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 SEPTEMBER 30, 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 [ × ] 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 [ ]  Non-accelerated filer [
        ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
        [
        ] No [×]
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock
        as of the latest practicable date.
 
 **Class**
              **Shares
                  outstanding as of November 2, 2006**Common
                  Stock, $.01 par value
              52,337,757
 
 
 
 
 
 
  
  
 ECLIPSYS
                  CORPORATION AND SUBSIDIARIESFORM
                  10-QFor
                  the period ended September 30, 2006Table
                  of ContentsPart
                  I.
              
              Financial
                  InformationItem
                  1.
              
              Financial
                  Statements - UnauditedCondensed
                  Consolidated Balance Sheets (unaudited) - As of September 30, 2006and
                  December 31, 2005
              
              3Condensed
                  Consolidated Statements of Operations (unaudited) - For the Three
                  andand
                  Nine Months ended September 30, 2006 and September 30,
                  2005
              
              4Condensed
                  Consolidated Statements of Cash Flows (unaudited) - For the Nine
                  Monthsended
                  September 30, 2006 and September 30, 2005
              
              5Notes
                  to Condensed Consolidated Financial Statements (unaudited)
              
              6Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Resultsof
                  Operations
              
              15Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              22Item
                  4.
              
              Controls
                  and Procedures
              
              22Part
                  II.
              
              Other
                  InformationItem
                  1.
              
              Legal
                  Proceedings
              
              22Item
                  1A.
              
              Risk
                  Factors
              
              22Item
                  6.
              
              ExhibitsSignaturesCertifications
 
  2
  **ECLIPSYS
                CORPORATION AND SUBSIDIARIES****Condensed
                Consolidated Balance Sheets (Unaudited)****(In
                thousands)****September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****Assets****Current
                  assets:**Cash
                  and cash equivalents
              
              
              
              
              $
              34,278
              
              $
              76,693Marketable
                  securities
              
              
              
              
              
              88,956
              
              
              37,455Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $4,721 and $5,676, respectively
              
              
              
              
              
              83,320
              
              
              80,833Inventory
              
              
              
              
              
              1,794
              
              
              2,289Prepaid
                  expenses
              
              
              
              
              
              24,407
              
              
              17,909Other
                  current assets
              
              
              
              
              
              594
              
              
              2,184**Total
                  current assets**
              
              
              
              
              
              233,349
              
              
              217,363Property
                  and equipment, net
              
              
              
              
              
              42,967
              
              
              40,500Capitalized
                  software development costs, net
              
              
              
              
              
              31,950
              
              
              35,690Acquired
                  technology, net
              
              
              
              
              
              984
              
              
              584Intangibles
                  assets, net
              
              
              
              
              
              3,222
              
              
              2,940Deferred
                  tax asset
              
              
              
              
              
              6,756
              
              
              4,124Goodwill
              
              
              
              
              
              9,589
              
              
              6,624Other
                  assets
              
              
              
              
              
              16,676
              
              
              20,964**Total
                  assets**
              
              
              
              
              $
              345,493
              
              $
              328,789**Liabilities
                  and Stockholders' Equity****Current
                  liabilities:**Deferred
                  revenue
              
              
              
              
              $
              100,563
              
              $
              107,960Accounts
                  payable
              
              
              
              
              
              13,069
              
              
              26,103Accrued
                  compensation costs
              
              
              
              
              
              17,187
              
              
              15,974Deferred
                  tax liability
              
              
              
              
              
              6,756
              
              
              4,124Other
                  current liabilities
              
              
              
              
              
              15,873
              
              
              10,413Total
                  current liabilities
              
              
              
              
              
              153,448
              
              
              164,574Deferred
                  revenue
              
              
              
              
              
              13,283
              
              
              16,772Other
                  long-term liabilities
              
              
              
              
              
              143
              
              
              1,252**Total
                  liabilities**
              
              
              
              
              
              166,874
              
              
              182,598**Stockholders'
                  equity:**Total
                  stockholders' equity
              
              
              
              
              
              178,619
              
              
              146,191**Total
                  liabilities and stockholders' equity**
              
              
              
              
              $
              345,493
              
              $
              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**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2006**
                
                **2005**
                
                **2006**
                
                **2005**Revenues:Systems
                    and services
                
                $
                104,266
                
                $
                94,806
                
                $
                298,243
                
                $
                269,491Hardware
                
                
                4,300
                
                
                3,046
                
                
                13,437
                
                
                8,660Total
                    revenues
                
                
                108,566
                
                
                97,852
                
                
                311,680
                
                
                278,151Costs
                    and expenses:Cost
                    of systems and services
                
                
                61,518
                
                
                56,776
                
                
                177,073
                
                
                165,601Cost
                    of hardware
                
                
                3,489
                
                
                2,575
                
                
                10,991
                
                
                7,233Sales
                    and marketing
                
                
                16,024
                
                
                14,076
                
                
                46,766
                
                
                47,136Research
                    and development
                
                
                13,166
                
                
                12,726
                
                
                44,424
                
                
                39,276General
                    and administrative
                
                
                6,762
                
                
                3,840
                
                
                17,961
                
                
                14,707Depreciation
                    and amortization
                
                
                3,885
                
                
                3,625
                
                
                11,581
                
                
                10,891Restructuring
                    charge
                
                
                -
                
                
                -
                
                
                8,547
                
                
                -Total
                    costs and expenses
                
                
                104,844
                
                
                93,618
                
                
                317,343
                
                
                284,844Income
                    (loss) from operations before interest and taxes
                
