UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





________________




FORM
      10-Q


________________







QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED MARCH 31, 2006





COMMISSION
      FILE NUMBER: 000-24539











**ECLIPSYS
      CORPORATION**


(Exact
      name of registrant as specified in its charter)








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








**1750
      Clint Moore Road**


**Boca
      Raton, Florida**


**33487**


(Address
      of principal executive offices)





**561-322-4321**


(Telephone
      number of registrant)














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





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


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





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


Yes
      [
      ]  No
      [ ü ]








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





**Class**
            **Shares
                outstanding as of May 1, 2006**Common
                Stock, $.01 par value
            52,209,870
















Part
                I.
            
            Financial
                InformationItem
                1.
            
            Financial
                Statements - UnauditedCondensed
                Consolidated Balance Sheets (unaudited) - As of March 31, 2006and
                December 31, 2005
            3Condensed
                Consolidated Statements of Operations (uaudited) - For the
                ThreeMonths
                ended March 31, 2006 and 2005
            4Condensed
                Consolidated Statements of Cash Flows (unaudited) - For the
                ThreeMonths
                ended March 31, 2006 and 2005
            5Notes
                to Condensed Consolidated Financial Statements (unaudited)
            6Item
                2.
            
            Mangement's
                Discussion and Analysis of Financial Condition and Resultsof
                Operations
            13Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4.
            
            Controls
                and Procedures
            23Part
                II.
            
            Other
                InformationItem
                1.
            
            Legal
                Proceedings
            24Item
                1A.
            
            Risk
                Factors
            24Item
                2.
            
            Unregistered
                Sales of Equity Securities
            33Item
                6.
            
            ExhibitsSignatures
            
            
            34Certifications
            
            
            36





**ECLIPSYS
                CORPORATION AND SUBSIDIARIES****Condensed
                Consolidated Balance Sheets (Unaudited)****(In
                thousands)****March
                31,**
            
            **December
                31,****2006**
            
            **2005****Assets**Current
                assets:Cash
            
            $
            36,214
            
            $
            76,693Marketable
                securities
            
            
            81,979
            
            
            37,455Accounts
                receivable, net of allowance for doubtful accounts of $6,246 and
                $5,676 at
                March 31, 2006 and December 31, 2005, respectively
            
            
            81,512
            
            
            80,833Inventory
            
            
            2,157
            
            
            2,289Prepaid
                expenses
            
            
            21,263
            
            
            17,909Other
                current assets
            
            
            1,204
            
            
            2,184Total
                current assets
            
            
            224,329
            
            
            217,363Property
                and equipment, net
            
            
            42,562
            
            
            40,500Capitalized
                software development costs, net
            
            
            32,765
            
            
            35,690Acquired
                technology, net
            
            
            508
            
            
            584Intangible
                assets, net
            
            
            2,727
            
            
            2,940Deferred
                tax asset
            
            
            4,083
            
            
            4,124Goodwill,
                net
            
            
            6,669
            
            
            6,624Other
                assets
            
            
            19,479
            
            
            20,964Total
                assets
            
            $
            333,122
            
            $
            328,789**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Deferred
                revenue
            
            $
            98,040
            
            $
            107,960Accounts
                payable
            
            
            22,490
            
            
            26,103Accrued
                compensation costs
            
            
            15,772
            
            
            15,974Deferred
                tax liability
            
            
            4,083
            
            
            4,124Other
                current liabilities
            
            
            14,749
            
            
            10,413Total
                current liabilities
            
            
            155,134
            
            
            164,574Deferred
                revenue
            
            
            14,827
            
            
            16,772Other
                long-term liabilities
            
            
            169
            
            
            1,252Total
                long-term liabilities
            
            
            14,996
            
            
            18,024Stockholders’
                equity:Total
                stockholders’ equity
            
            
            162,992
            
            
            146,191Total
                liabilities and stockholders’ equity
            
            $
            333,122
            
            $
            328,789


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




3


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Condensed
                  Consolidated Statements of Operations (Unaudited)****(In
                  thousands, except per share amounts)****Three
                  Months Ended March 31,****2006**
              
              **2005**Revenues:Systems
                  and services
              
              
              
              
              $
              96,223
              
              $
              83,128Hardware
              
              
              
              
              
              4,561
              
              
              1,307Total
                  revenues
              
              
              
              
              
              100,784
              
              
              84,435Costs
                  and expenses:Costs
                  of systems and services revenues
              
              
              
              
              
              56,458
              
              
              52,712Costs
                  of hardware revenues
              
              
              
              
              
              3,651
              
              
              1,101Sales
                  and marketing
              
              
              
              
              
              16,269
              
              
              17,729Research
                  and development
              
              
              
              
              
              16,962
              
              
              12,576General
                  and administrative
              
              
              
              
              
              5,640
              
              
              4,356Depreciation
                  and amortization
              
              
              
              
              
              3,802
              
              
              3,683Restructuring
                  charge
              
              
              
              
              
              7,198
              
              
              -Total
                  costs and expenses
              
              
              
              
              
              109,980
              
              
              92,157Loss
                  from operations
              
              
              
              
              
              (9,196
              )
              
              (7,722
              )Interest
                  income, net
              
              
              
              
              
              1,149
              
              
              561Loss
                  before taxes
              
              
              
              
              
              (8,047
              )
              
              (7,161
              )Provision
                  for income taxes
              
              
              
              
              
              -
              
              
              -Net
                  loss
              
              
              
              
              $
              (8,047
              )
              $
              (7,161
              )Loss
                  per shareBasic
                  and diluted loss per share
              
              
              
              
              $
              (0.16
              )
              $
              (0.15
              )Weighted
                  average common shares outstandingBasic
                  and diluted
              
              
              
              
              
              50,581
              
              
              47,323


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




4


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Condensed
                  Consolidated Statements of Cash Flows (Unaudited)****(In
                  thousands)****Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Operating
                  activities:Net
                  loss
              
              
              
              
              $
              (8,047
              )
              $
              (7,161
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
                  and amortization
              
              
              
              
              
              9,217
              
              
              7,806Provision
                  for bad debts
              
              
              
              
              
              518
              
              
              450Stock
                  compensation expense
              
              
              
              
              
              3,774
              
              
              416Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              
              
              
              (1,197
              )
              
              5,348Inventory
              
              
              
              
              
              132
              
              
              80Prepaid
                  expenses and other current assets
              
              
              
              
              
              (2,634
              )
              
              (3,444
              )Other
                  assets
              
              
              
              
              
              647
              
              
              (8,825
              )Deferred
                  revenue
              
              
              
              
              
              (11,864
              )
              
              2,279Accounts
                  payable and other current liabilities
              
              
              
              
              
              636
              
              
              (5,683
              )Accrued
                  compensation costs
              
              
              
              
              
              (203
              )
              
              1,265Other
                  long-term liabilities
              
              
              
              
              
              (1,083
              )
              
              416Total
                  adjustments
              
              
              
              
              
              (2,057
              )
              
              108Net
                  cash used in operating activities
              
              
              
              
              
              (10,104
              )
              
              (7,053
              )Investing
                  activities:Purchases
                  of property and equipment
              
              
              
              
              
              (5,651
              )
              
              (4,125
              )Purchases
                  of marketable securities
              
              
              
              
              
              (245,563
              )
              
              (138,018
              )Proceeds
                  from sales of marketable securities
              
              
              
              
              
              201,038
              
              
              101,158Capitalized
                  software development costs
              
              
              
              
              
              (1,576
              )
              
              (6,427
              )Net
                  cash used in investing activities
              
              
              
              
              
              (51,752
              )
              
              (47,412
              )Financing
                  activities:Proceeds
                  from stock options exercised
              
              
              
              
              
              21,042
              
              
              1,697Net
                  cash provided by financing activities
              
              
              
              
              
              21,042
              
              
              1,697Effect
                  of exchange rates on cash and cash equivalents
              
              
              
              
              
              335
              
              
              81Net
                  decrease in cash and cash equivalents
              
              
              
              
              
              (40,479
              )
              
              (52,687
              )Cash
                  and cash equivalents, beginning of period
              
              
              
              
              
              76,693
              
              
              122,031Cash
                  and cash equivalents, end of period
              
              
              
              
              $
              36,214
              
              $
              69,344
 The accompanying notes are an integral part
        of
        these unaudited condensed consolidated financial statements.
  5
  ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.  BASIS OF
          PRESENTATION
 
 The
          accompanying unaudited condensed consolidated financial statements of Eclipsys
          Corporation, or the Company, and the notes thereto have been prepared in
          accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation
          S-X
          of the Securities and Exchange Commission, or SEC. The year end condensed
          balance sheet data was derived from audited financial statements, but does
          not
          include all disclosures required by accounting principles generally accepted
          in
          the United States of America. These unaudited condensed consolidated financial
          statements do not include all of the information and disclosures required
          by
          accounting principles generally accepted in the United States of America.
          However, such information reflects all adjustments (consisting of normal
          recurring adjustments) that are, in the opinion of management, necessary
          for a
          fair statement of results for the interim periods presented.
  The
          results of operations for the three months ended March 31, 2006 are not
          necessarily indicative of annual results. The Company manages its business
          as
          one reportable segment.
 
 The
          unaudited condensed consolidated financial statements included herein should
          be
          read in conjunction with the audited consolidated financial statements
          and the
          notes thereto that are included in the Company's Annual Report on Form
          10-K for
          the year ended December 31, 2005 that was filed with the SEC on March 7,
          2006.
 
 
 2.
          STOCK-BASED COMPENSATION
 
 Prior
          to
          January 1, 2006, we accounted for our stock-based employee compensation
          arrangements under the intrinsic value method prescribed by Accounting
          Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
          (APB
          No. 25), as allowed by Statement of Financial Accounting Standards (“SFAS”) No.
          123, Accounting for Stock-based Compensation (SFAS No. 123), as amended
          by SFAS
          No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
          (SFAS
          No. 148). As a result, no expense was recognized for options to purchase
          our
          common stock that were granted with an exercise price equal to fair market
          value
          at the date of grant and no expense was recognized in connection with purchases
          under our employee stock purchase plan for the year ended December
          31, 2005, nor in the three-month period ended March 31, 2005. In December
          2004,
          the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
          “Share-Based Payment” (“SFAS No. 123(R)”), which amended SFAS No. 123. SFAS No.
          123(R) requires measurement of the cost of share-based payments to employees,
          including grants of employee stock options, to be recognized in the financial
          statements based on their fair values beginning with the first interim
          or annual
          period after June 15, 2005. Subsequent to the effective date, the pro forma
          disclosures previously permitted under SFAS No. 123 are no longer an alternative
          to financial statement recognition. Effective January 1, 2006, we have
          adopted
          SFAS No. 123(R) using the modified prospective method. Under this method,
          compensation cost recognized during the three-month period ended March
          31, 2006,
          includes: (a) compensation cost for all share-based payments granted prior
          to,
          but not yet vested as of January 1, 2006, based on the grant date fair
          value
          estimated in accordance with the original provisions of SFAS No. 123 amortized
          over the options’ vesting period, and (b) compensation cost for all share-based
          payments granted subsequent to January 1, 2006, based on the grant-date
          fair
          value estimated in accordance with the provisions of SFAS No. 123(R) amortized
          on a straight-line basis over the options’ vesting period. The option vesting
          period ranges from three to five years and all options have a contractual
          life
          of ten years. The fair value is estimated at the date of grant using the
          Black -
          Scholes option pricing model with weighted average assumptions for the
          activity
          under our stock plans. Option pricing model input assumptions such as expected
          term, expected volatility, and risk free interest rate, impact the fair
          value
          estimate. Further, the forfeiture rate impacts the amount of aggregate
          compensation. These assumptions are subjective and generally require significant
          analysis and judgment to develop. When estimating fair value, some of the
          assumptions were based on or determined from external data (for example
          the risk
          free interest rate) and other assumptions were derived from our historical
          experience with share-based payment arrangements (for example, volatility
          and
          expected term). The appropriate weight to place on historical experience
          is a
          matter of judgment, based on relevant facts and circumstances. Pro forma
          results
          for prior periods have not been restated. Implementation of SFAS No. 123(R)
          contributed $2.9 million to the current quarter loss of $(8.0) million.
          The
          adoption of SFAS No. 123(R) had no impact on cash flows from operations
          or
          financing activities.
 
 The
          following table illustrates the effect on net loss and net loss per share
          had we
          applied the fair value recognition provisions of SFAS No. 123 to account
          for our
          employee stock option plan for the three-month period ended March 31, 2005,
          because stock-based employee compensation was not accounted for using the
          fair
          value recognition method during that period.
  6
  
 ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 For
          purposes of pro forma disclosures, the estimated fair value of the stock
          awards,
          as prescribed by SFAS No. 123, is amortized to expense over the vesting
          period
          of such awards (in thousands, except per share data):
 Three
                    Months Ended March 31, 2005Net
                    loss:As
                    reported
                
                $
                (7,161
                )Add:
                    Stock-based employee compensation expense includedin
                    reported net loss, net of related tax effects
                
                
                416Deduct:
                    Total stock-based compensation expense determinedunder
                    fair value based method for all awards, net of related tax
                    effects
                
                
                (2,416
                )Pro
                    forma Net loss
                
                $
                (9,161
                )Basic
                    net loss per common share:As
                    reported
                
                $
                (0.15
                )Pro
                    forma
                
                $
                (0.19
                )Diluted
                    net loss per common share:As
                    reported
                
                $
                (0.15
                )Pro
                    forma
                
                $
                (0.19
                )
  The
            historical pro forma impact of applying the fair value method prescribed
            by SFAS
            No. 123 is not representative of the impact that may be expected in the
            future
            due to changes resulting from additional grants in future years and changes
            in
            assumptions such as volatility, interest rates and expected life used
            to
            estimate fair value of the grants in future years.
 
 Note
            that
            the above pro forma disclosure was not presented for the three-month
            period
            ended March 31, 2006 because stock-based employee compensation has been
            accounted for using the fair value recognition method under SFAS No.
            123(R) for
            this period.
 
 The
            following table shows total stock-based employee compensation expense
            (see Note
            8 for types of stock-based employee arrangements) included in the condensed
            consolidated statement of operations for the three month period ended
            March 31,
            2006 (in thousands):
 Three
                      Months Ended March 31, 2006Costs
                      and expenses:Costs
                      of systems & services revenues
                  
                  $
                  811Sales
                      and marketing
                  
                  
                  553Research
                      and development
                  
                  
                  239General
                      and administrative
                  
                  
                  1,277Total
                      stock-based compensation expense
                  
                  $
                  2,880
   7
 ECLIPSYS
              CORPORATION AND SUBSIDIARIES
 NOTES
              TO
              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 There
              was
              no stock-based employee compensation cost capitalized during the quarter
              ended
              March 31, 2006 nor any recognized tax benefit during the quarter ended
              March 31,
              2006. For restricted common stock issued at discounted prices, we recognize
              compensation expense over the vesting period for the difference between
              the
              exercise or purchase price and the fair market value on the measurement
              date.
              Compensation expense recognized in our financial statements for stock-based
              awards for restricted stock was $651,000 and is included in the $2.9
              million of
              stock-based compensation for the three month period ended March 31,
              2006. In the
              quarter ended March 31, 2005, we recorded $416,000 of stock-based compensation
              for restricted stock.
 
 3.
              MARKETABLE SECURITIES
  Marketable
              securities consist of funds that are highly liquid and are classified
              as
              available-for-sale. Marketable securities are recorded at fair value,
              and
              unrealized gains and losses are recorded as a component of other comprehensive
              income.
 (in
                        thousands)March
                    
                    December31,
                        2006
                    
                    31,
                        2005Security
                        TypeAuction
                        Rate Securities:Debt
                        securities issued by the U.S. Treasury and other U.S. government
                        corporations and agencies
                    
                    $
                    13,267
                    
                    $
                    14,117Debt
                        securities issued by states of the United States and political
                        subdivisions of the states
                    
                    
                    62,489
                    
                    
                    17,08475,756
                    
                    
                    31,201Other
                        Securities:Government
                        Bonds/Agencies
                    
                    
                    6,165
                    
                    
                    6,206Other
                        debt securities
                    
                    
                    58
                    
                    
                    48Total
                    
                    $
                    81,979
                    
                    $
                    37,455
  As
                of
                March 31, 2006, all marketable securities except for auction rate
                securities
                have a maturity of less than 2 years. Auction rate securities of $62.5
                million held at March 31, 2006 have an underlying maturity of greater
                than ten
                years, but typically have an interest rate reset feature every 30 days
                pursuant to which we can sell or reset the interest rate on the security.
                At
                March 31, 2006, we believe that these investments are considered
                a part of our
                working capital and are appropriately classified as current assets.
 
