months ended September 30, 2004. The
loss of any of our major customers could have a material adverse effect on our results of operations or financial condition. We may not be able to maintain our customer relationships, and our
customers may not renew their agreements with us, which could adversely affect our results of operations or financial condition. A significant change in the liquidity or financial position of any of
these customers could also have a material adverse effect on the collectibility of our accounts receivables, our liquidity and our future operating results.

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Interruptions or delays in service from our third party providers could impair the delivery of our hosted InForm electronic data capture solution and
harm our business.

We
host ourInFormelectronic data capture software solution at third-party facilities. Consequently, the occurrence of a natural disaster
or other unanticipated problems at the facilities of our third-party provider could result in unanticipated interruptions in our customers' access to our InFormelectronic data capture software
solution. Our hosted services may also be subject to sabotage, intentional acts of
malfeasance and similar misconduct due to the nature of the Internet. In the past, Internet users have occasionally experienced difficulties with Internet and online services due to system or security
failures. We cannot assure you that our business interruption insurance will adequately compensate our customers or us for losses that may occur. Even if covered by insurance, any failure or breach of
security of our systems could damage our reputation and cause us to lose customers. Further, certain of our hostedInFormelectronic data capture
solutions, representing approximately 38% of our total revenues for the three months ended September 30, 2004, are subject to service level agreements that guarantee certain levels of uptime
reliability. These agreements provide for 95% to 99% server availability. In the event that we fail to meet those levels, whether resulting from an interruption in service caused by our technology or
that of a third-party provider, we could be subject to customer credits or termination of these customer contracts.

Claims that we or our technologies infringe upon the intellectual property or other proprietary rights of a third party may require us to incur
significant costs, to enter into royalty or licensing agreements or to develop or license substitute technology.

We
are, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For instance,
Dr. Mark L. Kozam, doing business under the name MLK Software, has filed a complaint against us and one of our customers alleging that we infringe a patent claimed to be owned by
Dr. Kozam. This case is still in the initial pleading stage. In addition, the vendors who provide us with technology that we use in our technology could become subject to similar infringement
claims. Although we believe that our software solutions do not infringe the patents of any third party, we cannot assure you that our technology does not infringe patents held by others or that they
will not in the future. Any claims of infringement could cause us to incur substantial costs defending against the claim, even if the claim is without merit, and could distract our management from our
business. Moreover, any settlement or adverse judgment resulting from the claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of
the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially
reasonable terms, if at all, that we would be able to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license from another provider of
suitable alternative technology to permit us to continue offering, and our customers to continue using, the applicable technology. In addition, we generally provide in our customer agreements,
including our agreement with the customer that is the subject of the Kozam claim referenced above, that we will indemnify our customers, against third party infringement claims relating to our
technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or our vendors may have a material adverse effect on our business,
results of operations or financial condition.

Failure of our technology and products could harm our business and operating results.

The
technology underlying our software products and hosted solutions processes vast amounts of clinical trial data. Customers relying on our products to collect, manage and report
clinical trial information may have a greater sensitivity to product errors and security vulnerabilities than customers

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of
software products in general. In the past, failures of our technology and human error have negatively impacted the data capture, management or reporting capabilities of our products, and new errors
may be detected in the future. Any delay or failure of our technology may result in the disruption of the clinical trial process and could harm our business and operating results. Product or service
errors could materially and adversely affect our reputation, result in significant costs to us and impair our ability to sell our products and services in the future. The costs incurred in correcting
any defects or errors may be substantial and could adversely affect our operating margins. In addition, security breaches, whether intentional or accidental, could expose us to a risk of loss of data,
litigation and possible liability.

The global nature of our business exposes us to multiple risks.

For the year ended December 31, 2003 and the three months ended September 30, 2004, approximately 39% and 44%, respectively, of our revenues were
derived from international operations. We expect that our international operations will continue to account for a significant portion of our revenues. As a result of our international operations, we
are exposed to many risks and uncertainties, including:



Negative
developments in any of these areas in one or more countries could result in a reduction in demand for our software products, services and hosted solutions, the cancellation or
delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could adversely affect our business,
results of operations or financial condition. Moreover, with regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. This creates a
foreign currency exchange risk for us that could have a material adverse effect on our results of operations and financial condition.

We may lose or delay revenues related to our hosted solutions if our customers terminate or delay their contracts with us.