                
                3,722
                
                
                4,234
                
                
                (5,663
                )
                
                (6,693
                )Interest
                    income, net
                
                
                1,389
                
                
                865
                
                
                3,873
                
                
                2,146Income
                    (loss) before taxes
                
                
                5,111
                
                
                5,099
                
                
                (1,790
                )
                
                (4,547
                )Provision
                    for income taxes
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    income (loss)
                
                $
                5,111
                
                $
                5,099
                
                $
                (1,790
                )
                $
                (4,547
                )Net
                    income (loss) per common share:Basic
                    net income (loss) per common share
                
                $
                0.10
                
                $
                0.11
                
                $
                (0.03
                )
                $
                (0.10
                )Diluted
                    net income (loss) per common share
                
                $
                0.10
                
                $
                0.10
                
                $
                (0.03
                )
                $
                (0.10
                )Weighted
                    average common shares outstandingBasic
                
                
                51,712
                
                
                48,304
                
                
                51,312
                
                
                47,751Diluted
                
                
                52,791
                
                
                51,316
                
                
                52,930
                
                
                47,751
 
 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)****Nine
                    Months Ended September 30,****2006**
                
                **2005**Operating
                    activities:Net
                    loss
                $
                (1,790)
                
                $
                (4,547)Adjustments
                    to reconcile net loss to net cash provided byoperating
                    activities:Depreciation
                    and amortization
                
                27,811
                
                
                24,425Provision
                    for bad debt
                
                1,568
                
                
                1,500Stock
                    compensation expense
                
                10,745
                
                
                1,720Changes
                    in operating assets and liabilities:Increase
                    in accounts receivable
                
                (4,147)
                
                
                (11,832)Increase
                    in prepaid expenses and other current assets
                
                (4,927)
                
                
                (2,787)Decrease /
                    (Increase) in inventory
                
                479
                
                
                (490)Decrease/
                    (Increase) in other assets
                
                1,592
                
                
                (9,882)(Decrease)
                    / Increase in deferred revenue
                
                (11,061)
                
                
                1,567Increase
                    in accrued compensation
                
                256
                
                
                1,998(Decrease)
                    / Increase in accounts payable and othercurrent
                    liabilities
                
                (10,537)
                
                
                600(Decrease)
                    / Increase in other long-term liabilities
                
                (1,108)
                
                
                1,135Total
                    adjustments
                
                10,671
                
                
                7,954Net
                    cash provided by operating activities
                
                8,881
                
                
                3,407Investing
                    activities:Purchases
                    of property and equipment
                
                (10,174)
                
                
                (12,809)Purchase
                    of marketable securities
                
                (99,358)
                
                
                (93,554)Proceeds
                    from sales of marketable securities
                
                47,856
                
                
                9,930Capitalized
                    software development costs
                
                (9,535)
                
                
                (14,637)Cash
                    paid for acquisitions
                
                (4,002)
                
                
                (946)Net
                    cash used in investing activities
                
                (75,213)
                
                
                (112,016)Financing
                    activities:Proceeds
                    from stock options exercised
                
                23,181
                
                
                9,919Proceeds
                    from employee stock purchase plan
                
                732
                
                
                -Net
                    cash provided by financing activities
                
                23,913
                
                
                9,919Effect
                    of exchange rates on cash and cash equivalents
                
                4
                
                
                117Net
                    decrease in cash and cash equivalents
                
                (42,415)
                
                
                (98,573)Cash
                    and cash equivalents — beginning of period
                
                76,693
                
                
                122,031Cash
                    and cash equivalents — end of period
                $
                34,278
                
                $
                23,458Supplemental
                    Cash Flow Information:Non-cash
                    investing activities:Contingent
                    purchase price of eSys and CPMRC
                $
                360
                
                $
                1,275Purchases
                    of property and equipment
                $
                2,920
                
                $
                -
 
 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, (“Eclipsys” or the “Company”), and the notes thereto have been
        prepared in accordance with the instructions for Form 10-Q of the Securities
        and
        Exchange Commission, or SEC. The year-end condensed balance sheet data included
        in these unaudited condensed consolidated financial statements was derived
        from
        audited financial statements. These condensed statements do not include all
        of
        the information and disclosures required by accounting principles generally
        accepted in the United States of America but do reflect all adjustments
        (consisting of normal recurring adjustments) that are, in the opinion of
        management, necessary for a fair statement of results for the interim periods
        presented.
  The
        results
        of operations for the three and nine months ended September 30, 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. SIGNIFICANT
        ACCOUNTING POLICIES
  Principles
        of Consolidation
  The
        condensed
        consolidated financial statements include the accounts of Eclipsys, our wholly
        owned subsidiaries, and a variable interest entity for whom the Company is
        the
        primary beneficiary. The determination of the primary beneficiary is based
        upon
        the evaluation of rights held as a result of a management agreement with
        the
        entity effective July 14, 2006.  The net assets in this entity totaled
        $127,000 at September 30, 2006.  See Note 3, “Acquisition”, for additional
        information. All material intercompany transactions have been eliminated
        in
        consolidation.
  Revision
        to the statement of cash flows
 
 The
        statement
        of cash flows for the nine months ended September 30, 2005 has been revised
        to
        reflect auction rate securities that are held "at market" or held "at rate"
        on a
        net basis.  Previously, these cash flows were presented by the Company
        on a
        gross basis within "Net cash used in investing activities."  The impact
        of
        this revised presentation was to decrease purchases of marketable securities
        and
        proceeds from sales of marketable securities during the nine months ended
        September 30, 2005 by $248.4 million. These changes had no impact on net
        cash
        used in investing activities.
 