 In
                an
                effort to increase our interest income, we moved excess cash from
                money market
                investment to marketable securities, which include auction rates
                securities and
                government bonds. These funds remain highly liquid.
  4.
                ACCOUNTS RECEIVABLE
 
 Accounts
                receivable was comprised of the following (in thousands):
 March
                          31,
                      
                      December
                          31,2006
                      
                      2005**Accounts
                          Receivable:**Billed
                          accounts receivable, net
                      
                      $
                      70,218
                      
                      $
                      69,772Unbilled
                          accounts receivable, net
                      
                      
                      11,294
                      
                      
                      11,061Total
                          accounts receivable, net
                      
                      $
                      81,512
                      
                      $
                      80,833
  8
  ECLIPSYS
                    CORPORATION AND SUBSIDIARIES
 NOTES
                    TO
                    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  5.
                  WARRANTY RESERVE
 
 The
                  agreements that we use to license our software to our customers
                  generally
                  includes a limited warranty. The warranty provides that the product,
                  in its
                  unaltered form, will perform substantially in accordance with the
                  related
                  documentation. Warranty costs are charged to costs of systems of
                  services
                  revenues when they are probable and reasonably estimable. A summary
                  of the
                  activity in our warranty reserve was as follows (in
                  thousands):
 March
                            31,
                        
                        December
                            31,2006
                        
                        2005Beginning
                            Balance
                        
                        $
                        1,071
                        
                        $
                        2,057Provision
                            for warranty
                        
                        
                        -
                        
                        
                        -Provision
                            reduction
                        
                        
                        (290
                        )
                        
                        -Warranty
                            utilized
                        
                        
                        (55
                        )
                        
                        (986
                        )Ending
                            Balance
                        
                        $
                        726
                        
                        $
                        1,071
  6.
                    GOODWILL AND OTHER INTANGIBLE ASSETS
 
 Acquired
                    technology and intangible assets are amortized over their estimated
                    useful lives
                    generally on a straight-line basis. The carrying values of acquired
                    technology
                    and intangible assets are reviewed if the facts and circumstances
                    suggest that
                    they may be impaired and goodwill is reviewed annually in accordance
                    with SFAS
                    No. 142, “Goodwill and Other Intangible Assets”. Testing would be done on a more
                    frequent basis if impairment indicators arise. The test for impairment
                    is based
                    upon a number of factors, including operating results, business
                    plans and
                    projected future cash flows. No impairment has been identified
                    or recorded
                    during the three months ended March 31, 2006 or fiscal 2005.
  The
                      gross
                      and net amounts for acquired technology, goodwill, and intangible
                      assets consist
                      of the following (in thousands):
 March
                              31, 2006
                          
                          December
                              31, 2005Gross
                              Carrying
                          
                          Accumulated
                              Amortization
                          
                          Net
                              Book Value
                          
                          Gross
                              Carrying
                          
                          Accumulated
                              Amortization
                          
                          Net
                              Book ValueAmounts
                              subject to amortization:Acquired
                              technology
                          
                          $
                          914
                          
                          $
                          406
                          
                          $
                          508
                          
                          $
                          914
                          
                          $
                          330
                          
                          $
                          584Ongoing
                              customer relationships
                          
                          
                          4,335
                          
                          
                          1,608
                          
                          
                          2,727
                          
                          
                          4,335
                          
                          
                          1,395
                          
                          
                          2,940Total
                          
                          $
                          5,249
                          
                          $
                          2,014
                          
                          $
                          3,235
                          
                          $
                          5,249
                          
                          $
                          1,725
                          
                          $
                          3,524Amounts
                              not subject to amortization:Goodwill
                          
                          $
                          6,669
                          
                          $
                          -
                          
                          $
                          6,669
                          
                          $
                          6,624
                          
                          $
                          -
                          
                          $
                          6,624
  Estimated
                                aggregate amortization expense is:2006
                            
                            2007
                            
                            2008
                            
                            2009
                            
                            2010
                            
                            TotalAcquired
                                technology
                            
                            $
                            229
                            
                            $
                            279
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            -
                            
                            $
                            508Ongoing
                                customer relationships
                            
                            
                            638
                            
                            
                            851
                            
                            
                            851
                            
                            
                            340
                            
                            
                            47
                            
                            
                            2,727Total
                                amortized expense
                            
                            $
                            867
                            
                            $
                            1,130
                            
                            $
                            851
                            
                            $
                            340
                            
                            $
                            47
                            
                            $
                            3,235
  9
 ECLIPSYS
                        CORPORATION AND SUBSIDIARIES
 NOTES
                        TO
                        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 7.
                        OTHER
                        COMPREHENSIVE LOSS
 
 The
                        components of other comprehensive loss were as follows (in
                        thousands):
 Three
                                  Months Ended March 31,2006
                              
                              2005Net
                                  Loss
                              
                              $
                              (8,047
                              )
                              $
                              (7,161
                              )Foreign
                                  currency translation adjustment
                              
                              
                              335
                              
                              
                              81Total
                                  comprehensive loss
                              
                              $
                              (7,712
                              )
                              $
                              (7,080
                              )
  8.  EMPLOYEE
                          BENEFIT PLANS
 
 *2005
                          Stock Incentive Plan*
  At
                          our
                          Annual Meeting of Stockholders held June 29, 2005, our
                          shareholders approved the
                          2005 Stock Incentive Plan (2005 Plan).  Under the 2005 Plan, no further
                          awards will be granted under our prior Stock Incentive
                          Plans which include our
                          1996, 1998, 1999 and 2000 plans.  Awards may be made under the 2005 Plan
                          for a number of shares (subject to adjustment in the event
                          of stock splits and
                          other similar events) equal to the sum of (1) 2,000,000 shares of our
                          Voting Common Stock, (2) any shares reserved for issuance under the Amended
                          and Restated 2000 Stock Incentive Plan that remain available
                          for issuance as of
                          the date the 2005 Plan is approved by our stockholders
                          and (3) any shares
                          subject to outstanding awards under our 1996 Stock Plan,
                          the Amended and
                          Restated 1998 Stock Incentive Plan, the Amended and Restated
                          1999 Stock
                          Incentive Plan and the Amended and Restated 2000 Stock
                          Incentive Plan that
                          expire or are terminated, surrendered or canceled without
                          having been fully
                          exercised, are repurchased or forfeited in whole or part
                          or result in any shares
                          subject to such award not being issued.  As of March 31, 2006, there were
                          2,416,081 shares available for future issuance under the
                          2005
                          Plan.  We
                            issued
                            400,000 stock options and 100,000 shares of restricted
                            stock in the first
                            quarter of 2006 as an inducement grant in accordance
                            with NASD Marketplace
                            Rules. The grant date fair value of the restricted stock
                            was
                            $21.15.
 
 A
                            summary
                            of stock option transactions is as follows during the
                            quarter ended March 31,
                            2006:
 Number
                                      of Shares
                                  
                                  Weighted
                                      Average Exercise Price
                                  
                                  Weighted
                                      Average Remaining Contractual Life
                                  
                                  Aggregate
                                      Intrinsic Value (in thousands)Outstanding
                                      at January 1, 2006
                                  
                                  
                                  7,605,609
                                  
                                  $
                                  12.80Options
                                      granted
                                  
                                  
                                  690,000
                                  
                                  $
                                  22.59Options
                                      excercised
                                  
                                  
                                  (2,012,471
                                  )
                                  $
                                  10.46
                                  
                                  
                                  
                                  
                                  $
                                  24,220Options
                                      canceled
                                  
                                  
                                  (334,948
                                  )
                                  $
                                  12.93Outstanding
                                      at March 31, 2006
                                  
                                  
                                  5,948,190
                                  
                                  $
                                  14.73
                                  
                                  
                                  6.56
                                  
                                  $
                                  54,429Exercisable
                                      at March 31, 2006
                                  
                                  
                                  3,242,031
                                  
                                  $
                                  13.00
                                  
                                  
                                  4.64
                                  
                                  $
                                  35,668
 10
 ECLIPSYS
                              CORPORATION AND SUBSIDIARIES
 NOTES
                              TO
                              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   Non-vested
                            stock award activity including awards granted under NASD
                            Marketplace Rules for
                            the three month period ended March 31, 2006 is summarized
                            as
                            follows:
 Non-vested
                                        Number of Shares
                                    
                                    Weighted
                                        Average Grant-Date Fair ValueNonvested
                                        balance at January 1, 2006
                                    
                                    
                                    623,994
                                    
                                    $
                                    16.89Granted
                                    
                                    
                                    100,000
                                    
                                    
                                    21.14Vested
                                    
                                    
                                    (71,250
                                    )
                                    
                                    18.25Forfeited
                                    
                                    
                                    (52,500
                                    )
                                    
                                    18.91Nonvested
                                        balance at March 31, 2006
                                    
                                    
                                    600,244
                                    
                                    $
                                    17.26
  As
                            of
                            March 31, 2006, $34.3 million of total unrecognized compensation
                            costs related
                            to stock options is expected to be recognized over a
                            weighted average period of
                            3.81 years. As of March 31, 2006, $9.4 million of total
                            unrecognized
                            compensation costs related to nonvested awards is expected
                            to be recognized over
                            a weighted average period of 4.07 years.  The total fair value of shares
                            vested during the quarter ended March 31, 2006 was $1.4
                            million.
  The
                              weighted average estimated fair value of our employee
                              stock options granted at
                              grant date market prices was $18.13 per share during
                              the first quarter of fiscal
                              2006 and $11.69 per share during the first quarter
                              of fiscal 2005. There were
                              9,926 shares that will be granted under our stock purchase
                              plan as a result of
                              employee participation during the first quarter of
                              2006. Included in the
                              condensed statement of operations for the three month
                              period ended March 31,
                              2006 is $2.9 million in stock-based compensation expense
                              related to the
                              amortization of previously valued shares granted under
                              our Stock Incentive
                              Plan.
  The
                              weighted average fair value of outstanding stock options
                              has been estimated at
                              the date of grant using a Black-Scholes option pricing
                              model. The following are
                              significant weighted average assumptions used for estimating
                              the fair value of
                              the activity under our stock option plans for the quarter
                              ended March 31,
                              2006:
 Expected
                                        term (in years)
                                    
                                    6.45Risk
                                        free interest rate
                                    
                                    
                                    5.05
                                    %Expected
                                        volatility
                                    
                                    
                                    78
                                    %Dividend
                                        yield
                                    
                                    
                                    0
                                    %
  We
                                have
                                elected to use the simplified method for estimating
                                our expected term equal to
                                the midpoint between the vesting period and the contractual
                                term as allowed by
                                Staff Accounting Bulletin (SAB) No. 107, Share-Based
                                Payment.
 
 We
                                currently estimate volatility by using the weighted
                                average historical
                                volatility of our common stock.
 
 The
                                risk-free interest rate is the implied yield currently
                                available on U.S.
                                Treasury zero-coupon issues with a remaining term
                                equal to the expected term
                                input to the Black-Scholes model.
 
 We
                                estimate forfeitures using a weighted average historical
                                forfeiture rate. Our
                                estimate of forfeitures will be adjusted over the
                                requisite service period based
                                on the extent to which actual forfeitures differ,
                                or are expected to differ,
                                from our estimate.
 
 11
 ECLIPSYS
                                  CORPORATION AND SUBSIDIARIES
 NOTES
                                  TO
                                  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   9.
                                BASIC
                                AND DILUTED LOSS PER COMMON SHARE
 
 For
                                all
                                periods presented, basic and diluted loss per common
                                share is presented in
                                accordance with SFAS 128, “Earnings per Share,” which provides for the
                                accounting principles used in the calculation of
                                earnings per share. Basic loss
                                per common share excludes dilution and is calculated
                                by dividing net income
                                available to common shareholders by the weighted
                                average number of shares of
                                common stock outstanding during the period. Diluted
                                loss per common share
                                reflects the potential dilution from assumed conversion
                                of all dilutive
                                securities such as stock options and unvested restricted
                                stock using the
                                treasury stock method. When the effect of the outstanding
                                stock options are
                                anti-dilutive, they are not included in the calculation
                                of diluted earnings per
                                common share. The computation of basic and diluted
                                earnings per common share was
                                as follows (in thousands, except per share data):
 March
                                          31,2006
                                      
                                      2005Basic
                                          and Diluted Loss Per Common Share:Net
                                          loss
                                      
                                      $
                                      (8,047
                                      )
                                      $
                                      (7,161
                                      )Weighted
                                          average common shares outstanding
                                      
                                      
                                      50,581
                                      
                                      
                                      47,323Loss
                                          per common share
                                      
                                      $
                                      (0.16
                                      )
                                      $
                                      (0.15
                                      )
  10.  RESTRUCTURING
 
 In
                                  January 2006, we effected a restructuring of our
                                  operations which included a
                                  reduction in headcount of approximately 100 individuals
                                  and the reorganization
                                  of our senior management team. This initiative
                                  resulted in a restructuring
                                  charge of approximately $7.2 million in the first
                                  quarter of 2006 which has been
                                  recorded in our statements of operations as “restructuring charge” and is part
                                  of total costs and expenses. At March 31, 2006,
                                  the remaining unpaid liability
                                  was $3.9 million.  We expect to incur additional restructuring charges
                                  of
                                  $2.0 million during the second quarter of 2006.
                                  In connection with these
                                  initiatives, we have invested a portion of the
                                  anticipated cost reductions into
                                  client-related activities including client support
                                  and professional
                                  services.
  11.  NEW
                                  ACCOUNTING PRONOUNCEMENTS
 
 In
                                  May
                                  2005, the FASB issued SFAS No. 154, “Accounting Changes and Corrections”
which replaces APB Opinion No. 20, “Accounting Changes” and SFAS
                                  No. 3, “Reporting Accounting Changes in Interim Financial
                                  Statements”, and
                                  changes the requirements for the accounting for
                                  and reporting of a change in
                                  accounting principle. SFAS No. 154 also provides guidance on the accounting
                                  for and reporting of error corrections. This statement
                                  is applicable for
                                  accounting changes and corrections of errors made
                                  in fiscal years beginning
                                  after December 15, 2005.
  12.
                                  LEGAL
                                  ACTION
 
 The
                                  Company and its subsidiaries are from time to time
                                  parties to legal proceedings,
                                  lawsuits and other claims incident to their business
                                  activities. Such matters
                                  may include, among other things, assertions of
                                  contract breach or intellectual
                                  property infringement, claims for indemnity arising
                                  in the course of our
                                  business and claims by persons whose employment
                                  with us has been terminated.
                                  Such matters are subject to many uncertainties
                                  and outcomes are not predictable
                                  with assurance. Consequently, management is unable
                                  to ascertain the ultimate
                                  aggregate amount of monetary liability, amounts
                                  which may be covered by
                                  insurance or recoverable from third parties, or
                                  the financial impact with
                                  respect to these matters as of the date of this
                                  report. However, based on our
                                  knowledge at the time of this report, management
                                  believes that the final
                                  resolution of such matters pending at the time
                                  of this report, individually and
                                  in the aggregate, will not have a material adverse
                                  effect upon our consolidated
                                  financial position, results of operations or cash
                                  flows.
 
   12
  
 
 ITEM
                                  2.
 
 MANAGEMENT’S
                                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                                  AND
 RESULTS
                                  OF OPERATIONS
 
 
 This
                                  report contains forward-looking statements that
                                  are based on our current
                                  expectations, assumptions, estimates and projections
                                  about our company and our
                                  industry. When used in this report, the words “may”, “will”, “should”,
“predict”, “continue”, “plans”, “expects”, “anticipates”, “estimates”,
“intends”, “believe”, and “could”, and similar expressions are intended to
                                  identify forward-looking statements. These statements
                                  may include, but are not
                                  limited to, statements concerning our anticipated
                                  performance, including
                                  revenue, margin, cash flow, balance sheet and profit
                                  expectations; development
                                  and implementation of our software; duration, size,
                                  scope and revenue
                                  expectations associated with client contracts;
                                  benefits provided by Eclipsys
                                  software, outsourcing and consulting services;
                                  business mix; sales and growth in
                                  our client base; market opportunities; industry
                                  conditions; and our accounting,
                                  including its effects and potential changes in
                                  accounting.
 