Certain
of our hosted electronic data capture and other service and consulting contracts are subject to cancellation by our customers at any time with limited notice. Entities engaged in
clinical trials may terminate or delay a clinical trial for various reasons including the failure of the tested product to satisfy safety or efficacy requirements, unexpected or undesired clinical
results, decisions to de-emphasize a particular product or forego a particular clinical trial, decisions to downsize clinical development programs, insufficient patient enrollment or
investigator recruitment and production problems resulting in shortages of required clinical supplies. In the case of our hosted solutions, any termination or delay in the clinical trials would likely
result in a consequential delay or termination in those customers' service contracts. We have experienced terminations and delays of our customer service contracts in the past and expect to experience
additional terminations and delays in the future. Because we do not recognize any portion of a hosted service contract's revenue until the

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implementation
cycle is complete, the termination or delay of our customers' clinical trials could result in decreased or delayed revenues under these contracts which could materially harm our
business.

We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual property and other proprietary rights.

Our
success depends on our ability to protect our intellectual property and other proprietary rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair
competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual
property and proprietary information by requiring our employees and consultants to enter into confidentiality, noncompetition and assignment of inventions agreements. To the extent that our
intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to
ours, or use trademarks similar to ours, each of which could materially harm our business. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, the laws
of other countries in which we market our software products, services and hosted solutions may afford little or no effective protection of our intellectual property. If we resort to legal proceedings
to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and
expensive, even if we were to prevail. The failure to adequately protect our intellectual property and other proprietary rights may have a material adverse effect on our business, results of
operations or financial condition.

Our business could be seriously harmed by our dependence on a limited number of suppliers.

We
depend upon a limited number of suppliers for specific components of our software products and hosted solutions. We may increase our dependence on certain suppliers as we continue to
develop and enhance our software and service solutions. Our dependence on a limited number of suppliers leaves us vulnerable to having an inadequate supply of required components, price increases,
delayed supplier performance and poor component quality. For instance, we rely on Oracle Corporation to supply the database component of our software solutions and on IBM Corporation and
Equinix, Inc. to provide the server facilities for our hosting services. Oracle Corporation also offers a software package that is competitive with our products and services. If we are unable
to obtain components for our software solutions from third-party suppliers in the quantities and of the quality that we need, on a timely basis or at acceptable prices, we may not be able to deliver
our software products, services and hosted solutions on a timely or cost-effective basis to our customers, and our business, results of operations and financial condition could be
seriously harmed. Moreover, delays or interruptions in our service may reduce our revenue, cause customers to terminate their contracts and adversely affect our customer renewals.

We could incur substantial costs resulting from product liability claims relating to our products or services or our customers' use of our products or
services.

Any
failure or errors in a customer's clinical trial or adverse event reporting obligations caused or allegedly caused by our products or services could result in a claim for substantial
damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are entitled to indemnification under our customer contracts
against claims brought against us by third parties arising out of our customers' use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, divert our
resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, we cannot assure you that a court will enforce our indemnification right if
challenged by the customer obligated to

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indemnify
us or that the customer will be able to fund any amounts for indemnification owed to us. We also cannot assure you that our existing general liability insurance coverage will continue to be
available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim.

We and our products and services could be subjected to governmental regulation, requiring us to incur significant compliance costs or to cease offering
our products and services.

The
clinical trial process is subject to extensive and strict regulation by the FDA, as well as other regulatory authorities worldwide. Our electronic data capture, management and
adverse event reporting products and services could be subjected to state, federal and foreign regulations. We cannot assure you that our products and service offerings will comply with applicable
regulations and regulatory guidelines as they develop. If our products or services fail to comply with any applicable government regulations or guidelines, we could incur significant liability or be
forced to cease offering our applicable products or services. Also, conforming our products and services to any applicable regulations and guidelines could substantially increase our operating
expenses.

We may acquire or make investments in companies or technologies that could cause disruption of our business and loss of value or dilution to our
stockholders.

We
have made in the past, and may make in the future, acquisitions or significant investments in other businesses. Entering into an acquisition entails many risks, any of which could
harm our business, including:



In
addition, if we finance any future acquisitions by issuing equity securities or convertible debt, our existing stockholders may be diluted or the market price of our stock may be
adversely affected. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

If we are unable to retain our personnel and hire additional skilled personnel, we may be unable to achieve our goals.

Our
future success depends upon our ability to attract, train and retain highly skilled employees and contract workers, particularly our management team, sales and marketing personnel,
professional services personnel and software engineers. Each of our executive officers and other employees could terminate his or her relationship with us at any time. The loss of any member of our
management team

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might
significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. In addition, because of the technical nature of our software
products, services and hosted solutions and the dynamic market in which we compete, any failure to attract and retain qualified direct sales, professional services and product development personnel,
as well as our contract workers, could have a material adverse affect on our ability to generate sales or successfully develop new software products, services and hosted solutions or software
enhancements.