 3.
        ACQUISITION
 
 On
        June 11,
        2006, we entered into an agreement to acquire both the assets of Sysware
        Health
        Care Systems, Inc. (“Sysware”) and the stock of Sysware’s sister company Mosum
        Technology (India) Private Limited ("Mosum"). On July 14, 2006, we closed
        the
        asset acquisition of Sysware. The closing of the stock acquisition of Mosum,
        which is based in India, is pending certain Indian regulatory approvals,
        and we
        expect to finalize the acquisition of Mosum during the fourth quarter of
        2006.
        As we await those approvals, we are operating Mosum under a management
        agreement. As a result, our condensed consolidated financial statements include
        the accounts of Mosum since the entity’s activities either involve or are
        conducted on behalf of Eclipsys.  Mosum developed software for Sysware
        prior to our acquisition of Sysware’s assets, and now performs development for
        us pursuant to this management agreement. The acquisition of these affiliated
        companies will enable us to market Sysware’s laboratory information solution as
        a core module of Eclipsys’ Sunrise Clinical ManagerTM suite of enterprise-wide
        advanced clinical solutions, and also provides us with the foundation for
        a
        development and support organization in India.
  The
        aggregate
        purchase consideration includes $3.7 million in cash, as well as earnout
        consideration of up to approximately $3.9 million payable in a combination
        of
        cash and shares of our common stock over a two-year period, based on the
        attainment of conditions defined in the acquisition agreement. All future
        consideration paid under the earn-out provisions of the agreement, if any
        are
        earned, will be recorded as additional goodwill. The operating results of
        Sysware and Mosum have been combined with those of Eclipsys since July 14,
        2006.
        We did not present unaudited pro forma results of operations of Eclipsys
        combined with Sysware and Mosum for the nine months ended September 30, 2006
        and
        2005 because the acquisition is not material to our operating results or
        financial position.
 
 As
        a result
        of the acquisition, we recorded tax deductible goodwill of $2.6 million and
        other intangible assets including customer relationships of $960,000 and
        acquired technology of $675,000. Amortizable intangible assets include customer
        relationships and acquired technology, and are being amortized over five
        and
        three-year periods on a straight-line basis, respectively, which we believe
        reflect the estimated expected utility of these assets.
 
 6
 4.
        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 nine months ended September 30, 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) required 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 annual period
        after June 15, 2005. Subsequent to the effective date, the pro forma disclosures
        previously made 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 nine months
        ended September 30, 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 awards 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 awards 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. As a result of
        the
        adoption of SFAS No. 123(R), we recorded an additional $3.4 million and $10.7
        million in stock option expense which is included in our net income of $5.1
        million and net loss of $1.8 million for the three and nine months
        ended
        September 30, 2006, respectively.   The adoption of SFAS
        No.
        123(R) reduced earnings per diluted common share by $0.06 and $0.18
        for the
        three and nine months ended September 30, 2006, respectively.  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 income (loss) and net income (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 and nine months
        ended
        September 30, 2005 because stock-based employee compensation was not accounted
        for using the fair value recognition method during that period. 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
                  September
                    30, 2005
                
                Nine
                    Months Ended
                  September
                    30, 2005Net
                    income (loss):As
                    reported
                
                $
                5,099
                
                $
                (4,547
                )Add:
                    Stock-based employee compensation expense includedin
                    reported net income (loss), net of related tax effects
                
                
                570
                
                
                1,720Deduct:
                    Total stock-based compensation expense determinedunder
                    fair value based method for all awards, net of related taxeffects
                
                
                (2,331
                )
                
                (8,142
                )Pro
                    forma net income (loss)
                
                $
                3,338
                
                $
                (10,969
                )Basic
                    net income (loss) per common share:As
                    reported
                
                $
                0.11
                
                $
                (0.10
                )Pro
                    forma
                
                $
                0.07
                
                $
                (0.23
                )Diluted
                    net income (loss) per common share:As
                    reported
                
                $
                0.10
                
                $
                (0.10
                )Pro
                    forma
                
                $
                0.07
                
                $
                (0.23
                )
 7
 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.
 
 There
        was no
        stock-based employee compensation cost capitalized or tax benefit recognized
        during the three and nine months ended September 30, 2006. The following
        table
        shows total stock-based employee compensation expense included in the condensed
        consolidated statements of operations (in thousands):
  Three
                    Months Ended September 30, 2006
                
                Nine
                    Months Ended September 30, 2006Costs
                    and expenses:Cost
                    of systems & services
                
                $
                1,415
                
                $
                3,778Sales
                    and marketing
                
                
                676
                
                
                2,241Research
                    and development
                
                
                570
                
                
                1,492General
                    and administrative
                
                
                701
                
                
                2,072Restructuring
                    charge
                
                
                -
                
                
                1,162Total
                    stock-based compensation expense
                
                $
                3,362
                
                $
                10,745
  The
        restructuring charge of $1.2 million reflected in the table above is included
        in
        the $8.5 million restructuring charge disclosed separately on the Statement
        of
        Operations.
  Compensation
        expense for restricted common stock issued at discounted prices is recognized
        over the vesting period for the difference between the purchase price and
        the
        fair market value on the measurement date. Compensation expense recorded
        for
        stock-based awards of restricted stock was $658,000 and $1.9 million
        respectively for the three and nine months ended September 30, 2006. In the
        three and nine months ended September 30, 2005, recorded stock-based
        compensation for restricted stock was $571,000 and $1.7 million.
 