 Actual
                                  results might differ materially from the results
                                  projected due to a number of
                                  risks and uncertainties. Software development may
                                  take longer and cost more than
                                  expected, and incorporation of anticipated features
                                  and functionality may be
                                  delayed, due to various factors including programming
                                  and integration challenges
                                  and resource constraints. We may change our product
                                  strategy in response to
                                  client requirements, market factors, resource availability,
                                  and other factors.
                                  Implementation of some of our software is complex
                                  and time consuming. Clients’
circumstances vary and may include unforeseen issues
                                  that make it more difficult
                                  or costly than anticipated to implement or derive
                                  benefit from software,
                                  outsourcing or consulting services. The success
                                  and timeliness of our services
                                  often depends at least in part upon client involvement,
                                  which can be difficult
                                  to control. We are required to meet specified performance
                                  standards, and
                                  contracts can be terminated or their scope reduced
                                  under certain circumstances.
                                  Competition is vigorous, and competitors may develop
                                  more compelling offerings
                                  or offer more aggressive pricing. New business
                                  is not assured and existing
                                  clients may migrate to competing offerings. Financial
                                  performance targets might
                                  not be achieved due to various risks, including
                                  slower-than-expected business
                                  development or new account implementation, or higher-than-expected
                                  costs to
                                  develop products, meet service commitments or sign
                                  new contracts. Our cash
                                  consumption may exceed expected levels if profitability
                                  does not meet
                                  expectations or strategic opportunities require
                                  cash investments. These and
                                  other risks and uncertainties are described in
                                  this report under the headings
“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
                                  and Results of Operations” and in our other filings made from time to time
                                  with
                                  the Securities and Exchange Commission. The cautionary
                                  statements made in this
                                  report should be read as being applicable to all
                                  related forward-looking
                                  statements wherever they appear. These statements
                                  are only predictions. We
                                  cannot guarantee future results, levels of activity,
                                  performance or
                                  achievements. We assume no obligation to publicly
                                  update or revise these
                                  forward-looking statements for any reason, or to
                                  update the reasons actual
                                  results could differ materially from those anticipated
                                  in these forward-looking
                                  statements, even if new information becomes available
                                  in the future. We
                                  nonetheless reserve the right to make such updates
                                  from time to time without the
                                  need for specific reference to this report. No
                                  such update shall be deemed to
                                  indicate that other statements not addressed by
                                  such updates remain correct or
                                  create an obligation to provide any other updates.
 
 
 **Executive
                                  Overview**
  *The
                                  following should be read in conjunction with our
                                  condensed consolidated
                                  financial statements, including the notes thereto,
                                  which are included elsewhere
                                  in this document.*
  
 Eclipsys
                                  is a healthcare information technology (HIT) company
                                  and a leading provider of
                                  advanced clinical, financial and management information
                                  software and service
                                  solutions. We develop and license proprietary software
                                  and content that is
                                  designed for use in connection with many of the
                                  key clinical, administrative and
                                  financial functions that hospitals and other healthcare
                                  organizations require.
                                  Among other things, our software enables physicians,
                                  nurses and other clinicians
                                  to order tests, treatment and medications and record,
                                  access and share
                                  information about patients. Our software also facilitates
                                  many administrative
                                  and financial functions, including patient admissions,
                                  scheduling, records
                                  maintenance, invoicing, inventory control, cost
                                  accounting, and assessment of
                                  the profitability of specific medical procedures
                                  and personnel.  Our
                                  content, which is integrated with our software,
                                  provides practice
                                  guidelines in context at the point of care for
                                  use by physicians, nurses and
                                  other clinicians.
  We
                                  also
                                  provide services related to our software.  These services include software
                                  and hardware maintenance, outsourcing, remote hosting
                                  of our software as well as
                                  third-party HIT applications, network services,
                                  and training and
                                  consulting.
   13
  We
                                  believe that one of the key differentiators of
                                  our software is its open,
                                  flexible and modular architecture.  This allows our software to be
                                  installed one application at a time or all at once,
                                  and to integrate easily with
                                  software developed by other vendors or the client.
                                  This enables our clients to
                                  install our software without the disruption and
                                  expense of replacing
                                  their existing software systems to gain additional
                                  functionality.
  We
                                  market
                                  our software to small, stand-alone hospitals, large
                                  multi-entity healthcare
                                  systems, academic medical centers and community
                                  hospitals. We have one or more
                                  of our software applications installed in, or licensed
                                  to be installed at
                                  approximately 1,500 facilities. All 16 of the top-ranked
                                  U.S. hospitals named to
                                  the Honor Roll of “America’s Best Hospitals” in the July 18, 2005 issue of *U.S.
                                  News & World Report* use
                                  one
                                  or more of our solutions.
  Our
                                  Web
                                  site address is www.eclipsys.com.  We make available free of charge, on or
                                  through our Web site, our annual report on Form
                                  10-K, quarterly reports on Form
                                  10-Q, current reports on Form 8-K and all amendments
                                  to those reports as soon as
                                  reasonably practicable after such material is electronically
                                  filed with or
                                  furnished to the Securities and Exchange Commission.
  *Background*
  We
                                  were
                                  founded in December 1995 to commercialize an integrated
                                  clinical and financial
                                  information software system for use by hospitals.
                                  Historically, hospitals kept
                                  records in paper form. This has been associated
                                  with patient safety concerns,
                                  including avoidable medical errors, duplicative
                                  and unnecessary procedures,
                                  inefficient use of limited resources, and a limited
                                  ability to track, bill and
                                  collect for services rendered. Our software is
                                  designed to address these issues
                                  by turning data into information that can be easily
                                  used, accessed by or
                                  provided to the right person, at the right time,
                                  in the right place. This
                                  enables hospital employees to redesign business
                                  processes, deliver higher
                                  quality care at lower cost, and receive expedited
                                  payment for services rendered.
                                  Our software also helps to improve collaboration
                                  among physicians, nurses and
                                  other healthcare workers across all venues of care.
  *Software
                                  Development*
  In
                                  June
                                  1999, we began re-expressing the intellectual property
                                  we had acquired through
                                  acquisitions on a common platform to provide integrated
                                  software to our clients.
                                  In 1999, we announced the general availability
                                  of Sunrise Clinical Manager
                                  (SCM), the first version of our Sunrise TM suite of
                                  software. SCM provides advanced knowledge-based
                                  clinical decision-support
                                  capabilities including computerized physician order
                                  entry.
  In
                                  2001,
                                  we announced our SunriseXA TM strategy. This strategy was to migrate our Sunrise
                                  suite of software to an open
                                  architecture and platform. SunriseXA’s architecture is built on Microsoft’s .NET
                                  Framework, Microsoft SQL Server and the Microsoft
                                  Windows family of operating
                                  systems. In 2002 and 2003, we announced the general
                                  availability of certain
                                  components of our SunriseXA software offerings.
  In
                                  October 2003, we identified and announced certain
                                  response time issues within
                                  components of the version of our next-generation
                                  clinical software that we were
                                  developing at that time. Although some of our software
                                  components had been
                                  implemented in and were working at some client
                                  sites, we determined that the
                                  software did not produce acceptable response times
                                  for complex, high-volume
                                  hospital environments. To address the issue, we
                                  implemented a strategy that was
                                  designed to allow SunriseXA clients to continue
                                  their deployment of SunriseXA,
                                  and at the same time allow us to continue the development
                                  of advanced SunriseXA
                                  solutions. This strategy was to replace the affected
                                  SunriseXA components with
                                  certain components from our SCM software, which
                                  is our prior generation, core
                                  clinical software. The response time issue resulted
                                  in a software delivery delay
                                  for some of our advanced SunriseXA functionality.
                                  The announcement of these
                                  issues also impacted the implementation schedules
                                  for a number of our
                                  clients.
  In
                                  connection with this issue, we recorded a $1.2
                                  million write-down of capitalized
                                  software development costs to net realizable value
                                  for some SunriseXA components
                                  in the third quarter of 2003. The write-down was
                                  included in the costs of
                                  systems and services revenues. Also, we believe
                                  that the correction of the
                                  response time issue and related issues is covered
                                  by the warranties that we
                                  provide to our clients.  We intend to continue to remediate the problem
                                  for
                                  our clients. Accordingly, we recorded provisions
                                  related to warranty costs of
                                  $4.6 million to date.  These provisions reflect our estimate of
                                  warranty-related costs that includes among other
                                  things, implementation and
                                  third-party costs for affected clients. Warranty
                                  costs are charged to costs of
                                  systems and services revenues when they are probable
                                  and reasonably
                                  estimable.  Through March 31, 2006, we had expended approximately
                                  $3.9
                                  million in warranty costs related to remediation
                                  of the response time issue and
                                  related issues.  As of March 31, 2006, the warranty reserve balance
                                  was
                                  $726,000.   Professional services revenues have been, and we
                                  believe
                                  will continue to be negatively affected as we utilize
                                  resources to fulfill these
                                  obligations.
  On
                                  June
                                  30, 2004, we released Sunrise Clinical Manager
                                  Release 3.5 XATM. 
This
                                  new
                                  release contained significant additional functionality
                                  for core clinical,
                                  ambulatory and emergency department settings, as
                                  well as enhancements to patient
                                  management
  14
  functions. 
                                  Additionally, the new release extended support
                                  for physicians through the
                                  inclusion of advanced functionality for clinical
                                  decision support, structured
                                  notes, medical necessity checking, prescription
                                  writing and medication
                                  management configuration.
 
 In
                                  November 2004, we announced the general availability
                                  of Sunrise ED Manager 3.6
                                  XATM
                                  and
                                  Sunrise Ambulatory Care Manager 3.6 XATM. 
In
                                  the
                                  first quarter of 2005, we released Sunrise Clinical
                                  Manager Release 4.0 XATM,
                                  which contained
                                  new features and enhancements in several key areas
                                  including incremental
                                  functionality related to ambulatory, emergency
                                  department, critical care,
                                  medication management and nursing.   Additionally, we released Remote
                                  Access Services (RAS) 4.0 XA TM and
                                  Pocket Sunrise TM 4.0 XA,
                                  which enhanced users’ ability to access our applications from remote
                                  locations.  Furthermore, in November 2005 we announced the
                                  release of
                                  Sunrise Radiology Information System TM(RIS),
                                  which
                                  automates radiology workflow.
  In
                                  January 2006, we released Sunrise Clinical Manager
                                  Release 4.5 XATM
                                  (SCM
                                  4.5XA).  This release contained approximately 1,500 incremental
                                  functions
                                  which continued to enhance the capabilities of
                                  our offering in all major
                                  clinical areas including ambulatory, emergency
                                  department, critical care and
                                  nursing.  Additionally, this release included integrated
                                  end-to-end
                                  medication management capabilities and builds upon
                                  recent enhancements to our
                                  Sunrise Patient Financial Manager and Sunrise Decision
                                  Support Manager
                                  solutions. The
                                  general availability of these releases fulfilled
                                  key deliverables expected by
                                  our clients in connection with the 2003 response
                                  time issue.
  *Competitive
                                  Environment and Other Challenges for 2006*
  During
                                  the fourth quarter of 2004 and much of 2005, we
                                  experienced a slow-down in
                                  closing new sales transactions related to increasing
                                  competition, issues
                                  associated with our previously discussed software
                                  delay and our CEO
                                  transition.  Additionally, we hired a new CEO during the fourth
                                  quarter of
                                  2005 and implemented a restructuring of senior
                                  management and our operations
                                  during January 2006.   Our releases of  SCM 4.0 XA in March 2005
                                  and SCM 4.5 XA in January 2006 included significant
                                  new functionality, and we
                                  are implementing this new software with a signficant
                                  number of
                                  clients.   In the event our new software does not continue
                                  to achieve
                                  market acceptance, we experience any significant
                                  delays in implementing these
                                  new releases or experience disruptions in our operations
                                  as a result of the
                                  restructuring activities, our results of operations
                                  could be negatively
                                  affected, including a delay or loss in closing
                                  future new sales transactions.
  **Critical
                                  Accounting Policies**
  We
                                  believe there are several accounting policies that
                                  are critical to understanding
                                  our historical and future performance, as these
                                  policies affect the reported
                                  amount of revenue and other significant areas involving
                                  management’s judgments
                                  and estimates. On an ongoing basis, management
                                  evaluates and adjusts its
                                  estimates and judgments, if necessary. These significant
                                  accounting policies
                                  relate to revenue recognition, stock-based compensation,
                                  allowance for doubtful
                                  accounts, capitalized software development costs
                                  and our warranty reserve.
                                  Please refer to Note 2 of the audited consolidated
                                  financial statements for
                                  further discussion of our accounting policies in
                                  our 10-K for the year ended
                                  December 31, 2005 filed with the SEC on March 7,
                                  2006.
  *Revenue
                                  Recognition*
  We
                                  generally contract under multiple element arrangements,
                                  which include software
                                  license fees, hardware and services including consulting,
                                  implementation, and
                                  software maintenance, for periods of 3 to 10 years.
                                  We evaluate revenue
                                  recognition on a contract-by-contract basis as
                                  the terms of each arrangement
                                  vary. The evaluation of our contractual arrangements
                                  often requires judgments
                                  and estimates that affect the timing of revenue
                                  recognized in our statements of
                                  operations. Specifically, we may be required to
                                  make judgments
                                  about:
  ·
                                        whether
                                            the fees associated with our software
                                            and services are fixed or
                                            determinable;
  ·
                                        whether
                                            collection of our fees is reasonably
                                            assured;
  ·
                                        whether
                                            professional services are essential to
                                            the functionality of the related
                                            software;
  ·
                                          whether
                                              we have the ability to make reasonably
                                              dependable estimates in the
                                              application of the percentage-of-completion
                                              method; and
 ·
                                        whether
                                            we have verifiable objective evidence
                                            of fair value for our software and
                                            services.
   15
   We
                                  recognize revenues in accordance with the provisions
                                  of Statement of Position,
                                  No. 97-2, “Software Revenue Recognition,” (SOP 97-2) as amended by
                                  SOP 98-9, “Modification of SOP 97-2, With Respect to Certain
                                  Transactions”, (SOP No. 98-9) Staff Accounting Bulletin 104
“Revenue
                                  Recognition” (SAB 104) and Emerging Issues Task Force, “Revenue Arrangements
                                  with Multiple Deliverables” (EITF 00-21). SOP 97-2 and SAB 104, as amended,
                                  require among other matters, that there be a signed
                                  contract evidencing an
                                  arrangement exists, delivery has occurred, the
                                  fee is fixed or determinable, and
                                  collectibility is probable.
   Many
                                  of
                                  our contracts with our clients are multiple element
                                  arrangements which may
                                  provide for multiple software modules including
                                  the rights to future versions
                                  and releases we may offer within the software suites
                                  the client purchases or
                                  rights to software versions that support different
                                  hardware or operating
                                  platforms, and that do not qualify as exchange
                                  rights.  We refer to these
                                  arrangements as subscription contracts.  Additionally, we sometimes enter
                                  into multiple element arrangements that do not
                                  include these rights to future
                                  software or platform protection rights.  We refer to these arrangements as
                                  traditional software contracts.  Finally, we offer much of our software and
                                  services on a stand-alone basis. Revenue under
                                  each of these arrangements is
                                  recognized as follows:
  *Subscription
                                  Contracts*
  Our
                                  subscription contracts typically include the following
                                  deliverables:
   ·
                                        Software
                                            license fees;
  ·
                                        Maintenance;
  ·
                                        Professional
                                            services; and
  ·
                                        Third
                                            party hardware or remote hosting services.
  Software
                                  license fees are recognized ratably over the term
                                  of the contract, commencing
                                  upon the delivery of the software provided that
                                  (1) there is evidence of an
                                  arrangement, (2) the fee is fixed or determinable and (3) collection
                                  of our fee is considered probable. The value of
                                  the software is determined using
                                  the residual method pursuant to SOP 98-9. These contracts contain the
                                  rights to unspecified future software within the
                                  suite purchased and/or
                                  unspecified platform transfer rights that do not
                                  qualify for exchange
                                  accounting. Accordingly, these arrangements are
                                  accounted for pursuant to
                                  paragraphs 48 and 49 of SOP 97-2. Under certain arrangements, we
                                  capitalize related direct costs consisting of third
                                  party software costs and
                                  direct software implementation costs. These costs
                                  are amortized over the term of
                                  the arrangement.
  In
                                  the
                                  case of maintenance revenues, vendor-specific objective
                                  evidence, or VSOE of
                                  fair value is based on substantive renewal prices,
                                  and the revenues are
                                  recognized ratably over the maintenance period.
  In
                                  the
                                  case of professional services revenues, VSOE is
                                  based on prices from stand-alone
                                  sale transactions, and the revenues are recognized
                                  as services are performed
                                  pursuant to paragraph 65 of SOP 97-2.
  Third
                                  party hardware revenues are recognized upon delivery,
                                  pursuant to
                                  SAB 104.
  In
                                  the
                                  case of remote hosting services, VSOE is based
                                  upon consistent pricing charged
                                  to clients based on volumes and performance requirements
                                  on a stand-alone basis
                                  and substantive renewal terms, and the revenues
                                  are recognized ratably over the
                                  contract term as the services are performed. Our
                                  remote hosting arrangements
                                  generally require us to perform one-time set-up
                                  activities and include a
                                  one-time set-up fee. This one-time set-up fee is
                                  generally paid by the client at
                                  contract execution. We have determined that these
                                  set-up activities do not
                                  constitute a separate unit of accounting, and accordingly
                                  the related set-up
                                  fees are recognized ratably over the term of the
                                  contract.
  We
                                  consider the applicability of EITF 00-3, “Application of AICPA SOP 97-2 to
                                  Arrangements That Include the Right to Use Software
                                  Stored On Another Entity’s
                                  Hardware,” to our remote hosting services arrangements on
                                  a contract-by-contract
                                  basis. If we determine that the client has the
                                  contractual right to take
                                  possession of our software at any time during the
                                  hosting period without
                                  significant penalty, and can feasibly run the software
                                  on its own hardware or
                                  enter into another arrangement with a third party
                                  to host the software, a
                                  software element covered by SOP 97-2 exists. When a software element exists
                                  in a remote hosting services arrangement, we recognize
                                  the license, professional
                                  services and remote hosting services revenues pursuant
                                  to SOP 97-2, whereby
                                  the fair value of the remote hosting service is
                                  recognized as revenue ratably
                                  over the term of the remote hosting contract. If
                                  we determine that a software
                                  element covered by SOP 97-2 is not present in a remote hosting services
                                  arrangement; we recognize revenue for the remote
                                  hosting services arrangement,
                                  ratably over the term of the remote hosting contract
                                  pursuant to
                                  SAB 104.
  16
   *Traditional
                                  Software Contracts*
  We
                                  enter
                                  into traditional multiple-element arrangements
                                  that include the following
                                  elements:
   ·
                                        Software
                                            license;
  ·
                                        Maintenance;
  ·
                                        Professional
                                            services; and
  ·
                                        Third
                                            party hardware or remote hosting services.
  