Failure to manage our rapid growth effectively could harm our business.

We have been experiencing a period of rapid growth that has placed a significant strain on our operational and financial resources and our personnel. From
January 1, 1999 to September 30, 2004, the number of our employees increased from 35 to approximately 361. To manage our anticipated future growth effectively, we must continue to
maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations in geographically distributed locations. We
also must attract, integrate, train and retain a significant number of qualified sales and marketing personnel, professional services personnel, software engineers and other management personnel. Our
failure to manage our rapid growth effectively could have a material adverse effect on our business, operating results or financial condition.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We
anticipate that our current cash and cash equivalents will be sufficient to meet our current needs for general corporate purposes. However, we may need additional financing to execute
on our current or future business strategies, including to:



If
we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly
issued securities may have rights, preferences or privileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations, take advantage of unanticipated opportunities, develop or
enhance our software products, services and hosted solutions, or otherwise respond to competitive pressures would be significantly limited.

Our loan agreements contain operating and financial covenants that may restrict our business and financing activities.

We
have a loan agreements with a bank that provide for a $5.0 million working capital credit line and equipment lines of credit. Our loan agreements restrict our ability to:



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In
addition, our credit facilities require us to meet specified revenue thresholds and maintain specified financial ratios and tests. The operating and financial restrictions and
covenants in these credit facilities, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or
fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to meet those covenants. A breach of any of these
covenants could result in a default under the loan agreement, which could cause all of the outstanding indebtedness under both credit facilities to become immediately due and payable and terminate all
commitments to extend further credit.

At
December 31, 2003, we were in violation of a financial covenant requiring us to achieve quarterly revenues of $16.0 million, net of reimbursable
out-of-pocket expenses, for which we received a waiver from the bank. That waiver, however, did not remove or limit the financial covenants we must satisfy under the loan
agreement in the future. Although the financial covenants were amended in connection with the March 2004 renewal and we believe we are currently in compliance under this agreement, we cannot
assure you that if a future violation occurs we will receive a waiver or that our indebtedness will not be accelerated. While we believe that we will have sufficient resources to fund any amounts
which may become due under these credit facilities, we cannot assure you that we will have sufficient assets to repay our credit facilities upon any default or that the bank will not seek to enforce
its remedies against us. If we were unable to repay those amounts, the bank could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our
assets, other than our intellectual property, as collateral under the loan agreement. We have also entered into a negative pledge agreement that, subject to certain exceptions, generally prohibits us
from pledging our intellectual property to others.

In the course of conducting our business, we possess or could be deemed to possess personal medical information in connection with the conduct of
clinical trials, which if we fail to keep properly protected, could subject us to significant liability.

Our
software solutions are used to collect, manage and report information in connection with the conduct of clinical trails. This information is or could be considered to be personal
medical information of the clinical trial participants. Regulation of the use and disclosure of personal medical information is complex and growing. Increased focus on individuals' rights to
confidentiality of their personal information, including personal medical information, could lead to an increase of existing and future legislative or regulatory initiatives giving direct legal
remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in
identifying or applying a common law theory of liability, whether or not that law affords a private right of action. Since we receive and process personal information of clinical trial participants
from our customers, there is a risk that we could be liable if there were a breach of any obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to
properly protect this personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability.

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Risks Related to our Common Stock

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in the public markets and
subject us to securities class action litigation.

We
only recently completed our initial public offering. Prior to our initial public offering, you could not buy or sell our common stock publicly. An active public market for our common
stock may not continue to develop or be sustained. Market prices for securities of software, technology and health care companies have been particularly volatile. The trading price of our common stock
may fluctuate significantly and, accordingly, may not be indicative of future trading prices and we may be unable to sustain or increase the value of an investment in our common stock. Some of the
factors that may cause the market price of our common stock to fluctuate include:



In
addition, if the market for software, technology or health care stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock
could decline for reasons unrelated to our business, operating results or financial condition. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action
lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This
could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales
of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of lock-up agreements applicable to some of our
stockholders 180 days following our July 2004 initial public offering. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares,
could reduce the market price of our common stock. As of October 27, 2004, we had 32,338,409 shares of common stock outstanding. Approximately 26,175,236 shares, or 81% of our outstanding
shares, are currently restricted as a result

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of
securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations under federal securities laws, in the near future as set forth below.