 Effective
          May
          10, 2006, we implemented a deferred stock unit plan to provide for equity
          compensation for our non-employee directors in the form of deferred stock
          units
          ("DSUs") granted under the Company's 2005 Stock Incentive Plan ("2005
          Plan").  As of the date of each annual meeting of the Company's
          stockholders, each continuing non-employee director receives a number of
          DSUs
          determined by dividing $75,000 by the fair market value of a share of the
          Company's common stock on the grant date. These DSUs vest quarterly over
          the
          course of the ensuing year. After cessation of board service, the Company
          will
          pay the DSUs by issuing to the former director a number of shares of the
          Company's common stock equal to the number of accumulated deferred stock
          units.
          In addition, a non-employee director may elect to receive DSUs in lieu
          of all or
          a portion of his or her cash fees. All DSUs received for cash fees are
          fully
          vested.
 
 We
        granted
        25,486 deferred stock units during the nine months ended September 30, 2006
        at
        an average market value of $18.79. The value of these deferred stock units
        is
        amortized to compensation expense ratably over the vesting period. In the
        three
        and nine months ended September 30, 2006, recorded expense for deferred stock
        units was $72,000 and $188,000, respectively. The provisions of SFAS No.
        123R do
        not change the accounting for deferred stock units.
  5.
        EMPLOYEE BENEFIT PLANS
 
 *2005
        Stock Incentive Plan*
 
 At
        our Annual
        Meeting of Stockholders held June 29, 2005, our shareholders approved
        the 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 September 30, 2006, there were 2,027,532 shares
        available for future issuance under the 2005 Plan.
  8
 We
        issued
        400,000 stock options and 100,000 shares of restricted stock in the nine
        months
        ended September 30, 2006 as an inducement grant made without shareholder
        approval and outside the 2005 Plan. The grant date fair value of the
        restricted stock was $21.15 per share.
  A
        summary of
        stock option transactions is as follows:
  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
                
                
                1,273,486
                
                $
                20.59Options
                    exercised
                
                
                (2,274,225
                )
                $
                10.19
                
                
                
                
                $
                27,565Options
                    canceled
                
                
                (529,721
                )
                $
                15.36Outstanding
                    at September 30, 2006
                
                
                6,075,149
                
                $
                15.19
                
                
                6.46
                
                $
                23,960Vested
                    and expected to vest at September 30, 2006
                
                
                5,721,879
                
                $
                15.01
                
                
                0.69
                
                $
                23,371Exercisable
                    at September 30, 2006
                
                
                3,227,727
                
                $
                13.38
                
                
                4.54
                
                $
                18,109
 
 Non-vested
        stock award activity for the nine months ended September 30, 2006 is summarized
        as follows:
  Non-vested
                    Number of Shares
                
                Weighted
                    Average Grant-Date Fair ValueNonvested
                    balance at January 1, 2006
                
                
                623,994
                
                $
                16.72Granted
                
                
                100,000
                
                $
                21.14Vested
                
                
                (165,085
                )
                $
                16.56Forfeited
                
                
                (52,500
                )
                $
                18.91Nonvested
                    balance at September 30, 2006
                
                
                506,409
                
                $
                17.42
 
 As
        of
        September 30, 2006, $25.3 million of total unrecognized compensation costs
        related to stock options is expected to be recognized over a weighted average
        period of 3.1 years. As of September 30, 2006, $7.4 million of total
        unrecognized compensation costs related to nonvested awards is expected to
        be
        recognized over a weighted average period of 3.7 years.  The total
        fair
        value of shares vested during the nine months ended September 30, 2006 was
        $4.0
        million.
  The
        weighted
        average estimated fair value of our employee stock options granted at grant
        date
        market prices was $15.97 per share during nine months ended September 30,
        2006.
        There were 39,638 shares granted under our stock purchase plan as a result
        of
        employee participation during the nine months ended September 30,
        2006.
  9
 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:
  Nine
                    Months Ended September 30,2006
                
                2005Expected
                    term (in years)
                6.46
                
                
                6.01Risk
                    free interest rate
                5.04
                %
                
                4.02
                %Expected
                    volatility
                77.38
                %
                
                80.26
                %Dividend
                    yield
                
                0
                %
                
                0
                %
 
 We
        have
        elected to use the simplified method for estimating our expected term equal
        to
        the midpoint between the vesting period and the contractual term as allowed
        by
        Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment.
 
 We
        currently
        estimate volatility by using the 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.
  6.
        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)September
                    30,
                
                December
                    31,2006
                
                2005Security
                    TypeAuction
                    Rate Securities:Debt
                    securities issued by the U.S. Treasury and other U.S. government
                    corporations and agencies
                
                $
                11,271
                
                $
                14,117Debt
                    securities issued by states of the United States and political
                    subdivisions of the states
                
                
                66,043
                
                
                17,08477,314
                
                
                31,201Other
                    Securities:Government
                    Bonds/Agencies
                
                
                11,581
                
                
                6,206Other
                    debt securities
                
                
                61
                
                
                48Total
                
                $
                88,956
                
                $
                37,455
 As
          of
          September 30, 2006, most marketable securities have a maturity of more
          than 1
          year. Auction rate securities of $66.0 million, held at September 30, 2006,
          typically have an interest rate reset feature every 30 days pursuant to
          which we
          can sell or reset the interest rate on the security. Eclipsys policy for
          all
          securities in the portfolio is to hold them less than one year, and therefore,
          we believe that these investments are part of our working capital and are
          appropriately classified as current assets.
 