 Revenue
                                  for each of the elements is recognized as follows:
  Software
                                  license fees are recognized upon delivery of the
                                  software provided that
                                  (1) there is evidence of an arrangement, (2) the fee is fixed or
                                  determinable and (3) collection of our fee is considered probable. For
                                  those arrangements in which the fee is not considered
                                  fixed or determinable, the
                                  software license revenue is recognized as the payments
                                  become due. For
                                  arrangements where VSOE only exists for the undelivered
                                  elements, we account for
                                  the delivered elements (software license revenue)
                                  using the residual method in
                                  accordance with SOP 98-9.
  In
                                  addition to the software license fees, these contracts
                                  may also contain
                                  maintenance, professional services and hardware
                                  or remote hosting services. VSOE
                                  and revenue recognition for these elements is determined
                                  using the same
                                  methodology as noted above for subscription contracts.
  *Software
                                  Contracts Requiring Contract Accounting*
  We
                                  enter
                                  into certain multiple element arrangements containing
                                  milestone provisions in
                                  which the professional services are considered
                                  essential to the functionality of
                                  the software. Under these arrangements, software
                                  license fees and professional
                                  service revenues are recognized using the percentage-of-completion
                                  method over
                                  the implementation period which generally ranges
                                  from 12 to 24 months.
                                  Under the percentage-of-completion method, revenue
                                  and profit are recognized
                                  throughout the term of the implementation based
                                  upon estimates of total labor
                                  hours incurred and revenues to be generated over
                                  the term of the implementation.
                                  Changes in estimates of total labor hours and the
                                  related effect on the timing
                                  of revenues and profits are recognized in the period
                                  in which they are
                                  determinable. Accordingly, changes in these estimates
                                  could occur and have a
                                  material effect on our operating results in the
                                  period of change.
  *Stand-Alone
                                  Software and Service*
  We
                                  also
                                  market certain software and services on a stand-alone
                                  basis, including the
                                  following:
   ·
                                        Outsourcing;
  ·
                                        Software
                                            license;
  ·
                                        Maintenance;
  ·
                                        Professional
                                            services;
  ·
                                        Hardware;
  ·
                                        Network
                                            services; and
  ·
                                        Remote
                                            Hosting services.
  Revenues
                                  related to such software and services are recognized
                                  as follows:
  Software
                                  license fees and maintenance are marketed on a
                                  stand-alone basis may be licensed
                                  either under traditional contracts or under subscription
                                  arrangements. Software
                                  license fees under traditional contracts are recognized
                                  pursuant to
                                  SOP 97-2 upon delivery of the
  17
  software,
                                  persuasive evidence of an arrangement exists, the
                                  fee is fixed or determinable
                                  and collectibility is probable. Under subscription
                                  agreements for stand-alone
                                  software, license fees are recognized ratably over
                                  the term of the contract.
                                  With respect to maintenance, VSOE is determined
                                  based on substantive renewal
                                  prices contained in the contracts. Maintenance
                                  is recognized ratably over the
                                  term of the contract.
  Professional
                                  services represent incremental services marketed
                                  to clients including
                                  implementation and consulting services. Professional
                                  services revenues, where
                                  VSOE is based on prices from stand-alone transactions
                                  are recognized as services
                                  are performed.
  Hardware
                                  is recognized upon delivery pursuant to SAB 104.
  Network
                                  service arrangements include the assessment, assembly
                                  and delivery of a wireless
                                  network which may include wireless carts or other
                                  wireless equipment to the
                                  client. Our network services arrangements are sold
                                  to a client for a fixed fee.
                                  All services are performed prior to the delivery
                                  of the equipment. These
                                  contracts are typically 60 to 90 days in length and are recognized pursuant
                                  to SAB 104, upon the delivery of the network to the client.
  Remote
                                  hosting contracts that are sold on a stand alone
                                  basis are recognized ratably
                                  over the contract term pursuant to SAB 104. Our remote hosting arrangements
                                  generally require us to perform one-time set-up
                                  activities and include a
                                  one-time set-up fee. This one-time set-up fee is
                                  generally paid by the client at
                                  contract execution. We have determined that these
                                  set-up activities do not
                                  constitute a separate unit of accounting, and accordingly
                                  we recognize the
                                  related set-up fees ratably over the term of the
                                  contract.
  We
                                  provide outsourcing services to our clients. Under
                                  these arrangements we assume
                                  all responsibilities for a healthcare organization’s IT operations using our
                                  employees. Our outsourcing services include facilities
                                  management, network
                                  outsourcing and transition management. These arrangements
                                  typically range from
                                  five to ten years in duration. Revenues from these
                                  arrangements are recognized
                                  when services are performed.
  We
                                  record
                                  reimbursable out-of-pocket expenses in both systems
                                  and services revenues and as
                                  a direct cost of systems and services revenues
                                  in accordance with EITF Issue No.
                                  01-14, *Income
                                  Statement Characterization of Reimbursements Received
                                  for “Out-of-Pocket”
Expenses Incurred* (“EITF
                                  01-14”) *.* EITF
                                  01-14 requires reimbursable out-of-pocket expenses
                                  incurred to be characterized
                                  as revenue in the statement of operations. In the
                                  quarter ended March 31, 2006
                                  and 2005, reimbursable out-of-pocket expenses were
                                  $1.9 and $1.7 million
                                  respectively.
 
 In
                                  accordance with EITF Issue No. 00-10 *,
                                  Accounting for Shipping and Handling Fees,* we
                                  have
                                  classified the re-imbursement by clients of shipping
                                  and handling costs as
                                  revenue and the associated cost as a component
                                  of costs of systems and services
                                  revenues.
  If
                                  other
                                  judgments or assumptions were used in the evaluation
                                  of our revenue
                                  arrangements, the timing and amounts of revenue
                                  recognized may have been
                                  significantly different.
  *Stock
                                  - Based Compensation*
 
 Prior
                                  to
                                  January 1, 2006, we accounted for our stock-based
                                  employee compensation
                                  arrangements under the intrinsic value method prescribed
                                  by APB No. 25, as
                                  allowed by SFAS No. 123, as amended by SFAS No.
                                  148. As a result, no expense was
                                  recognized for options to purchase our common stock
                                  that were granted with an
                                  exercise price equal to fair market value at the
                                  date of grant and no expense
                                  was recognized in connection with purchases under
                                  our employee stock purchase
                                  plan for the year ended December
                                  31, 2005, nor in the three-month period ended March
                                  31, 2005. In December 2004,
                                  FASB issued SFAS No. 123(R), which amended SFAS
                                  No. 123. SFAS No. 123(R)
                                  requires measurement of the cost of share-based
                                  payments to employees, including
                                  grants of employee stock options, to be recognized
                                  in the financial statements
                                  based on their fair values beginning with the first
                                  interim or annual period
                                  after June 15, 2005. Subsequent to the effective
                                  date, the pro forma disclosures
                                  previously permitted under SFAS No. 123 are no
                                  longer an alternative to
                                  financial statement recognition. Effective January
                                  1, 2006, we have adopted SFAS
                                  No. 123(R) using the modified prospective method.
                                  Under this method,
                                  compensation cost recognized during the three-month
                                  period ended March 31, 2006,
                                  includes: (a) compensation cost for all share-based
                                  payments granted prior to,
                                  but not yet vested as of January 1, 2006, based
                                  on the grant date fair value
                                  estimated in accordance with the original provisions
                                  of SFAS No. 123 amortized
                                  over the options’ vesting period, and (b) compensation cost for all
                                  share-based
                                  payments granted subsequent to January 1, 2006,
                                  based on the grant-date fair
                                  value estimated in accordance with the provisions
                                  of SFAS No. 123(R) amortized
                                  on a straight-line basis over the options’ vesting period. The fair value is
                                  estimated at the date of grant using the Black
                                  - Scholes option pricing model
                                  with weighted average assumptions for the activity
                                  under our stock plans. Option
                                  pricing model input assumptions such as expected
                                  term, expected volatility, and
                                  risk-free interest rate, impact the fair value
                                  estimate. Further, the forfeiture
                                  rate impacts the amount of aggregate compensation.
                                  These assumptions are
                                  subjective and generally require significant analysis
                                  and judgment to develop.
                                  When estimating fair value, some of
  18
  the
                                  assumptions were based on or determined from external
                                  data (for example the risk
                                  free interest rate) and other assumptions were
                                  derived from our historical
                                  experience with share-based payment arrangements
                                  (for example, volatility and
                                  expected term). The appropriate weight to place
                                  on historical experience is a
                                  matter of judgment, based on relevant facts and
                                  circumstances. Pro forma results
                                  for prior periods have not been restated. Implementation
                                  of SFAS No. 123(R)
                                  contributed $2.9 million to the current quarter
                                  loss of $(8.0) million The
                                  adoption of SFAS No. 123(R) had no impact on cash
                                  flows from operations or
                                  financing activities.
 
 *Allowance
                                  for Doubtful Accounts*
  In
                                  evaluating the collectibility of our accounts receivable,
                                  we assess a number of
                                  factors, including a specific client’s ability to meet its financial obligations
                                  to us, as well as general factors such as the length
                                  of time the receivables are
                                  past due and historical collection experience.
                                  Based on these assessments, we
                                  record a reserve for specific account balances
                                  as well as a reserve based on our
                                  historical experience for bad debt to reduce the
                                  related receivables to the
                                  amount we ultimately expect to collect from clients.
                                  If circumstances related to
                                  specific clients change, or economic conditions
                                  deteriorate such that our past
                                  collection experience is no longer relevant, our
                                  estimate of the recoverability
                                  of our accounts receivable could be further reduced
                                  from the levels provided for
                                  in the consolidated financial statements.
  *Capitalized
                                  Software Development Costs*
  We
                                  capitalize software development costs in accordance
                                  with FASB Statement
                                  No. 86 “Accounting for the Costs of Computer Software to
                                  Be Sold, Leased,
                                  or Otherwise Marketed.” We capitalize software development costs incurred
                                  subsequent to establishing technological feasibility
                                  of the software being
                                  developed. These costs include salaries, benefits,
                                  consulting and other directly
                                  related costs incurred in connection with coding
                                  and testing software.
                                  Capitalization ceases when the software is generally
                                  released for sale to
                                  clients, at which time amortization of the capitalized
                                  costs begins. At each
                                  balance sheet date, we perform a detailed assessment
                                  of our capitalized software
                                  development costs which includes a review of, among
                                  other factors, projected
                                  revenues, client demand requirements, software
                                  lifecycle, changes in software
                                  and hardware technologies, and software development
                                  plans. Based on this
                                  analysis we record adjustments, when appropriate,
                                  to reflect the net realizable
                                  value of our capitalized software development costs.
                                  The estimates of expected
                                  future revenues generated by the software, the
                                  remaining economic life of the
                                  software, or both, could change, materially affecting
                                  the carrying value of
                                  capitalized software development costs, as well
                                  as our consolidated operating
                                  results in the period of change.
  *Warranty
                                  Reserve*
  The
                                  agreements that we use to license our software
                                  include a limited warranty
                                  providing that our software, in its unaltered form,
                                  will perform substantially
                                  in accordance with the related documentation. Warranty
                                  costs are charged to
                                  costs of systems and services revenues when they
                                  are probable and reasonably
                                  estimable. In determining this warranty reserve,
                                  we used significant judgments
                                  and estimates for the additional professional service
                                  hours and third party
                                  costs that will be necessary to remedy this issue
                                  on a client-by-client basis.
                                  The timing and amount of our warranty reserve could
                                  have been different if we
                                  had used other
                                  judgments or assumptions in our evaluation.
  19
 **THREE
                                  MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS
                                  ENDED MARCH 31, 2005 (In
                                  thousands)**
 Three
                                            Months Ended March 31, 2006
                                        
                                        Three
                                            Months Ended March 31, 20052006
                                        
                                        %
                                            of Total Revenues
                                        
                                        2005
                                        
                                        %
                                            of Total Revenues
                                        
                                        Change
                                            $
                                        
                                        Change
                                            %RevenuesSystems
                                            and services
                                        
                                        $
                                        96,223
                                        
                                        
                                        95.5
                                        %
                                        $
                                        83,128
                                        
                                        
                                        98.5
                                        %
                                        $
                                        13,095
                                        
                                        
                                        15.8
                                        %Hardware
                                        
                                        
                                        4,561
                                        
                                        
                                        4.5
                                        %
                                        
                                        1,307
                                        
                                        
                                        1.5
                                        %
                                        
                                        3,254
                                        
                                        
                                        249.0
                                        %Total
                                            revenues
                                        
                                        
                                        100,784
                                        
                                        
                                        100.0
                                        %
                                        
                                        84,435
                                        
                                        
                                        100.0
                                        %
                                        
                                        16,349
                                        
                                        
                                        19.4
                                        %Costs
                                            and expenses:Costs
                                            of systems and services
                                        
                                        
                                        56,458
                                        
                                        
                                        56.0
                                        %
                                        
                                        52,712
                                        
                                        
                                        62.4
                                        %
                                        
                                        3,746
                                        
                                        
                                        7.1
                                        %Costs
                                            of hardware revenues
                                        
                                        
                                        3,651
                                        
                                        
                                        3.6
                                        %
                                        
                                        1,101
                                        
                                        
                                        1.3
                                        %
                                        
                                        2,550
                                        
                                        
                                        231.6
                                        %Sales
                                            and marketing
                                        
                                        
                                        16,269
                                        
                                        
                                        16.1
                                        %
                                        
                                        17,729
                                        
                                        
                                        21.0
                                        %
                                        
                                        (1,460
                                        )
                                        
                                        -8.2
                                        %Research
                                            and development
                                        
                                        
                                        16,962
                                        
                                        
                                        16.8
                                        %
                                        
                                        12,576
                                        
                                        
                                        14.9
                                        %
                                        
                                        4,386
                                        
                                        
                                        34.9
                                        %General
                                            and administrative
                                        
                                        
                                        5,640
                                        
                                        
                                        5.6
                                        %
                                        
                                        4,356
                                        
                                        
                                        5.2
                                        %
                                        
                                        1,284
                                        
                                        
                                        29.5
                                        %Depreciation
                                            and amortization
                                        
                                        
                                        3,802
                                        
                                        
                                        3.8
                                        %
                                        
                                        3,683
                                        
                                        
                                        4.4
                                        %
                                        
                                        119
                                        
                                        
                                        3.2
                                        %Restructuring
                                            charge
                                        
                                        
                                        7,198
                                        
                                        
                                        7.1
                                        %
                                        
                                        -
                                        
                                        
                                        0.0
                                        %
                                        
                                        7,198Total
                                            costs and expenses
                                        
                                        
                                        109,980
                                        
                                        
                                        109.1
                                        %
                                        
                                        92,157
                                        
                                        
                                        109.1
                                        %
                                        
                                        17,823
                                        
                                        
                                        19.3
                                        %Loss
                                            from operations
                                        
                                        
                                        (9,196
                                        )
                                        
                                        -9.1
                                        %
                                        
                                        (7,722
                                        )
                                        
                                        -9.1
                                        %
                                        
                                        (1,474
                                        )Interest
                                            income, net
                                        
                                        
                                        1,149
                                        
                                        
                                        1.1
                                        %
                                        
                                        561
                                        
                                        
                                        0.7
                                        %
                                        
                                        588
                                        
                                        
                                        104.8
                                        %Loss
                                            before income taxes
                                        
                                        
                                        (8,047
                                        )
                                        
                                        -8.0
                                        %
                                        
                                        (7,161
                                        )
                                        
                                        -8.5
                                        %
                                        
                                        (886
                                        )Provision
                                            for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        0.0
                                        %
                                        
                                        -
                                        
                                        
                                        0.0
                                        %
                                        
                                        -Net
                                            loss
                                        
                                        $
                                        (8,047
                                        )
                                        
                                        -8.0
                                        %
                                        $
                                        (7,161
                                        )
                                        
                                        -8.5
                                        %
                                        $
                                        (886
                                        )
                                        
                                        -12.4
                                        %Basic
                                            and diluted loss per common share
                                        
                                        $
                                        (0.16
                                        )
                                        
                                        
                                        
                                        $
                                        (0.15
                                        )
                                        
                                        
                                        
                                        $
                                        (0.01
                                        )
  **RESULTS
                                    OF OPERATIONS**
 
 Total
                                    revenues increased $16.3 million, or 19.4%, to
                                    $100.8 million for the quarter
                                    ended March 31, 2006, compared with $84.4 million
                                    for the first quarter of
                                    2005.
 