|Number of Shares and
% of Total Outstanding |  | Date Available for Sale
Into Public Market                                                                                                                                                                                                                                                                                                                                                                               
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|25,485,503 shares, or 78.8%                 |  | On or after January 11, 2005, subject to extension in specified instances, due to lock-up agreements between the holders of these shares and the underwriters in our July 2004 initial public offering. However, Thomas Weisel Partners LLC, the managing
underwriter in our initial public offering, can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time.
|400,118 shares, or 1.2%                     |  | On or after January 11, 2005 due to a lock-up agreement between the holders of these shares and us. However, the managing underwriter of our initial public offering can waive the provisions of these lock-up agreements and allow these stockholders to
sell their shares at any time.                                                                                                                                 

In
addition, as of September 30, 2004, there were 34,330 shares subject to an outstanding warrant that will become eligible for sale in the public market to the extent permitted
by the lock-up agreement and the applicable requirements of the federal securities laws. We have also registered, on Form S-8, 4,474,349 shares that we may issue
pursuant to outstanding options and an additional 2,120,000 shares are reserved for future issuance under our stock option and stock purchase plans that will be eligible for sale in the public market
to the extent permitted by any applicable vesting requirements and the lock-up agreements. Moreover, holders of an aggregate of 25,093,840 shares of our common stock as of
September 30, 2004, will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that
we may file for ourselves or other stockholders.

Our directors and management exercise significant control over our company.

At September 30, 2004, our directors and executive officers and their affiliates beneficially control approximately 35% of our outstanding common stock. As
a result, these stockholders, if they act together, are able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common
stock.

Delaware law and our corporate documents may prevent or frustrate a change in control or a change in management that stockholders believe is desirable.

Provisions
of our certificate of incorporation and bylaws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may
consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions include:



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The
affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of
incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock
entitled to vote.

In
addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested
stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The
existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Our
results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British pound sterling,
Australian dollar and Japanese yen. In the nine months ended September 30, 2003 and 2004, 38% and 41%, respectively, of our revenues were generated in locations outside the United States. The
majority of these revenues are denominated in currencies other than U.S. dollars. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign
customers. This creates a foreign currency exchange risk for us.

As
of September 30, 2004, we had $4.5 million of receivables denominated in currencies other than the U.S. dollar. If the foreign exchange rates fluctuated by 10% as of
September 30, 2004, our foreign exchange exposure would have fluctuated by approximately $450,000. In addition, our subsidiaries have intercompany accounts that eliminate upon consolidation,
however, such accounts expose us to foreign currency exchange rate exposure. Exchange rate fluctuations on short-term intercompany accounts are reported in other income (expense), while
exchange rate fluctuations on long-term intercompany accounts are recorded in other comprehensive income or loss in stockholders' deficit. We have a risk management process in place that
monitors monthly activity through the use of various internal controls. This process is designed to minimize foreign currency exposures. To date, we have not entered into any hedging contracts.

Interest Rate Sensitivity

We had cash, cash equivalents and short-term investments totaling $60.1 million at September 30, 2004. These amounts were invested
primarily in money market funds. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any
material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

Item 4. Controls and Procedures



As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, we have evaluated, with the participation of
management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based
on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in enabling us to record, process, summarize and
report information required to be included in the reports that we file or submit under the Securities Exchange Act of 1934 within the applicable time period prescribed by the Securities and Exchange
Commission. From time to time, we review the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve
with our business.



There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part IIOther Information

Item 1. Legal Proceedings

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation, including the litigation described in
Note 8 of the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. The outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially and adversely affect our financial condition or results of operations.

Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

On July 20, 2004, we closed the sale of an aggregate of 5,250,000 shares of our common stock, $0.01 par value, in our initial public offering at a price to
the public of $7.50 per share. The managing underwriters in the offering were Thomas Weisel Partners LLC, Piper Jaffray & Co. and Raymond James & Associates, Inc. As part of the
initial public offering, we granted the several underwriters an over-allotment option to purchase up to an additional 787,500 shares of our common stock from us within 30 days of
the offering. On August 19, 2004, the Company sold an additional 330,000 shares of common stock at $7.50 per share as a result of the exercise of the over-allotment option. All of
the shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (Reg. No. 333-113594)
that was declared effective by the SEC on July 13, 2004, as amended by Post-Effective Amendment No. 1 and No. 2 to Form S-1 Registration Statement
(Reg. No. 333-113594) declared effective by the SEC on July 14, 2004, and a Registration Statement filed pursuant to Rule 424(b) under the Securities Act of 1933 that
was filed on July 15, 2004 (Reg. No. 333-113594). The offering commenced on July 15, 2004 and did not terminate until after the sale of all of the securities
registered in the Registration Statement. There were no selling stockholders in the offering.