 In
        an effort
        to maximize the yield of our excess cash, we transferred cash from money
        market
        investments to marketable securities, which include auction rates securities
        and
        government bonds. These funds remain highly liquid.
 
 10
 7.
        ACCOUNTS RECEIVABLE
  Accounts
        receivable, net of allowances for doubtful accounts, is comprised of the
        following (in thousands):
  September
                    30,
                
                December
                    31,2006
                
                2005Accounts
                    Receivable:Billed
                    accounts receivable, net
                
                $
                68,845
                
                $
                69,772Unbilled
                    accounts receivable, net
                
                
                14,475
                
                
                11,061Total
                    accounts receivable, net
                
                $
                83,320
                
                $
                80,833
  8.
        WARRANTY RESERVE
 
 The
        agreements that we use to license software to our customers generally include
        limited warranties including a warranty that the product, in its unaltered
        form,
        will perform substantially in accordance with the related documentation.
        Warranty costs are charged to costs of systems of services when they are
        probable and reasonably estimable. A summary of the activity in our warranty
        reserve is as follows (in thousands):
  Balance
                    at January 1, 2005
                
                $
                2,057Warranty
                    utilized
                
                
                (986
                )Balance
                    at December 31, 2005
                
                
                1,071Provision
                    reduction
                
                
                (290
                )Warranty
                    utilized
                
                
                (230
                )Balance
                    at September 30, 2006
                
                $
                551
 
 During
        the
        nine months ended September 30, 2006, the warranty reserve was reduced by
        $290,000 as a result of a decrease in the estimate of expected warranty
        costs.
  9.
        GOODWILL AND OTHER INTANGIBLE ASSETS
 
 Acquired
        technology and other intangible assets are amortized over their estimated
        useful
        lives on a straight-line basis. The carrying values of acquired technology
        and
        other intangible assets are reviewed if the facts and circumstances suggest
        that
        they may be impaired, and goodwill is reviewed annually in accordance with
        SFAS
        No. 142, “Goodwill and Other Intangible Assets”. Testing is performed on a more
        frequent basis if impairment triggering events arise. The impairment test
        is
        based upon a number of factors, including operating results, business plans
        and
        projected future cash flows. No impairment has been identified or recorded
        during the nine months ended September 30, 2006 and fiscal year ended December
        31, 2005.
 
 During
        the
        quarter ended September 30, 2006, we recorded goodwill of $2.6 million and
        other
        intangible assets of $1.6 million in connection with the acquisition of the
        assets of Sysware. See Note 3, “Acquisition”, for additional information.
 
 The
        changes
        in the carrying amount of goodwill for the nine months ended September 30,
        2006,
        were as follows (in thousands):
  Balance
                    at January 1, 2006
                
                $
                6,624eSys
                    earnout
                
                
                75CPMRC
                    earnout
                
                
                330Sysware
                    acquisition
                
                
                2,560Balance
                    at September 30, 2006
                
                $
                9,589
  11
 The
        gross and
        net amounts for goodwill and other intangible assets consist of the
        following (in thousands):
  September
                      30, 2006
                  
                  December
                      31, 2005Gross
                      Carrying
                  
                  Accumulated
                      Amortization
                  
                  Net
                      Book Value
                  
                  Gross
                      Carrying
                  
                  Accumulated
                      Amortization
                  
                  Net
                      Book ValueIntangibles
                      subject to amortization:Acquired
                      technology
                  
                  $
                  1,589
                  
                  $
                  605
                  
                  $
                  984
                  
                  $
                  914
                  
                  $
                  330
                  
                  $
                  584Ongoing
                      customer relationships
                  
                  
                  5,295
                  
                  
                  2,073
                  
                  
                  3,222
                  
                  
                  4,335
                  
                  
                  1,395
                  
                  
                  2,940Total
                  
                  $
                  6,884
                  
                  $
                  2,678
                  
                  $
                  4,206
                  
                  $
                  5,249
                  
                  $
                  1,725
                  
                  $
                  3,524Intangibles
                      not subject to amortization:Goodwill
                  
                  $
                  9,589
                  
                  
                  
                  
                  $
                  9,589
                  
                  $
                  6,624
                  
                  
                  
                  
                  $
                  6,624
 Estimated
          aggregate ammortization expense (in thousands):
  For
                    the remainder of2006
                
                2007
                
                2008
                
                2009
                
                2010
                
                Thereafter
                
                TotalTotal
                    amortization expense
                
                $
                394
                
                $
                1,547
                
                $
                1,268
                
                $
                654
                
                $
                233
                
                $
                110
                
                $
                4,206
 10.
        OTHER
        COMPREHENSIVE INCOME (LOSS)
 
 The
        components of other comprehensive income (loss) were as follows (in
        thousands):
  Three
                      Months Ended September 30,
                  
                  Nine
                      Months Ended September 30,2006
                  
                  2005
                  
                  2006
                  
                  2005Net
                      income (loss)
                  
                  $
                  5,111
                  
                  $
                  5,099
                  
                  $
                  (1,790
                  )
                  $
                  (4,547
                  )Foreign
                      currency translation adjustment
                  
                  
                  (219
                  )
                  
                  29
                  
                  
                  309
                  
                  
                  117Total
                      comprehensive income (loss)
                  
                  $
                  4,892
                  
                  $
                  5,128
                  
                  $
                  (1,481
                  )
                  $
                  (4,430
                  )
 11.
          BASIC
          AND DILUTED INCOME (LOSS) PER COMMON SHARE
 