 Systems
                                    and services revenues increased $13.1 million,
                                    or 15.8%, to $96.2 million for
                                    the quarter ended March 31, 2006, compared with
                                    $83.1 million for the first
                                    quarter of 2005. The increase in systems and
                                    services revenues was primarily a
                                    result of an increase in revenues associated
                                    with revenues recognized on a
                                    monthly basis including software, maintenance,
                                    outsourcing and remote hosting
                                    which increased $7.5 million or 12.5% over the
                                    prior year. Additionally,
                                    professional services revenues which include
                                    implementation and consulting
                                    related services were $23.6 million, an increase
                                    of $7.5 million or 46.0% over
                                    the prior year. Revenues related to software
                                    and networking services were $5.5
                                    million, a decrease of $1.8 million over the
                                    prior year.
 
 The
                                    increase in revenues from software, maintenance,
                                    outsourcing and remote hosting
                                    was primarily related to higher sales volumes
                                    in the second half of 2005. The
                                    higher sales volumes were associated with successful
                                    sales of our advanced
                                    clinical systems as well as outsourcing and remote
                                    hosting related services
                                    which is the result of an ongoing industry-wide
                                    trend in the adoption of such
                                    systems. The increase in professional services
                                    was related to heightened
                                    activity with customer implementations of our
                                    software solutions. These
                                    activities are expected to remain at higher levels
                                    in 2006 as nearly 100
                                    customers are in the process of upgrading their
                                    software applications.
                                    Additionally, we have experienced a trend of
                                    a higher volume of professional
                                    services being purchased by our customers as
                                    they implement our applications.
                                    The decrease in software and networking services
                                    was primarily due to a lower
                                    volume of these transactions in 2006.
  20
  Hardware
                                    revenues increased $3.3 million, or 249.0%, to
                                    $4.6 million for the quarter
                                    ended March 31, 2006, compared with $1.3 million
                                    for the first quarter of 2005.
                                    We expect hardware and networking services revenue
                                    to continue to fluctuate on a
                                    quarterly basis. During the next several years
                                    we expect to enhance our
                                    marketing effort around remote hosting to expand
                                    this portion of our business.
 
 The
                                    adoption of SFAS No. 123(R) on January 1, 2006,
                                    which resulted in the expensing
                                    of stock based compensation during the current
                                    quarter, impacted costs and
                                    expenses discussed in more detail below as follows
                                    (in
                                    thousands):
 Three
                                              Months Ended March 31, 2006Costs
                                              of systems & services revenues
                                          
                                          $
                                          811Sales
                                              and marketing
                                          
                                          
                                          553Research
                                              and development
                                          
                                          
                                          239General
                                              and administrative
                                          
                                          
                                          1,277Total
                                              stock-based compensation expense
                                          
                                          $
                                          2,880
  Costs
                                      of
                                      systems and services revenues increased $3.7
                                      million, or 7.1%, to $56.5 million,
                                      for the quarter ended March 31, 2006, compared
                                      to $52.7 million for the first
                                      quarter of 2005. The increase in costs of systems
                                      and services revenues was as a
                                      result of the increase in higher volumes of
                                      outsourcing, remote hosting and the
                                      delivery of professional services, the impact
                                      of adopting 123(R) as well as an
                                      increase in amortization of capitalized software
                                      development costs, discussed in
                                      further detail below. Gross margins on systems
                                      and services revenue were 41.3%
                                      for the quarter ended March 31, 2006 compared
                                      to 36.6% for the first quarter of
                                      2005. The increase in gross margins was primarily
                                      a result of an improvement in
                                      revenue mix.
 
 Costs
                                      of
                                      hardware revenues increased $2.6 million, or
                                      231.6%, to $3.7 million for the
                                      quarter ended March 31, 2006, compared to $1.1
                                      million for the first quarter of
                                      2005. The increase in the cost of hardware
                                      revenues was attributable to the
                                      increase in hardware revenues discussed above.
                                      Gross margins on hardware revenue
                                      were 20.0% in the first quarter of 2006 compared
                                      to 15.8% in first quarter 2005.
 
 Sales
                                      and
                                      marketing expenses decreased $1.5 million,
                                      or 8.2%, to $16.3 million for the
                                      quarter ended March 31, 2006, compared to $17.7
                                      million for the first quarter of
                                      2005. The decrease in sales and marketing expenses
                                      was primarily related to
                                      lower expenditures in the quarter related to
                                      trade shows and other marketing
                                      events. The current quarter restructuring initiative
                                      also had a positive impact
                                      on sales and marketing expenditures during
                                      the current quarter. We do not expect
                                      sales and marketing expense to continue at
                                      these lower levels for the rest of
                                      2006.
 
 Research
                                      and development expenses increased $4.4 million,
                                      or 34.9%, to $17.0 million, for
                                      the quarter ended March 31, 2006, compared
                                      to $12.6 million for the first
                                      quarter of 2005. The increase in research and
                                      development expense was primarily
                                      related to a decrease in capitalized software
                                      development costs of $4.9 million
                                      from $6.5 million in the quarter ended March
                                      31, 2005, to $1.6 million for the
                                      quarter ended March 31, 2006. Gross research
                                      and development costs were $18.3
                                      million in the quarter, compared to $19.0 million
                                      in the first quarter of 2005.
                                      The decrease in capitalized software was due
                                      to a lower level of costs
                                      associated with coding and development as a
                                      result of the release of SunriseXA
                                      4.5 in January 2006 and the release of SunriseXA
                                      4.0 in March 2005. We also made
                                      a concentrated effort in the current quarter
                                      to dedicate research and
                                      development resource on reducing our backlog
                                      of open customer support cases as
                                      part of our focus on customer service. Amortization
                                      of capitalized software
                                      development costs, which is included as a component
                                      of cost of systems and
                                      services revenues, increased by approximately
                                      $1.2 million, to $4.5 million for
                                      the three months ended March 31, 2006, compared
                                      to $3.3 million for the first
                                      quarter of 2005. We expect capitalized software
                                      development costs to increase
                                      during the remainder of 2006 as we begin to
                                      focus more heavily on new
                                      development initiatives. For the year, we expect
                                      capitalized software
                                      development costs to approximate 20% of gross
                                      research and development
                                      expenditures, with amortization of capitalized
                                      software development costs
                                      slightly exceeding capitalization. Ultimately,
                                      we expect the effect of
                                      amortization and capitalization to be approximately
                                      neutral over a calendar
                                      year, although not necessarily in individual
                                      quarters.
 
 General
                                      and administrative expenses increased $1.3
                                      million, or 29.5%, to $5.6 million,
                                      for the quarter ended March 31, 2006, compared
                                      to $4.4 million for the first
                                      quarter of 2005. The increase in expenses was
                                      primarily related to stock based
                                      compensation costs of $1.3 million as a result
                                      of the adoption of SFAS 123(R) as
                                      described previously.
  21
  Depreciation
                                      and amortization increased $119,000, or 3.2%,
                                      to $3.8 million for the quarter
                                      ended March 31, 2006, compared to $3.7 million,
                                      for the first quarter of 2005.
                                      The increase was primarily the result of higher
                                      depreciation related to fixed
                                      assets to increase capacity at our Technology
                                      Solutions Center.
 
 In
                                      the
                                      quarter ended March 31, 2006, we recorded a
                                      restructuring charge of $7.2 million
                                      as a result of a reduction in headcount of
                                      approximately 100 individuals and the
                                      reorganization of our senior management team.
                                      This initiative was undertaken to
                                      better align our organization, reduce costs
                                      and to re-invest some of the cost
                                      savings into client-related activities including
                                      client support and professional
                                      services. At March 31, 2006, the remaining
                                      unpaid liability was $3.9 million
which
                                      we
                                      expect to pay out during 2006.  We expect to incur additional
                                      restructuring related charges of approximately
                                      $2.0 million which will impact
                                      the second quarter of 2006.
 
 Interest
                                      income increased $588,000, or 104.8%, to $1.1
                                      million for the quarter ended
                                      March 31, 2006, compared to $561,000 for the
                                      first quarter of 2005. The increase
                                      was due to an improvement in yields related
                                      to higher interest rates in the
                                      quarter on higher cash balances.
 
 As
                                      a
                                      result of these factors, we had a net loss
                                      of $(8.0) million for the quarter
                                      ended March 31, 2006, compared to a net loss
                                      of $(7.2) million for the first
                                      quarter in 2005.
  LIQUIDITY
                                      AND CAPITAL RESOURCES
 
 During
                                      the quarter ended March 31, 2006, operations
                                      used $10.1 million of cash,
                                      primarily related to the payment of year-end
                                      bonuses and commissions, and costs
                                      associated with the restructuring initiative.
                                      Investing activities used $51.8
                                      million of cash, consisting of a net $44.5
                                      million of purchases of marketable
                                      securities, $5.7 million for the purchase of
                                      property and equipment and $1.6
                                      million for the funding of capitalized software
                                      development costs. The purchases
                                      of property and equipment was related to our
                                      continued investment in the
                                      infrastructure of our Technology Solutions
                                      Center for the expansion of our
                                      remote hosting services as well as our Oracle
                                      ERP implementation. Financing
                                      activities provided $21.0 million of cash from
                                      the exercise of stock options.
                                      Stock option exercises were higher than usual
                                      in the quarter because option
                                      holders whose employment was terminated in
                                      connection with our restructuring
                                      exercised their options.
 
 As
                                      of
                                      March 31, 2006, our principal source of liquidity
                                      is our combined cash and
                                      marketable securities balance of $118.2 million.
                                      Our future liquidity
                                      requirements will depend on a number of factors
                                      including, among other things,
                                      the timing and level of our new sales volumes,
                                      the cost of our development
                                      efforts related to SunriseXA, the success and
                                      market acceptance of our future
                                      product releases, and other related items.
                                      As of March 31, 2006, we had
                                      approximately $840,000 in commitments for expenditures
                                      related to the Oracle ERP
                                      implementation. We believe that our current
                                      cash and marketable securities
                                      balances, combined with our anticipated cash
                                      collections from customers will be
                                      adequate to meet our liquidity requirements
                                      through 2006.
  ITEM
                                      3.
                                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
                                      MARKET RISK
 
 We
                                      do not
                                      currently use derivative financial instruments.
                                      We generally invest in high
                                      quality debt instruments with relatively short
                                      maturities. Based upon the nature
                                      of our investments, we do not expect any material
                                      loss from our
                                      investments.
  22
 Investments
                                      in both fixed rate and floating rate interest
                                      earning instruments carry a degree
                                      of interest rate risk. Fixed rate securities
                                      may have their fair market value
                                      adversely impacted due to a rise in interest
                                      rates, while floating rate
                                      securities may produce less income than expected
                                      if interest rates fall. Due in
                                      part to these factors, our future investment
                                      income may fall short of
                                      expectations due to changes in interest rates
                                      or we may suffer losses in
                                      principal if forced to sell securities that
                                      have seen a decline in market value
                                      due to changes in interest rates. A hypothetical
                                      10% increase or decrease in
                                      interest rates, however, would not have a material
                                      adverse effect on our
                                      financial condition.
  The
                                      following table illustrates potential fluctuation
                                      in annualized interest income
                                      based upon hypothetical values for blended
                                      interest rates and cash and
                                      marketable securities account balances.
 Combined
                                                cash and cash equivalents andmarketable
                                                securities balances (in thousands)Hypothetical
                                                Interest Rate
                                            
                                            $
                                            100,000
                                            
                                            $
                                            110,000
                                            
                                            $
                                            120,0001.5%
                                            
                                            
                                            1,500
                                            
                                            
                                            1,650
                                            
                                            
                                            1,8002.0%
                                            
                                            
                                            2,000
                                            
                                            
                                            2,200
                                            
                                            
                                            2,4002.5%
                                            
                                            
                                            2,500
                                            
                                            
                                            2,750
                                            
                                            
                                            3,0003.0%
                                            
                                            
                                            3,000
                                            
                                            
                                            3,300
                                            
                                            
                                            3,6003.5%
                                            
                                            
                                            3,500
                                            
                                            
                                            3,850
                                            
                                            
                                            4,2004.0%
                                            
                                            
                                            4,000
                                            
                                            
                                            4,400
                                            
                                            
                                            4,800*
                                                This sensitivity analysis is not
                                                a forecast of future interest
                                                income.
  We
                                      account for cash equivalents and marketable
                                      securities in accordance with SFAS
                                      No. 115. “Accounting for Certain Investments in Debt
                                      and Equity Securities.”
Cash equivalents are short-term highly liquid
                                      investments with original maturity
                                      dates of three months or less. Cash equivalents
                                      are carried at cost, which
                                      approximates fair market value.
 We
                                        do not
                                        currently enter into foreign currency hedge
                                        transactions. Through March 31,
                                        2006, foreign currency fluctuations have
                                        not had a material impact on our
                                        financial position or results of operations.
 
 ITEM
                                        4.
                                        CONTROLS AND PROCEDURES
  Our
                                        management, with the participation of our
                                        chief executive officer and chief
                                        financial officer, evaluated the effectiveness
                                        of our disclosure controls and
                                        procedures as defined in Rule 13a-15(e) under
                                        the Securities Exchange Act of
                                        1934 (the “Exchange Act”) as of March 31, 2006.  Our disclosure controls
                                        and procedures are designed to provide reasonable
                                        assurance of achieving their
                                        objectives of ensuring that information we
                                        are required to disclose in the
                                        reports we file or submit under the Exchange
                                        Act is recorded, processed,
                                        summarized and reported, within the time
                                        periods specified in the SEC’s rules
                                        and forms.  There is no assurance that our disclosure
                                        controls and
                                        procedures will operate effectively under
                                        all circumstances.  Based upon
                                        the evaluation described above our chief
                                        executive officer and chief financial
                                        officer concluded that, as of March 31, 2006,
                                        our disclosure controls and
                                        procedures were effective at the reasonable
                                        assurance level.
  No
                                        change
                                        in our internal control over financial reporting
                                        (as defined in Rules 13a-15(f)
                                        and 15d-15(f) under the Exchange Act) occurred
                                        during the quarter ended March
                                        31, 2006 that has materially affected, or
                                        is reasonably likely to materially
                                        affect, our internal control over financial
                                        reporting.
 
 The
                                        Company is in the process of implementing
                                        an Oracle ERP system which is expected
                                        to go live during the second quarter of fiscal
                                        2006. As a result of the
                                        implementation, it is anticipated that there
                                        will be changes to the design of
                                        our internal controls over financial reporting.
 
 23
 PART
                                        II.
 
 ITEM
                                        1.
                                        LEGAL PROCEEDINGS
 
 The
                                        Company and its subsidiaries are from time
                                        to time parties to legal proceedings,
                                        lawsuits and other claims incident to their
                                        business activities. Such matters
                                        may include, among other things, assertions
                                        of contract breach or intellectual
                                        property infringement, claims for indemnity
                                        arising in the course of our
                                        business and claims by persons whose employment
                                        with us has been terminated.
                                        Such matters are subject to many uncertainties
                                        and outcomes are not predictable
                                        with assurance. Consequently, management
                                        is unable to ascertain the ultimate
                                        aggregate amount of monetary liability, amounts
                                        which may be covered by
                                        insurance or recoverable from third parties,
                                        or the financial impact with
                                        respect to these matters as of the date of
                                        this report. However, based on our
                                        knowledge at the time of this report, management
                                        believes that the final
                                        resolution of such matters pending at the
                                        time of this report, individually and
                                        in the aggregate, will not have a material
                                        adverse effect upon our consolidated
                                        financial position, results of operations
                                        or cash flows.
 