The
aggregate price of the offering amount registered on our behalf was approximately $41.9 million, including approximately $39.4 million as a result of the initial sale
of 5,250,000 shares in the initial
public offering and approximately $2.5 million as a result of the exercise of the over-allotment option. In connection with the offering, we paid approximately $2.9 million
in underwriting discounts and commissions to the underwriters and incurred $2.4 million in other offering-related expenses. Prior to the offering, entities affiliated with Thomas Weisel
Partners LLC, a managing underwriter in the offering, beneficially owned in the aggregate more than ten percent of our outstanding common stock. We paid approximately $1.3 million in
underwriting discounts and commissions to Thomas Weisel Partners LLC in connection with the offering. Except as described in the preceding sentence, none of the underwriting discounts and commissions
or offering expenses were incurred or paid to directors or officers of ours or their associates or to persons owning ten percent or more of our common stock or to any affiliates of ours. After
deducting the underwriting discounts and commissions and offering expenses, we received net proceeds from the offering of approximately $36.6 million. We currently expect to use the proceeds to
us in conformity with our intended use outlined in the prospectus related to the offering. To date, other than the repayment of our $2.5 million equipment line of credit as disclosed in the
prospectus, none of the net proceeds from the initial public offering has been applied. Pending such application, we have invested the remaining net proceeds of the offering in cash, cash equivalents
and short-term investments in accordance with our investment policy in one or more of the following fixed income instruments: money-market mutual funds, U.S. Government agencies and direct
and guaranteed obligations of the United States, as well as corporate bonds. None of the net proceeds were paid, directly or indirectly, to directors, officers, persons owning ten percent or more of
our equity securities, or our affiliates.

During
the quarter ended September 30, 2004, there were no repurchases made by us or on our behalf, or by any "affiliated purchaser," of shares of our common stock registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.

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Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into
trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that our Vice President and General Manager of International
Operations, Stephen J. Powell and our Vice President of Marketing, Kathryn A. Roy have each entered into a trading plan in accordance with Rule 10b5-1 and our policy
governing transactions in our securities. We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers,
directors and employees may establish trading plans in the future. We intend to disclose the names of executive officers and directors who establish a trading plan in compliance with
Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and
10-K filed with the SEC. However, we undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan,
other than in such quarterly and annual reports.

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Item 6. Exhibits.

Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1)      |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                                    
|3.2(1)      |  | Amended and Restated Bylaws of the Company.                                                                                                                                          
|10.1(1)*    |  | Form of Executive Agreement.                                                                                                                                                         
|10.2(1)*    |  | Form of Indemnification Agreement.                                                                                                                                                   
|10.3*       |  | Letter agreement between the Company and John J. Schickling dated as of October 21, 2004.                                                                                            
|10.4*       |  | Form of Incentive Stock Option Agreement.                                                                                                                                            
|10.5*       |  | Form of Non-Statutory Stock Option Agreement.                                                                                                                                        
|10.6(2)**   |  | Software License and Services Agreement, dated as of July 23, 2004, between Phase Forward Incorporated and GlaxoSmithKline Services Unlimited, a member of the GlaxoSmithKline group.
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                                                             
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                                                             
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           

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Signatures

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

| |  | Phase Forward Incorporated
| |  | --------------------------
| |  | By:                       
| |  | By:                       

Date:
November 9, 2004

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Exhibit Index

|Exhibit No. |  | Description                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1)      |  | Amended and Restated Certificate of Incorporation of the Company.                                                                                                                    
|3.2(1)      |  | Amended and Restated Bylaws of the Company.                                                                                                                                          
|10.1(1)*    |  | Form of Executive Agreement.                                                                                                                                                         
|10.2(1)*    |  | Form of Indemnification Agreement.                                                                                                                                                   
|10.3*       |  | Letter agreement between the Company and John J. Schickling dated as of October 21, 2004.                                                                                            
|10.4*       |  | Form of Incentive Stock Option Agreement.                                                                                                                                            
|10.5*       |  | Form of Non-Statutory Stock Option Agreement.                                                                                                                                        
|10.6(2)**   |  | Software License and Services Agreement, dated as of July 23, 2004, between Phase Forward Incorporated and GlaxoSmithKline Services Unlimited, a member of the GlaxoSmithKline group.
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                                                             
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.                                                             
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                           

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