 For
        all
        periods presented, basic and diluted income (loss) per common share is presented
        in accordance with SFAS 128, “Earnings per Share,” which provides for the
        accounting principles used in the calculation of income (loss) per share.
        Basic
        income (loss) per common share excludes dilution and is calculated by dividing
        net income (loss) available to common shareholders by the weighted average
        number of shares of common stock outstanding during the period. Diluted income
        (loss) per common share reflects the potential d ilution
        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 is anti-dilutive, they are not included in
        the
        calculation of diluted income (loss) per common share.
  12
 The
        computation of basic and diluted income (loss) per common share was as follows
        (in thousands, except per share data):
  Three
                      Months Ended September 30,2006
                  
                  2005Net
                    Income
                  
                  Shares
                  
                  Per
                      Share Amount
                  
                  Net
                      Loss
                  
                  Shares
                  
                  Per
                      Share AmountBasic
                      EPS
                  
                  $
                  5,111
                  
                  
                  51,712
                  
                  $
                  0.10
                  
                  $
                  5,099
                  
                  
                  48,304
                  
                  $
                  0.11Effect
                      of dilutive securities:Stock
                      options and other dilutive securities
                  
                  
                  -
                  
                  
                  1,021
                  
                  
                  
                  
                  
                  -
                  
                  
                  3,012Shares
                      issuable pursuant to earn-out agreement
                  
                  
                  -
                  
                  
                  58
                  
                  
                  
                  
                  
                  -
                  
                  
                  -Diluted
                      EPS
                  
                  $
                  5,111
                  
                  
                  52,791
                  
                  $
                  0.10
                  
                  $
                  5,099
                  
                  
                  51,316
                  
                  $
                  0.10Nine Months
                      Ended September 30,2006
                  
                  
                  2005Net
                      Income
                  
                  
                  Shares
                  
                  
                  Per
                      Share Amount
                  
                  
                  Net
                      Loss
                  
                  
                  Shares
                  
                  
                  Per
                      Share AmountBasic
                      EPS
                  
                  $
                  (1,790
                  )
                  
                  51,312
                  
                  $
                  (0.03
                  )
                  $
                  (4,547
                  )
                  
                  47,751
                  
                  $
                  (0.10
                  )Effect
                      of dilutive securities:Stock
                      options and other dilutive securities
                  
                  
                  -
                  
                  
                  1,560
                  
                  
                  
                  
                  
                  -
                  
                  
                  -Shares
                      issuable pursuant to earn-out agreement
                  
                  
                  -
                  
                  
                  58
                  
                  
                  
                  
                  
                  -
                  
                  
                  -Diluted
                      EPS
                  
                  $
                  (1,790
                  )
                  
                  52,930
                  
                  $
                  (0.03
                  )
                  $
                  (4,547
                  )
                  
                  47,751
                  
                  $
                  (0.10
                  )
 12.
        RESTRUCTURING
 
 In
        January
        2006, we effected a restructuring of our operations which included a reduction
        in headcount of approximately 100 individuals, and the reorganization of
        our
        company. This was undertaken to better align our organization, reduce costs,
        and
        re-invest some of the cost savings into client-related activities including
        client support and professional services. We completed the restructuring
        during
        the second quarter of 2006. This resulted in restructuring charges of $8.5
        million in the nine months ended September 30, 2006, which has been recorded
        in
        our statements of operations as “restructuring charge.” At September 30, 2006,
        the remaining unpaid severance liability was $2.4 million which we expect
        to pay
        out during 2006 and 2007.
 
 A
        summary of
        the restructuring activity was as follows (in thousands):
  Balance
                    at January 1, 2006
                
                $
                -Restructuring
                    charge
                
                
                7,198Non-cash
                    charges related to stock option modifications
                
                
                (894
                )Payments
                
                
                (2,413
                )Balance
                    at March 31, 2006
                
                
                3,891Restructuring
                    charge
                
                
                1,349Non-cash
                    charges related to stock option modifications
                
                
                (267
                )Payments
                
                
                (1,165
                )Balance
                    at June 30, 2006
                
                
                3,808Payments
                
                
                (1,378
                )Balance
                    at September 30, 2006
                
                $
                2,430
  13
 13.
        CONTINGENCIES
 
 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.
 
 14.
        RECENT ACCOUNTING PRONOUNCEMENTS
 
 In
        September
        2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
        Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements
        (“SFAS No. 157”). SFAS No. 157 enhances existing guidance for measuring assets
        and liabilities using fair value. Prior to the issuance of SFAS No. 157,
        guidance for applying fair value was incorporated in several accounting
        pronouncements. SFAS No. 157 provides a single definition of fair value,
        together with a framework for measuring it, and requires additional disclosure
        about the use of fair value to measure assets and liabilities. SFAS No. 157
        also
        emphasizes that fair value is a market-based measurement, not an entity-specific
        measurement, and sets out a fair value hierarchy with the highest priority
        being
        quoted prices in active markets. Under SFAS No. 157, fair value measurements
        are
        disclosed by level within that hierarchy. SFAS No. 157 is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007, and interim periods within those fiscal years.
 Eclipsys
        has not yet determined
        the impact of adopting SFAS No. 157 on its financial statements.
  In
        September
        2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
        Benefit Pension and Other Postretirement Plans (an amendment of SFAS
        No. 87, 88, 106, and 132R). The requirement by SFAS No. 158 to recognize
        the funded status of a benefit plan and the disclosure requirements of SFAS
        No.
        158 are effective as of the end of the fiscal year ending after
        December 15, 2006 for entities with publicly traded equity securities.
        The
        requirement to measure plan assets and benefit obligations as of the date
        of the
        employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. Eclipsys does not expect
        the
        adoption of SFAS No. 158 to have a material effect on its financial position
        at
        December 31, 2006.
  In
        September
        2006, the Securities and Exchange Commission released Staff Accounting Bulletin
        No. 108 (“SAB 108”), which provides the Staff's views on applying generally
        accepted accounting principles to the quantification of financial statement
        errors based on the effects of the error on each of a company’s financial
        statements. SAB 108 is effective for financial statements issued for fiscal
        years beginning after November 15, 2006. SAB 108 is not expected to have
        a
        material impact on Eclipsys’ results of operations.
 