 ITEM
                                        1A.
                                        RISK FACTORS
 
 Many
                                        risks affect our business.  These risks include, but are not limited
                                        to,
                                        those described below, each of which may
                                        be relevant to decisions regarding
                                        ownership of our stock.  We have attempted to organize the description
                                        of
                                        these risks into logical groupings to enhance
                                        readability, but many of the risks
                                        interrelate or could be grouped in other
                                        ways, so no special significance should
                                        be attributed to these groupings.  Any of these risks could have a
                                        significant adverse effect on our business,
                                        financial condition or results of
                                        operations.
  **Risks
                                        relating to development and operation of
                                        our software**
  ***Since
                                        October 2003, we have worked to overcome
                                        the effects of technical issues we
                                        experienced at that time, and the success
                                        of our recent software releases,
                                        particularly Sunrise Clinical Manager 4.5
                                        XA, is critical.***
  ****** In
                                        October 2003, we announced the existence of response
                                        time issues within
                                        some components of the version of our next-generation
                                        core clinical software
                                        that we were developing at that time. We
                                        concluded that this was attributable to
                                        the technical design of the software, which
                                        did not adequately support the
                                        throughput required in the highly interactive
                                        patient care
                                        environment.   These issues harmed our reputation in the
                                        marketplace
                                        and set back our software development plans.  In addition, they resulted in
                                        significant expense associated with re-development
                                        and warranty claims. 
Our 2003 operating results include a $1.2
                                        million write-down of capitalized
                                        software development costs for some of our
                                        software components, and to date we
                                        have recorded provisions related to warranty
                                        costs of $4.6 million. We
                                        still have warranty and related issues with
                                        clients associated with the October
                                        2003 problem.  Our sales bookings, market position, and
                                        financial
                                        performance have suffered as a result.
  We
                                        took
                                        steps to address these issues, and our subsequent
                                        releases of Sunrise Clinical
                                        Manager 3.5 XA (3.5) in June 2004 and Sunrise Clinical Manager 4.0 XA
                                        (4.0)
                                        in March 2005 to date have not manifested these same
                                        throughput
                                        shortcomings.  Combined, these versions have been installed
                                        in
                                        approximately 60 locations; we believe they
                                        have performed well and achieved
                                        market acceptance.  However, they are still relatively recent
                                        releases
                                        and issues may appear in the future.  Due to our recent history, the
                                        marketplace can be expected to be particularly
                                        sensitive to any future technical
                                        issues we may encounter with our software,
                                        so any serious issues associated with
                                        3.5 or 4.0 that may emerge could seriously
                                        impair our reputation, sales, client
                                        relationships and results of operations.
  We
                                        believe that Sunrise Clinical Manager 4.5
                                        XA (4.5), which we released in January
                                        2006, largely completes the development objectives
                                        that we had envisioned before
                                        October 2003.  Many clients, investors and market observers
                                        have
                                        anticipated the 4.5 release as an important
                                        milestone in the evolution of our
                                        software offering and our market position.  However, 4.5 has not yet been
                                        widely implemented in clinical environments,
                                        so it is too early to assess its
                                        operational performance.  It is an ambitious software release that
                                        incorporates a large number of new features
                                        and functions and was completed
                                        relatively quickly.  As is typical with new software releases
                                        in general,
                                        4.5 may require additional work to add functionality
                                        and to address issues that
                                        may be discovered as the software comes into
                                        use in our client base.  If
                                        these issues are significant, our reputation,
                                        sales, client relationships and
                                        results of operations could be significantly
                                        impaired.
  ***Our
                                        software may not operate properly, which
                                        could damage our reputation and impair
                                        our sales.***
  Software
                                        development is time consuming, expensive
                                        and complex.  Unforeseen
                                        difficulties can arise. We may encounter
                                        technical obstacles, and it is possible
                                        that we could discover additional problems
                                        that prevent our software from
                                        operating properly. If our software contains
                                        errors or does not function
                                        consistent with product specifications or
                                        client expectations, clients could
                                        assert liability claims against us and/or
                                        attempt to cancel their contracts with
                                        us.  It is also possible that future releases
                                        of our software, which would
                                        typically include additional features for
                                        our software, may be delayed. This
                                        could damage our reputation and impair our
                                        sales.
  ***Our
                                        software development efforts may not meet
                                        the needs of our clients, which could
                                        adversely affect our results of operations.***
  We
                                        continuously strive to develop new software,
                                        and improve our existing software
                                        to add new features and functionality. We
                                        schedule and prioritize these
                                        development efforts according to a variety
                                        of factors, including our perceptions
                                        of market trends, client requirements, and
                                        resource availability. Our software
                                        is complex and requires a significant investment
                                        of time and resources to
                                        develop, test and introduce into use. Sometimes
                                        this takes longer than we
                                        expect. Sometimes we encounter unanticipated
                                        difficulties that require us to
                                        re-direct or scale-back our efforts. Sometimes
                                        we change our plans in response
                                        to changes in client requirements, market
                                        demands, resource availability,
                                        regulatory requirements, or other factors.
                                        All of this can result in
                                        acceleration of some initiatives and delay
                                        of others.  If we make the wrong
                                        choices or do not manage our development
                                        efforts well, we may fail to produce
                                        software that responds appropriately to our
                                        clients’ needs or fails to meet
                                        client expectations regarding new or enhanced features and
  24
  functionality.
                                         If we fail to deliver software within the
                                        timeframes and with the features
                                        and functionality as described in our product
                                        specifications, we could be
                                        subject to significant contractual damages.
  ***Market
                                        changes or mistaken development decisions
                                        could decrease the demand for our
                                        software, which could harm our business and
                                        decrease our
                                        revenues.***
  The
                                        healthcare information technology market
                                        is characterized by rapidly changing
                                        technologies, evolving industry standards
                                        and new software introductions and
                                        enhancements that may render existing software
                                        obsolete or less competitive. Our
                                        position in the market could erode rapidly
                                        due to the development of regulatory
                                        or industry standards that our software may
                                        not fully meet, or due to changes in
                                        the features and functions of competing software,
                                        as well as the pricing models
                                        for such software.  Our future success will depend in part upon
                                        our ability
                                        to enhance our existing software and services,
                                        and to develop and introduce
                                        competing new software and services that
                                        are appropriately priced to meet
                                        changing client and market requirements.
                                        The process of developing software and
                                        services such as those we offer is extremely
                                        complex and is expected to become
                                        more complex and expensive in the future
                                        as new technologies are
                                        introduced.  As we evolve our offering in an attempt to
                                        anticipate and meet
                                        market demand, clients and potential clients
                                        may find our software and services
                                        less appealing.  If software development for the healthcare
                                        information
                                        technology market becomes significantly more
                                        expensive due to changes in
                                        regulatory requirements or healthcare industry
                                        practices, or other factors, we
                                        may find ourselves at a disadvantage to larger
                                        competitors with more financial
                                        resources to devote to development.  If we are unable to enhance our
                                        existing software or develop new software
                                        to meet changing client requirements,
                                        demand for our software could suffer.
  ***Our
                                        software strategy is dependent on the continued
                                        development and support by
                                        Microsoft of its .NET Framework and other
                                        technologies.***
  Our
                                        software strategy is substantially dependent
                                        upon Microsoft’s .NET Framework and
                                        other Microsoft technologies. The .NET Framework,
                                        in particular, is a relatively
                                        new and evolving technology. If Microsoft
                                        were to cease actively supporting .NET
                                        or other technologies, fail to update and
                                        enhance them to keep pace with
                                        changing industry standards, encounter technical
                                        difficulties in the continuing
                                        development of these technologies or make
                                        them unavailable to us, we could be
                                        required to invest significant resources
                                        in re-engineering our software. This
                                        could lead to lost or delayed sales, client
                                        costs associated with platform
                                        changes, unanticipated development expenses
                                        and harm to our reputation, and
                                        would cause our financial results and business
                                        to suffer.
  ***Any
                                        failure by us to protect our intellectual
                                        property, or any misappropriation of
                                        it, could enable our competitors to market
                                        software with similar features, which
                                        could reduce demand for our software.***
  We
                                        are
                                        dependent upon our proprietary information
                                        and technology. Our means of
                                        protecting our proprietary rights may not
                                        be adequate to prevent
                                        misappropriation. The laws of some foreign
                                        countries may not protect our
                                        proprietary rights as fully as do the laws
                                        of the United States. Also, despite
                                        the steps we have taken to protect our proprietary
                                        rights, it may be possible
                                        for unauthorized third parties to copy aspects
                                        of our software, reverse engineer
                                        our software or otherwise obtain and use
                                        information that we regard as
                                        proprietary. In some limited instances, clients
                                        can access source-code versions
                                        of our software, subject to contractual limitations
                                        on the permitted use of the
                                        source code. Furthermore, it may be possible
                                        for our competitors to copy or gain
                                        access to our content. Although our license
                                        agreements with clients attempt to
                                        prevent misuse of the source code or trade
                                        secrets, the possession of our source
                                        code or trade secrets by third parties increases
                                        the ease and likelihood of
                                        potential misappropriation of our software.
                                        Furthermore, others could
                                        independently develop technologies similar
                                        or superior to our technology or
                                        design around our proprietary rights.
  ***Failure
                                        of security features of our software could
                                        expose us to significant expense and
                                        reputational harm.***
  Clients
                                        use our systems to store and transmit highly
                                        confidential patient health
                                        information.  Because of the sensitivity of this information,
                                        security
                                        features of our software are very important.  If, notwithstanding our
                                        efforts, our software security features do not function
                                        properly, or client
                                        systems using our software are compromised,
                                        we could face damages for contract
                                        breach, penalties for violation of applicable
                                        laws or regulations, significant
                                        costs for remediation and re-engineering
                                        to prevent future occurrences, and
                                        serious harm to our reputation.
  **Risks
                                        related to sales and implementation of our
                                        software**
  ***The
                                        length of our sales and implementation cycles
                                        may adversely affect our future
                                        operating results.***
  We
                                        have
                                        experienced long sales and implementation
                                        cycles. How and when to implement,
                                        replace, expand or substantially modify an
                                        information system, or modify or add
                                        business processes, are major decisions for
                                        hospitals, our target client market.
                                        Furthermore, our software generally requires
                                        significant capital expenditures by
                                        our clients. The sales cycle for our software
                                        ranges from 6 to
                                        18 months
  25
  or
                                        more
                                        from initial contact to contract execution.  Our implementation cycle has
                                        generally ranged from 6 to 36 months from contract execution to completion
                                        of implementation. During the sales and implementation
                                        cycles, we will expend
                                        substantial time, effort and resources preparing
                                        contract proposals, negotiating
                                        the contract and implementing the software.
                                        We may not realize any revenues to
                                        offset these expenditures and, if we do,
                                        accounting principles may not allow us
                                        to recognize the revenues during corresponding
                                        periods. Additionally, any
                                        decision by our clients to delay purchasing
                                        or implementing our software may
                                        adversely affect our revenues.
  ***We
                                        may experience implementation delays that
                                        could harm our reputation and violate
                                        contractual commitments.***
  Some
                                        of
                                        our software is complex and requires a lengthy
                                        and expensive implementation
                                        process.  Each client’s situation is different, and unanticipated
                                        difficulties and delays may arise as a result
                                        of failures by us or the client to
                                        meet our respective implementation responsibilities.
 Because of the
                                        complexity of the implementation process,
                                        delays are sometimes difficult to
                                        attribute solely to us or the client.  Implementation delays could motivate
                                        clients to delay payments or attempt to cancel
                                        their contracts with us or seek
                                        other remedies from us. Any inability or
                                        perceived inability to implement
                                        consistent with a client’s schedule may be a competitive disadvantage
                                        for us as
                                        we pursue new business.  Implementation also requires our clients
                                        to make a
                                        substantial commitment of their own time
                                        and resources and to make significant
                                        organizational and process changes, and if
                                        our clients are unable to fulfill
                                        their implementation responsibilities in
                                        a timely fashion our projects may be
                                        delayed or become less profitable.
  ***Implementation
                                        costs may exceed expectations, which can
                                        negatively affect our operating
                                        results.***
  Each
                                        client’s circumstances may include unforeseen issues
                                        that make it more difficult
                                        or costly than anticipated to implement our
                                        software. We may fail to project,
                                        price or manage our implementation services
                                        correctly.  If we do not have
                                        sufficient qualified personnel to fulfill
                                        our implementation commitments in a
                                        timely fashion, related revenue may be delayed,
                                        and if we must supplement our
                                        capabilities with expensive third-party consultants,
                                        our costs will
                                        increase.
  **Risks
                                        related to our outsourcing services**
  ***Various
                                        risks could interrupt clients’ access to their data residing in our service
                                        center, exposing us to significant costs.***
  We
                                        provide remote hosting services that involve
                                        running our software and third-
                                        party vendor’s software for clients in our Technology
                                        Solutions Center
                                        (TSC).  The ability to access the systems and the
                                        data the TSC hosts and
                                        supports on demand is critical to our clients.  Our operations and
                                        facilities are vulnerable to interruption
                                        and/or damage from a number of
                                        sources, many of which are beyond our control,
                                        including, without limitation:
                                        (i) power loss and telecommunications failures;
                                        (ii) fire, flood, hurricane and
                                        other natural disasters; (iii) software and
                                        hardware errors, failures or
                                        crashes, and (iv) computer viruses, hacking
                                        and similar disruptive
                                        problems.  We attempt to mitigate these risk through
                                        various means
                                        including redundant infrastructure, disaster
                                        recovery plans, separate test
                                        systems and change control and system security
                                        measures, but our
                                        precautions  may not protect against all problems.  If clients’ access
                                        is interrupted because of problems in the
                                        operation of our facilities, we could
                                        be exposed to significant claims by clients
                                        or their patients, particularly if
                                        the access interruption is associated with
                                        problems in the timely delivery of
                                        medical care.  We must maintain disaster recovery and business
                                        continuity
                                        plans that rely upon third-party providers
                                        of related services, and if those
                                        vendors fail us at a time that our center
                                        is not operating correctly, we could
                                        incur a loss of revenue and liability for
                                        failure to fulfill our contractual
                                        service commitments.  Any significant instances of system downtime
                                        could
                                        negatively affect our reputation and ability
                                        to sell our remote hosting
                                        services.
  ***Any
                                        breach of confidentiality of client or patient
                                        data in our service center could
                                        expose us to significant expense and reputational
                                        harm.***
  We
                                        must
                                        maintain facility and systems security measures
                                        to preserve the confidentiality
                                        of data belonging to our clients and their
                                        patients that resides on computer
                                        equipment in our TSC.  Notwithstanding the efforts we undertake
                                        to protect
                                        data, our measures can be vulnerable to infiltration
                                        as well as unintentional
                                        lapse, and if confidential information is
                                        compromised we could face damages for
                                        contract breach, penalties for violation
                                        of applicable laws or regulations,
                                        significant costs for remediation and re-engineering
                                        to prevent future
                                        occurrences, and serious harm to our reputation.
   ***Recruiting
                                        challenges and higher than anticipated costs
                                        in outsourcing our client’s IT
                                        operations may adversely affect our profitability.***
  We
                                        provide outsourcing services that involve
                                        operating clients’ IT departments
                                        using our employees.  At the initiation of these relationships,
                                        clients
                                        often require us to hire, at substantially
                                        the same compensation, the entire IT
                                        staff that had been performing the
  26
  services
                                        we take on.  In these circumstances our costs may be higher
                                        than we target
                                        unless and until we are able to transition
                                        the workforce, methods and systems to
                                        a more scalable model.  Various factors can make this difficult,
                                        including
                                        geographic dispersion of client facilities
                                        and variation in client needs, IT
                                        environments, and system configurations.  Also, under some circumstances we
                                        may incur unanticipated costs as a successor
                                        employer by inheriting unforeseen
                                        liabilities that the client had to these
                                        employees.  Further, facilities
                                        management contracts require us to provide
                                        the IT services specified by
                                        contract, and in some places it can be difficult
                                        to recruit qualified IT
                                        personnel.  Changes in circumstances or failure to assess
                                        the client’s
                                        environment and scope our services accurately
                                        can mean we must hire more staff
                                        than we anticipated in order to meet our
                                        responsibilities.  If we have to
                                        increase salaries or relocate personnel,
                                        or hire more people than we
                                        anticipated, our costs may increase under
                                        fixed fee contracts.
  ***Inability
                                        to obtain consents needed from third parties
                                        could impair our ability to provide
                                        remote outsourcing services.***
  We
                                        and
                                        our clients need consent from some third-party
                                        software providers as a condition
                                        to running their software in our data center,
                                        or to allowing our employees who
                                        work in client locations under facilities
                                        management arrangements to have access
                                        to their software.  Vendors’ refusal to give such consents, or insistence
                                        upon unreasonable conditions to such consents,
                                        could reduce our revenue
                                        opportunities and make our outsourcing services
                                        less viable for some
                                        clients.
  **Risks
                                        related to the healthcare IT industry and
                                        market**
  ***We
                                        operate in an intensely competitive market
                                        that includes companies that have
                                        greater financial, technical and marketing
                                        resources than we
                                        do.***
  We
                                        face
                                        intense competition in the marketplace. We
                                        are confronted by rapidly changing
                                        technology, evolving user needs and the frequent
                                        introduction of new software to
                                        meet the needs of our current and future
                                        clients. Our principal competitors in
                                        our software business include Cerner Corporation,
                                        Epic Systems Corporation,
                                        Meditech, GE Medical Systems (which recently
                                        acquired IDX Systems Corporation,
                                        formerly a separate competitor), McKesson
                                        Corporation, QuadraMed Corporation and
                                        Siemens AG. Other software competitors include
                                        providers of practice management,
                                        general decision support and database systems,
                                        as well as segment-specific
                                        applications and healthcare technology consultants.  Our services business
                                        competes with large consulting firms such
                                        as Deloitte & Touche and Cap
                                        Gemini, as well as independent providers
                                        of technology implementation and other
                                        services.  Our outsourcing business competes with large
                                        national providers
                                        of technology solutions such as International
                                        Business Machines Corporation
                                        (IBM), Computer Sciences Corp. (CSC), Perot
                                        Systems Corporation, as well as
                                        smaller firms.  Several of our existing and potential competitors
                                        are
                                        better established, benefit from greater
                                        name recognition and have significantly
                                        more financial, technical and marketing resources
                                        than we do.  Some
                                        competitors, particularly those with a more
                                        diversified revenue base or that are
                                        privately held, may have greater flexibility
                                        than we do to compete aggressively
                                        on the basis of price.  We expect that competition will continue
                                        to
                                        increase, which could lead to a loss of market
                                        share or pressure on our prices
                                        and could make it more difficult to grow
                                        our business profitably.
  The
                                        principal factors that affect competition
                                        within our market include software
                                        functionality, performance, flexibility and
                                        features, use of open industry
                                        standards, speed and quality of implementation
                                        and client service and support,
                                        company reputation, price and total cost
                                        of ownership.  We anticipate that
                                        competition will increase as a result of
                                        continued consolidation in both the
                                        information technology and healthcare industries.  We expect large
                                        integrated technology companies to become
                                        more active in our markets, both
                                        through acquisition and internal investment.  There is a finite number of
                                        hospitals and other healthcare providers
                                        in our target market.  As costs
                                        fall, technology improves, and market factors
                                        continue to compel investment by
                                        healthcare organizations in software and
                                        services like ours, market saturation
                                        may change the competitive landscape in favor
                                        of larger competitors with greater
                                        scale.
  ***Clients
                                        that use our legacy software are vulnerable
                                        to
                                        competition.***
  A
                                        significant part of our revenue comes from
                                        relatively high-margin legacy
                                        software that was installed by our clients
                                        many years ago. We attempt to convert
                                        these clients to our newer generation software,
                                        but such conversions require
                                        significant investments of time and resources
                                        by clients. This reduces our
                                        advantage as the incumbent vendor and has
                                        allowed our competitors to target
                                        these clients, with some success.  If we are not successful in retaining a
                                        large portion of these clients by continuing
                                        to support legacy software - which
                                        is increasingly expensive to maintain - or
                                        by converting them to our newer
                                        software, our results of operations will
                                        be negatively affected.
  ***The
                                        healthcare industry faces financial constraints
                                        that could adversely affect the
                                        demand for our software and services.***
  The
                                        healthcare industry faces significant financial
                                        constraints. For example, the
                                        shift to managed healthcare in the 1990’s put pressure on healthcare
                                        organizations to reduce costs, and the Balanced
                                        Budget Act of 1997 dramatically
                                        reduced Medicare reimbursement to healthcare
                                        organizations. Our software often
                                        involves a significant financial commitment
                                        by our clients. Our ability to grow
                                        our
  27
  business
                                        is largely dependent on our clients’ information technology budgets.  If
                                        healthcare information technology spending
                                        declines or increases more slowly
                                        than we anticipate, demand for our software
                                        could be adversely
                                        affected.
  ***Healthcare
                                        industry consolidation could impose pressure
                                        on our software prices, reduce our
                                        potential client base and reduce demand for
                                        our
                                        software.***
  Many
                                        hospitals have consolidated to create larger
                                        healthcare enterprises with greater
                                        market power. If this consolidation trend
                                        continues, it could reduce the size of
                                        our target market and give the resulting
                                        enterprises greater bargaining power,
                                        which may lead to erosion of the prices for
                                        our software. In addition, when
                                        hospitals combine they often consolidate
                                        infrastructure including IT systems,
                                        and acquisition of our clients could erode
                                        our revenue base.
 