 In
        June 2006,
        the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income
        Taxes" (FIN 48) which clarifies the accounting for uncertainty in income
        taxes
        recognized in financial statements in accordance with SFAS No. 109, "Accounting
        for Income Taxes."  This Interpretation prescribes a recognition threshold
        and measurement attribute of tax positions taken or expected to be taken
        on a
        tax return.  This Interpretation is effective for the Company beginning
        January 1, 2007.  We are currently evaluating the impact FIN 48 will
        have
        on our financial statements.
 
 In
        June 2006,
        Emerging Issues Task Force Issue No. 06-3, “How Sales Taxes Collected from
        Customers and Remitted to Governmental Authorities Should Be Presented in
        the
        Income Statement (That Is, Gross Versus Net Presentation)” (EITF 06-3) was
        issued. EITF 06-3 requires disclosure of the presentation of taxes on either
        a
        gross (included in revenues and costs) or a net (excluded from revenue) basis
        as
        an accounting policy decision. The provisions of this standard are effective
        for
        interim and annual reporting periods beginning after December 15, 2006. We
        do
        not expect the adoption of EITF 06-3 to have a material impact on our
        consolidated financial statements.
 
 14
 ITEM
        2.
        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
        OF OPERATIONS
 
 This
        report
        contains forward-looking statements that are based on our current expectations,
        assumptions, estimates and projections about our company and our industry.
        These
        statements are not guarantees of future performance and actual outcomes may
        differ materially from what is expressed or forecasted. When used in this
        report, the words “may”, “will”, “should”, “predict”, “continue”, “plans”,
“expects”, “anticipates”, “estimates”, “intends”, “believe”, “could”, and
        similar expressions are intended to identify forward-looking statements.
        These
        statements may include, but are not limited to, statements concerning our
        anticipated performance, including revenue, margin, cash flow, balance sheet
        and
        profit expectations; development and implementation of our software; duration,
        size, scope and revenue expectations associated with client contracts; benefits
        provided by Eclipsys software, outsourcing and consulting services; business
        mix; sales and growth in our client base; market opportunities; industry
        conditions; and our accounting, including its effects and potential changes
        in
        accounting.
 
 Actual
        results might differ materially from the results projected due to a number
        of
        risks and uncertainties. Software development may take longer and cost more
        than
        expected, and incorporation of anticipated features and functionality may
        be
        delayed, due to various factors including programming and integration challenges
        and resource constraints. We may change our product strategy in response
        to
        client requirements, market factors, resource availability, and other factors.
        Implementation of some of our software is complex and time consuming. Clients'
        circumstances vary and may include unforeseen issues that make it more difficult
        or costly than anticipated to implement or derive benefit from software,
        outsourcing or consulting services. The success and timeliness of our services
        often depend, at least, in part upon client involvement, which can be difficult
        to control. We are required to meet standard performance specifications,
        and
        contracts can be terminated or their scope reduced under certain circumstances.
        Competition is vigorous, and competitors may develop more compelling offerings
        or offer more aggressive pricing. New business is not assured and existing
        clients may migrate to competing offerings. Financial performance targets
        might
        not be achieved due to various risks, including slower-than-expected business
        development or new account implementation, or higher-than-expected costs
        to
        develop products, meet service commitments or sign new contracts. Our cash
        consumption may exceed expected levels if profitability does not meet
        expectations or strategic opportunities require cash investments. These and
        other risks and uncertainties that could cause our actual results to differ
        materially from our forward-looking statements are described in this report
        under the headings “Risk Factors” and “Management's Discussion and Analysis of
        Financial Condition and Results in Operations” and in our other filings made
        from time to time with the Securities and Exchange Commission. The cautionary
        statements made in this report should be read as being applicable to all
        related
        forward-looking statements wherever they appear. These statements are only
        predictions. We cannot guarantee future results, levels of activity, performance
        or achievements. All forward-looking statements attributable to us or any
        persons acting on our behalf are expressly qualified in their entirety by
        the
        risk factors referenced above. 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, training and consulting.
  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. Ten of the top-ranked U.S. hospitals named to the Honor
        Roll
        of “America's Best Hospitals” in the July 17, 2006 issue of U.S. News &
        World Report use one or more of our solutions.
  Software
        Development
 
 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.  In September 2005,
        we
        released Remote Access Services (RAS) 4.0 XATM and Pocket SunriseTM 4.0 XA, which
        enhanced users' ability to access our applications from remote locations. 
        In the fourth quarter of 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 4.5 XA). 
        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 medication management
        capabilities and builds upon recent enhancements to our Sunrise Patient
        Financial Manager and Sunrise Decision Support Manager
        solutions.
  15
 *Competitive
        Environment and Other Challenges for the balance of 2006*
  Our
        releases
        of SCM 4.0 XA in March 2005 and SCM 4.5 XA in January 2006 included
        new
        functionality, and we are implementing this new software with a number of
        clients.  In the event our new software does not continue to
        achieve
        market acceptance or we experience any significant delays in implementing
        these
        new releases, our results of operations could be negatively affected, including
        a delay or loss in closing future new sales transactions. Our software sales
        in
        the first half of 2006 did not meet our internal targets and attainment of
        the
        results we expect for 2006 depend upon fourth quarter software and content
        license fees and capitalized software development costs consistent with our
        projections, continued improvement in our professional service revenues and
        margins, and continued successful client activations.
 