 ***Potential
                                        changes in standards applicable to our software
                                        could require us to incur
                                        substantial additional development costs.***
  Integration
                                        and interoperability of the software and
                                        systems provided by various vendors are
                                        important issues in the healthcare industry.  Market forces or regulatory
                                        authorities could cause emergence of software
                                        standards applicable to us, and if
                                        our software is not consistent with those
                                        standards we could be forced to incur
                                        substantial additional development costs
                                        to conform.  If our software is
                                        not consistent with emerging standards, our
                                        market position and sales could be
                                        impaired.
  **Risks
                                        related to our operating results, accounting
                                        controls and
                                        finances**
  ***We
                                        have a history of operating losses and we
                                        cannot predict future
                                        profitability.***
  During
                                        the current quarter, we had a net loss of
                                        $8.0 million. We had a profit of
                                        $485,000 in 2005 although we had a loss from
                                        operations of $2.6 million. We had
                                        a net loss of $32.6 million for the year
                                        ended December 31, 2004. We also
                                        had net losses of $56.0 million in 2003, $29.8 million in 2002 and
                                        $34.0 million in 2000. In 2001, we had net income
                                        of $4.4 million,
                                        although we had a loss from operations of
                                        $1.6 million.  It is not
                                        certain that we will achieve sustained or
                                        increasing profitability.  We may
                                        incur net losses in the future.
  ***Our
                                        operating results may fluctuate significantly
                                        and may cause our stock price to
                                        decline.***
  We
                                        have
                                        experienced significant variations in revenues
                                        and operating results from
                                        quarter to quarter. Our operating results
                                        may continue to fluctuate due to a
                                        number of factors, including:
 
 ·
                                              the
                                                  performance of our software and
                                                  our ability to promptly and efficiently
                                                  address software performance shortcomings
                                                  or warranty
                                                  issues;
 ·
                                              the
                                                  cost, timeliness and outcomes of
                                                  our software development and
                                                  implementation efforts;
 ·
                                              the
                                                  timing, size and complexity of
                                                  our software sales and
                                                  implementations;
 ·
                                              overall
                                                  demand for healthcare information
                                                  technology;
 ·
                                              the
                                                  financial condition of our clients
                                                  and potential
                                                  clients;
 ·
                                              market
                                                  acceptance of new services, software
                                                  and software enhancements by us
                                                  and
                                                  our competitors;
 ·
                                              client
                                                  decisions regarding renewal or
                                                  termination of their
                                                  contracts;
 ·
                                              software
                                                  and price competition;
 ·
                                              the
                                                  relative proportions of revenues
                                                  we derive from software, services
                                                  and
                                                  hardware;
 ·
                                              the
                                                  timing and size of future
                                                  acquisitions;
 ·
                                              personnel
                                                  changes;
 ·
                                              significant
                                                  judgments and estimates made by
                                                  management in the application of
                                                  generally
                                                  accepted accounting principles;
 ·
                                              healthcare
                                                  reform measures and healthcare
                                                  regulation in general;
                                                  and
 ·
                                              fluctuations
                                                  in general economic and financial
                                                  market conditions, including interest
                                                  rates.
  It
                                        is
                                        difficult to predict the timing of revenues
                                        that we receive from software sales,
                                        because the sales cycle can vary depending
                                        upon several factors. These include
                                        the size and terms of the transaction, the
                                        changing business plans of the
                                        client, the effectiveness of the client’s management, general economic
                                        conditions and the regulatory environment.
                                        In addition, the timing of our
                                        revenue recognition could vary considerably
                                        depending upon whether our clients
                                        license our software under our subscription
                                        model or our traditional licensing
                                        arrangements. Because a significant percentage
                                        of our expenses are relatively
                                        fixed, a variation in the timing of sales
                                        and implementations could cause
                                        significant variations in operating results
                                        from quarter to quarter. We believe
                                        that period-to-period comparisons of our
                                        historical results of operations are
                                        not necessarily meaningful. Investors should
                                        not rely on these comparisons as
                                        indicators of future performance.
  28
   ***Early
                                        termination of client contracts could adversely
                                        affect results of
                                        operations.***
  Client
                                        contracts can change or terminate early for
                                        a variety of reasons.  Change
                                        of control, financial issues, or other changes
                                        in client circumstances may cause
                                        us or the client to seek to modify or terminate
                                        a contract.  Further,
                                        either we or the client may generally terminate
                                        a contract for material uncured
                                        breach by the other.  If we breach a contract, we may be required
                                        to refund
                                        money previously paid to us by the client,
                                        or to pay other damages.  Even
                                        if we have not breached, we may deal with
                                        various situations from time to time
                                        for the reasons described above which may
                                        result in the amendment of a
                                        contract.  These steps can result in significant current
                                        period charges
                                        and/or reductions in future revenue.
  ***Because
                                        in many cases we recognize revenues for our
                                        software monthly over the term of a
                                        client contract, downturns or upturns in
                                        sales will not be fully reflected in
                                        our operating results until future periods.***
  We
                                        recognize a significant portion of our revenues
                                        from clients monthly over the
                                        terms of their agreements, which are typically
                                        5-7 years and can be up to
                                        10 years. As a result, much of the revenue that
                                        we report each quarter is
                                        attributable to agreements executed during
                                        prior quarters. Consequently, a
                                        decline in sales, client renewals, or market
                                        acceptance of our software in one
                                        quarter will not necessarily be reflected
                                        in lower revenues in that quarter, and
                                        may negatively affect our revenues and profitability
                                        in future quarters. In
                                        addition, we may be unable to adjust our
                                        cost structure to compensate for these
                                        reduced revenues. This monthly revenue recognition
                                        also makes it difficult for
                                        us to rapidly increase our revenues through
                                        additional sales in any period, as a
                                        significant portion of revenues from new
                                        clients must generally be recognized
                                        over the applicable agreement term.
  ***Payment
                                        defaults by large customers could have significant
                                        negative impact on our
                                        liquidity and overall financial condition.***
  During
                                        the fiscal year ended December 31, 2005,
                                        approximately 40.2 % of our revenues
                                        were attributable to our 20 largest clients.  In addition, approximately
                                        51.7% of our accounts receivable as of December
                                        31, 2005 were attributable to 20
                                        clients. Significant payment defaults by
                                        these clients could have a significant
                                        negative impact on our liquidity and overall
                                        financial condition.
 
 ***Impairment
                                        of intangible assets could increase our expenses.***
  A
                                        significant portion of our assets consists
                                        of intangible assets, including
                                        capitalized development costs, goodwill and
                                        other intangibles acquired in
                                        connection with acquisitions.  Current accounting standards require us to
                                        evaluate goodwill on an annual basis and
                                        other intangibles if certain triggering
                                        events occur, and adjust the carrying value
                                        of these assets to net realizable
                                        value when such testing reveals impairment
                                        of the assets.  Various factors,
                                        including regulatory or competitive changes,
                                        could affect the value of our
                                        intangible assets.  If we are required to write-down the value
                                        of our
                                        intangible assets due to impairment, our
                                        reported expenses will increase,
                                        resulting in a corresponding decrease in
                                        our reported profit.
  ***Failure
                                        to maintain effective internal controls could
                                        adversely affect our operating
                                        results and the market price of our common
                                        stock.***
  Section
                                        404 of the Sarbanes-Oxley Act of 2002 requires
                                        that we maintain internal control
                                        over financial reporting that meets applicable
                                        standards.  If we fail to
                                        maintain effective internal controls and
                                        procedures in accordance with the
                                        requirements of Section 404, as such standards
                                        may be modified, supplemented or
                                        amended, we may be required to disclose our
                                        deficiencies.  If we are
                                        unable, or are perceived as unable, to produce
                                        reliable financial reports due to
                                        internal controls deficiencies, investors
                                        could lose confidence in our reported
                                        financial information and our operating results
                                        and the market price of our
                                        common stock could be adversely affected.
  ***Inability
                                        to obtain additional financing could limit
                                        our ability to conduct necessary
                                        development activities and make strategic
                                        investments.***
  While
                                        our
                                        available cash and cash equivalents and the
                                        cash we anticipate generating from
                                        operations appear at this time to be adequate
                                        to meet our foreseeable needs, we
                                        could incur significant expenses as a result
                                        of unanticipated events in our
                                        business or competitive, regulatory, or other
                                        changes in our market.  As a
                                        result, we may in the future need to obtain
                                        additional financing.  If
                                        additional financing is not available on
                                        acceptable terms, we may not be able to
                                        respond adequately to these changes, which
                                        could adversely affect our operating
                                        results and the market price of our common
                                        stock.
 
 
 
  29
  
 **Risk
                                        of liability to third parties**
  ***Our
                                        software and content are used to assist clinical
                                        decision-making and provide
                                        information about patient medical histories
                                        and treatment plans. If our software
                                        fails to provide accurate and timely information
                                        or is associated with faulty
                                        clinical decisions or treatment, clients,
                                        clinicians or their patients could
                                        assert claims against us that could result
                                        in substantial cost to us, harm our
                                        reputation in the industry and cause demand
                                        for our software to
                                        decline.***
  We
                                        provide software and content that provides
                                        practice guidelines and potential
                                        treatment methodologies, and other information
                                        and tools for use in clinical
                                        decision-making, provides access to patient medical histories
                                        and assists
                                        in creating patient treatment plans. If our
                                        software fails to provide accurate
                                        and timely information, or if our content
                                        or any other element of our software
                                        is associated with faulty clinical decisions
                                        or treatment, we could have
                                        liability to clients, clinicians or patients.
                                        The assertion of such claims,
                                        whether or not valid and ensuing litigation,
                                        regardless of its outcome, could
                                        result in substantial cost to us, divert
                                        management’s attention from operations
                                        and decrease market acceptance of our software.
                                        We attempt to limit by contract
                                        our liability for damages and to require
                                        that our clients assume responsibility
                                        for medical care and approve all system rules
                                        and protocols. Despite these
                                        precautions, the allocations of responsibility
                                        and limitations of liability set
                                        forth in our contracts may not be enforceable,
                                        may not be binding upon patients,
                                        or may not otherwise protect us from liability
                                        for damages. We maintain general
                                        liability and errors and omissions insurance
                                        coverage, but this coverage may not
                                        continue to be available on acceptable terms
                                        or may not be available in
                                        sufficient amounts to cover one or more large
                                        claims against us. In addition,
                                        the insurer might disclaim coverage as to
                                        any future claim. One or more large
                                        claims could exceed our available insurance
                                        coverage.
  Complex
                                        software such as ours may contain errors
                                        or failures that are not detected until
                                        after the software is introduced or updates
                                        and new versions are released. It is
                                        challenging for us to envision and test our
                                        software for all potential problems
                                        because it is difficult to simulate the wide
                                        variety of computing environments
                                        or treatment methodologies that our clients
                                        may deploy or rely upon. Despite
                                        extensive testing by us and clients, from
                                        time to time we have discovered
                                        defects or errors in our software, and such
                                        defects or errors can be expected to
                                        appear in the future.  Defects and errors that are not timely detected
                                        and
                                        remedied could expose us to risk of liability
                                        to clients, clinicians and
                                        patients and cause delays in software introductions
                                        and shipments, result in
                                        increased costs and diversion of development
                                        resources, require design
                                        modifications or decrease market acceptance
                                        or client satisfaction with our
                                        software.
  ***Our
                                        software and our vendors’ software that we include in our offering
                                        could
                                        infringe third-party intellectual property
                                        rights, exposing us to costs that
                                        could be significant.***
  Infringement
                                        or invalidity claims or claims for indemnification
                                        resulting from infringement
                                        claims could be asserted or prosecuted against
                                        us based upon design or use of
                                        software we provide to clients, including
                                        software we develop as well as
                                        software provided to us by vendors. Regardless
                                        of the validity of any claims,
                                        defending against these claims could result
                                        in significant costs and diversion
                                        of our resources, and vendor indemnity might
                                        not be available. The assertion of
                                        infringement claims could result in injunctions
                                        preventing us from distributing
                                        our software, or require us to obtain a license
                                        to the disputed intellectual
                                        property rights, which might not be available
                                        on reasonable terms or at
                                        all.  We might also be required to indemnify our
                                        clients at significant
                                        expense.
  **Risks
                                        related to our strategic relationships and
                                        initiatives**
  ***We
                                        depend on licenses from third parties for
                                        rights to some technology we use, and
                                        if we are unable to continue these relationships
                                        and maintain our rights to this
                                        technology, our business could suffer.***
  We
                                        depend
                                        upon licenses for some of the technology
                                        used in our software from a number of
                                        third-party vendors. Most of these licenses
                                        expire within one to five years, can
                                        be renewed only by mutual consent and may
                                        be terminated if we breach the terms
                                        of the license and fail to cure the breach
                                        within a specified period of time. We
                                        may not be able to continue using the technology
                                        made available to us under
                                        these licenses on commercially reasonable
                                        terms or at all. As a result, we may
                                        have to discontinue, delay or reduce software
                                        shipments until we obtain
                                        equivalent technology, which could hurt our
                                        business. Most of our third-party
                                        licenses are non-exclusive. Our competitors
                                        may obtain the right to use any of
                                        the technology covered by these licenses
                                        and use the technology to compete
                                        directly with us. In addition, if our vendors
                                        choose to discontinue support of
                                        the licensed technology in the future or
                                        are unsuccessful in their continued
                                        research and development efforts, particularly
                                        with regard to Microsoft, we may
                                        not be able to modify or adapt our own software.
  
 
  30
  
 ***Our
                                        offering often includes software modules
                                        provided by third parties, and if these
                                        third parties do not meet their commitments,
                                        our relationships with our clients
                                        could be impaired.***
  Some
                                        of
                                        the software modules we offer to clients
                                        are provided by third parties.  We
                                        often rely upon these third parties to produce
                                        software that meets clients’
needs and to implement and maintain that
                                        software.  If these third parties
                                        fail to fulfill their responsibilities, our
                                        relationships with affected clients
                                        could be impaired, and we could be responsible
                                        to clients for the
                                        failures.  We might not be able to recover from these
                                        third parties for all
                                        of the costs we incur as a result of their
                                        failures.
  ***If
                                        we undertake additional acquisitions, they
                                        may be disruptive to our business and
                                        could have an adverse effect on our future
                                        operations and the market price of
                                        our common stock.***
  An
                                        important element of our business strategy
                                        has been expansion through
                                        acquisitions. Since 1997, we have completed
                                        ten acquisitions.  While there
                                        is no assurance that we will complete any
                                        future acquisitions, any future
                                        acquisitions would involve a number of risks,
                                        including the
                                        following:
 
 ·
                                              The
                                                  anticipated benefits from any acquisition
                                                  may not be achieved. The
                                                  integration of acquired businesses
                                                  requires substantial attention
                                                  from
                                                  management. The diversion of management’s attention and any difficulties
                                                  encountered in the transition process
                                                  could hurt our
                                                  business.
 ·
                                              In
                                                  future acquisitions, we could issue
                                                  additional shares of our capital
                                                  stock, incur additional indebtedness
                                                  or pay consideration in excess
                                                  of
                                                  book value, which could have dilutive
                                                  effect on future net income, if
                                                  any,
                                                  per share.
 ·
                                              New
                                                  business acquisitions must be accounted
                                                  for under the purchase method of
                                                  accounting. These acquisitions
                                                  may generate significant intangible
                                                  assets
                                                  and result in substantial related
                                                  amortization charges to
                                                  us.
 
 **Risks
                                        related to industry regulation**
  ***Potential
                                        regulation by the U.S. Food and Drug Administration
                                        of our software and content
                                        as medical devices could impose increased
                                        costs, delay the introduction of new
                                        software and hurt our business.***
  The
                                        U.S.
                                        Food and Drug Administration, or FDA, is
                                        likely to become increasingly active in
                                        regulating computer software or content intended
                                        for use in the healthcare
                                        setting. The FDA has increasingly focused
                                        on the regulation of computer software
                                        and computer-assisted products as medical
                                        devices under the Food, Drug, and
                                        Cosmetic Act, or the FDC Act. If the FDA
                                        chooses to regulate any of our
                                        software, or third party software that we
                                        resell, as medical devices, it could
                                        impose extensive requirements upon us, including
                                        the following:
 
 ·
                                              requiring
                                                  us to seek FDA clearance of pre-market
                                                  notification submission
                                                  demonstrating substantial equivalence
                                                  to a device already legally
                                                  marketed, or to obtain FDA approval
                                                  of a pre-market approval application
                                                  establishing the safety and effectiveness
                                                  of the
                                                  software;
 ·
                                              requiring
                                                  us to comply with rigorous regulations
                                                  governing the pre-clinical and
                                                  clinical testing, manufacture,
                                                  distribution, labeling and promotion
                                                  of
                                                  medical devices; and
 ·
                                              requiring
                                                  us to comply with rigorous regulations
                                                  governing the pre-clinical and
                                                  clinical testing, manufacture,
                                                  distribution, labeling and promotion
                                                  of
                                                  medical devices; and
 ·
                                              requiring
                                                  us to comply with the FDC Act regarding
                                                  general controls including
                                                  establishment registration, device
                                                  listing, compliance with good
                                                  manufacturing practices, reporting
                                                  of specified device malfunctions
                                                  and
                                                  adverse device events.
  If
                                        we
                                        fail to comply with applicable requirements,
                                        the FDA could respond by imposing
                                        fines, injunctions or civil penalties, requiring
                                        recalls or software
                                        corrections, suspending production, refusing
                                        to grant pre-market clearance or
                                        approval of software, withdrawing clearances
                                        and approvals, and initiating
                                        criminal prosecution. Any FDA policy governing
                                        computer products or content, may
                                        increase the cost and time to market of new
                                        or existing software or may prevent
                                        us from marketing our software.
  ***Changes
                                        in federal and state regulations relating
                                        to patient data could depress the
                                        demand for our software and impose significant
                                        software redesign costs on
                                        us.***
  Clients
                                        use our systems to store and transmit highly
                                        confidential patient health
                                        information and data.  State and federal laws and regulations and
                                        their
                                        foreign equivalents govern the collection,
                                        use, transmission and other
                                        disclosures of health information. These
                                        laws and regulations may change rapidly
                                        and may be unclear or difficult to apply.
   31
  Federal
                                        regulations under the Health Insurance Portability
                                        and Accountability Act of
                                        1996, or HIPAA, impose national health data
                                        standards on healthcare providers
                                        that conduct electronic health transactions,
                                        healthcare clearinghouses that
                                        convert health data between HIPAA-compliant
                                        and non-compliant formats and health
                                        plans. Collectively, these groups are known
                                        as covered entities. The HIPAA
                                        standards prescribe transaction formats and
                                        code sets for electronic health
                                        transactions; protect individual privacy
                                        by limiting the uses and disclosures of
                                        individually identifiable health information;
                                        and require covered entities to
                                        implement administrative, physical and technological
                                        safeguards to ensure the
                                        confidentiality, integrity, availability
                                        and security of individually
                                        identifiable health information in electronic
                                        form. Though we are not a covered
                                        entity, most of our clients are and require
                                        that our software and services
                                        adhere to HIPAA standards. Any failure or
                                        perception of failure of our software
                                        or services to meet HIPAA standards could
                                        adversely affect demand for our
                                        software and services and force us to expend
                                        significant capital, research and
                                        development and other resources to modify
                                        our software or services to address
                                        the privacy and security requirements of
                                        our clients.
  States
                                        and foreign jurisdictions in which we or
                                        our clients operate have adopted, or
                                        may adopt, privacy standards that are similar
                                        to or more stringent than the
                                        federal HIPAA privacy standards. This may
                                        lead to different restrictions for
                                        handling individually identifiable health
                                        information. As a result, our clients
                                        may demand information technology solutions
                                        and services that are adaptable to
                                        reflect different and changing regulatory
                                        requirements which could increase our
                                        development costs. In the future, federal
                                        or state governmental authorities may
                                        impose new data security standards or additional
                                        restrictions on the collection,
                                        use, transmission and other disclosures of
                                        health information. We cannot predict
                                        the potential impact that these future rules,
                                        may have on our business. However,
                                        the demand for our software and services
                                        may decrease if we are not able to
                                        develop and offer software and services that
                                        can address the regulatory
                                        challenges and compliance obligations facing
                                        our clients.
  **Risks
                                        related to our personnel and organization**
  ***Recent
                                        changes in our executive team could distract
                                        management and cause uncertainty
                                        that could result in delayed or lost sales.***
  From
                                        April until November 2005, our Chairman, Eugene
                                        V. Fife, served as our
                                        President and Chief Executive Officer on
                                        an interim basis, pending a search for
                                        a new, long-term Chief Executive Officer.  In November 2005, R. Andrew
                                        Eckert replaced Mr. Fife as CEO and President.  Including Mr. Eckert, five
                                        of our executive officers have joined the
                                        Company or assumed their current roles
                                        within the past year.  In January, 2006, we announced a headcount
                                        reduction
                                        of approximately 100 persons, including seven
                                        senior executives, and
                                        reorganization of our management structure.  These changes may disrupt
                                        continuity in our organization, disrupt established
                                        relationships with clients,
                                        prospects and vendors, divert our management’s time and attention from the
                                        operation of our business, delay important
                                        operational initiatives, and cause
                                        some level of uncertainty among our clients
                                        and potential clients that could
                                        lead to delays in closing new business or
                                        ultimately in lost sales.
  ***If
                                        we fail to attract, motivate and retain highly
                                        qualified technical, marketing,
                                        sales and management personnel, our ability
                                        to execute our business strategy
                                        could be impaired.***
  Our
                                        success depends, in significant part, upon
                                        the continued services of our key
                                        technical, marketing, sales and management
                                        personnel, and on our ability to
                                        continue to attract, motivate and retain
                                        highly qualified employees. Competition
                                        for these employees is intense and we maintain
                                        at-will employment terms with our
                                        employees, meaning that they are free to
                                        leave at any time.  Further, while
                                        we do utilize non-compete agreements with
                                        some employees, such agreements may
                                        not be enforceable, or we may choose for
                                        various reasons not to attempt to
                                        enforce them. In addition, the process of
                                        recruiting personnel with the
                                        combination of skills and attributes required
                                        to execute our business strategy
                                        can be difficult, time-consuming and expensive.
                                        We believe that our ability to
                                        implement our strategic goals depends to
                                        a considerable degree on our senior
                                        management team. The loss of any member of
                                        that team could hurt our
                                        business.
  ***Provisions
                                        of our charter documents and Delaware law
                                        may inhibit potential acquisition bids
                                        that a stockholder may believe is desirable,
                                        and the market price of our common
                                        stock may be lower as a result.***
  Our
                                        board
                                        of directors has the authority to issue up
                                        to 4,900,000 shares of preferred
                                        stock. The board of directors can fix the
                                        price, rights, preferences, privileges
                                        and restrictions of the preferred stock without
                                        any further vote or action by
                                        our stockholders. The issuance of shares
                                        of preferred stock may discourage,
                                        delay or prevent a merger or acquisition
                                        of our company. The issuance of
                                        preferred stock may result in the loss of
                                        voting control to other stockholders.
                                        We have no current plans to issue any shares
                                        of preferred stock. In
                                        August 2000, our board of directors adopted a shareholder
                                        rights plan under
                                        which we issued preferred stock purchase
                                        rights that would adversely affect the
                                        economic and voting interests of a person
                                        or group that seeks to acquire us or a
                                        15% or more interest in our common stock
                                        without negotiations with our board of
                                        directors.
  
  32
  
 Our
                                        charter documents contain additional anti-takeover
                                        devices
                                        including:
  ·
                                              only
                                                  one of the three classes of directors
                                                  is elected each
                                                  year;
 ·
                                              the
                                                  ability of our stockholders to
                                                  remove directors without cause
                                                  is
                                                  limited;
 ·
                                              the
                                                  right of stockholders to act by
                                                  written consent has been
                                                  eliminated;
 ·
                                              the
                                                  right of stockholders to call a
                                                  special meeting of stockholders
                                                  has been
                                                  eliminated; and
 ·
                                              advance
                                                  notice must be given to nominate
                                                  directors or submit proposals for
                                                  consideration at stockholders
                                                  meetings.
 
 ITEM
                                        2.
                                        UNREGISTERED SALES OF EQUITY SECURITIES
 
 In
                                        January 2006, we hired John E. Deady as Executive
                                        Vice President Client
                                        Solutions. Mr. Deady’s compensation includes 100,000 restricted
                                        shares of
                                        Eclipsys common stock and non-qualified options
                                        to purchase up to 400,000 shares
                                        of Eclipsys common stock, which were issued
                                        to Mr. Deady during the quarter,
                                        ended March 31, 2006. The
                                        restricted stock has a purchase price of
                                        $.01 per share, is subject to
                                        contractual restrictions on transfer until
                                        vested, and vests over five years,
                                        with the first 26.666%
                                        vesting on June 1, 2007, and an additional
                                        10% of the total number of shares
                                        vesting on each December 1 and June 1 thereafter,
                                        with the final 3.334% vesting
                                        on June 1, 2011 . 
                                        The stock options were issued to Mr. Deady
                                        in partial consideration of his
                                        employment, have a 10-year term and an exercise
                                        price per share equal to the
                                        fair market value of Eclipsys common stock
                                        on the date of grant, and vest over
                                        five years, with the first 20 percent vesting
                                        on February 1, 2007, and the
                                        remaining 80 percent vesting in 48 equal
                                        consecutive monthly installments
                                        thereafter. Vesting
                                        of the restricted stock and stock options
                                        is contingent upon continued
                                        employment and is subject to acceleration
                                        under certain circumstances. These
                                        issuances were made as inducement grants
                                        pursuant to Section 4350(i)(1)(A)(iv)
                                        of the NASD Marketplace Rules, and were exempt
                                        from registration under the Securities Act
                                        of 1933 under Section 4(2) of that
                                        Act, because they did not involve any public
                                        offering.
 
 
 ITEM
                                        6.
                                        EXHIBITS
 
 See
                                        Index
                                        to exhibits.
  33
 SIGNATURES
 
 Pursuant
                                          to the requirements of the Securities Exchange
                                          Act of 1934, the registrant has
                                          duly caused this report to be signed on
                                          its behalf by the undersigned thereunto
                                          duly authorized.
  Date:
                                          May
                                          9, 2006  /S/
                                          Robert J. Colletti
 Robert
                                          J. Colletti
 Senior
                                          Vice President, Chief Financial Officer and
                                          Chief
                                          Accounting Officer
  34
  **ECLIPSYS
                                        CORPORATION**
 **EXHIBIT
                                        INDEX**
 Exhibit
                                                  Number
                                                Description3.1
                                                    (1)
                                                Third
                                                    Amended and Restated Certificate
                                                    of Incorporation of Eclipsys
                                                    Corporation3.2
                                                    (3)
                                                Certificate
                                                    of Designation of Series A Junior Participating
                                                    Preferred3.3
                                                    (2)
                                                Amended
                                                    and Restated Bylaws of Eclipsys
                                                    Corporation4.1
                                                    (3)
                                                Rights
                                                    Agreement dated July 26, 2000
                                                    by and between Eclipsys Corporation
                                                    and
                                                    Fleet National Bank, as Rights
                                                    Agent, which includes as Exhibit
                                                    A, the
                                                    Form of Certificate of Designation,
                                                    as Exhibit B, the form of Rights
                                                    Certificate, and as Exhibit C,
                                                    the Summary of Rights to Purchase
                                                    Preferred
                                                    Stock.31.1
                                                Rule
                                                    13a-14(a) Certification of R.
                                                    Andrew Eckert31.2
                                                Rule
                                                    13a-14(a) Certification of Robert
                                                    J. Colletti32.1
                                                Rule
                                                    13a-14(b) Certification of R.
                                                    Andrew Eckert (pursuant to 18
                                                    U.S.C. Section
                                                    1350)32.2
                                                Rule
                                                    13a-14(b) Certification of Robert
                                                    J. Colletti (pursuant to 18 U.S.C.
                                                    Section 1350)
 
 (1)
                                          Previously filed with the Registrant’s Quarterly Report on Form 10-Q for
                                          the quarter ended June 30, 1998 (File No. 000-24539 and incorporated
                                          herein by reference.
 
 (2)
                                          Previously filed with the Registrant’s Registration Statement on Form S-1,
                                          as amended (Registration No. 333-50781) and incorporated herein by
                                          reference.
 
 (3)
                                           Previously filed with the Company’s Current Report on Form 8-K filed
                                          August 8, 2000 and incorporated herein
                                          by reference.


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