 On
        July 14,
        2006 we closed the asset acquisition of Sysware and expect to close the stock
        acquisition of Mosum, based in India during the fourth quarter of 2006. We
        are
        currently operating Mosum under a management agreement. This acquisition
        did not
        have a material impact on our results of operations for the three and nine
        month
        periods ended September 30, 2006.
 
 
  16
  **THREE
        MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER
        30,
        2005**
 **(In
        thousands, except per share amounts)**
  **%
                    of Total**
                
                
                
                
                
                **%
                    of Total****2006**
                
                
                **Revenues**
                
                
                **2005**
                
                
                **Revenues**
                
                
                **Change
                    $**
                
                
                **Change
                    %**RevenuesSystems
                    and services
                
                $
                104,266
                
                
                96.0
                %
                $
                94,806
                
                
                96.9
                %
                $
                9,460
                
                
                10.0
                %Hardware
                
                
                4,300
                
                
                4.0
                %
                
                3,046
                
                
                3.1
                %
                
                1,254
                
                
                41.2
                %Total
                    revenues
                
                
                108,566
                
                
                100.0
                %
                
                97,852
                
                
                100.0
                %
                
                10,714
                
                
                10.9
                %Costs
                    and expensesCost
                    of systems and services
                
                
                61,518
                
                
                56.7
                %
                
                56,776
                
                
                58.0
                %
                
                4,742
                
                
                8.4
                %Cost
                    of hardware
                
                
                3,489
                
                
                3.2
                %
                
                2,575
                
                
                2.6
                %
                
                914
                
                
                35.5
                %Sales
                    and marketing
                
                
                16,024
                
                
                14.8
                %
                
                14,076
                
                
                14.4
                %
                
                1,948
                
                
                13.8
                %Research
                    and development
                
                
                13,166
                
                
                12.1
                %
                
                12,726
                
                
                13.0
                %
                
                440
                
                
                3.5
                %General
                    and administrative
                
                
                6,762
                
                
                6.2
                %
                
                3,840
                
                
                3.9
                %
                
                2,922
                
                
                76.1
                %Depreciation
                    and amortization
                
                
                3,885
                
                
                3.6
                %
                
                3,625
                
                
                3.7
                %
                
                260
                
                
                7.2
                %Restructuring
                    charge
                
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %
                
                -
                
                
                n/aTotal
                    costs and expenses
                
                
                104,844
                
                
                96.6
                %
                
                93,618
                
                
                95.7
                %
                
                11,226
                
                
                12.0
                %Income
                    from operations
                
                
                3,722
                
                
                3.4
                %
                
                4,234
                
                
                4.3
                %
                
                (512
                )
                
                -12.1
                %Interest
                    income, net
                
                
                1,389
                
                
                1.3
                %
                
                865
                
                
                0.9
                %
                
                524
                
                
                60.6
                %Income
                    before taxes
                
                
                5,111
                
                
                4.7
                %
                
                5,099
                
                
                5.2
                %
                
                12
                
                
                0.2
                %Provision
                    for income taxes
                
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %Net
                    income
                
                $
                5,111
                
                
                4.7
                %
                $
                5,099
                
                
                5.2
                %
                $
                12
                
                
                0.2
                %Basic
                    net income per common share
                
                $
                0.10
                
                
                
                
                $
                0.11
                
                
                
                
                $
                (0.01
                )Diluted
                    net income per common share
                
                $
                0.10
                
                
                
                
                $
                0.10
                
                
                
                
                $
                (0.00
                )
 **RESULTS
        OF OPERATIONS**
 
 Total
        revenues increased $10.7 million, or 10.9%, to $108.6 million for the quarter
        ended September 30, 2006, compared with $97.9 million for the third quarter
        of
        2005.
 
 Systems
        and
        services revenues increased $9.5 million, or 10.0%, to $104.3 million for
        the
        quarter ended September 30, 2006, compared with $94.8 million for the third
        quarter of 2006. The increase in systems and services revenues resulted
        primarily from an increase in revenues recognized on a ratable basis associated
        with software, maintenance, outsourcing and remote hosting services which
        increased $7.8 million from $61.7 million to $69.5 million or 12.6% over
        the
        prior year. Professional services revenues, which include implementation
        and
        consulting related services, were $25.0 million, an increase of $2.8 million
        or
        12.6% over the prior year. Revenues related to software license fees, third
        party software licenses and networking services were $9.8 million, a decrease
        of
        $1.1 million or 10.0% over the prior year.
 
 The
        increase
        in revenues from software, maintenance, outsourcing and remote hosting was
        primarily related to higher sales bookings in 2005 and the activation of
        numerous customers on our advanced clinical and financial solutions. The
        increase in professional services was related to heightened activity with
        customer implementations of our software solutions. These implementation
        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 revenue from software license fees, third party software
        licenses and networking services was primarily due to a lower volume of software
        license fee transactions in the third quarter 2006.
  Hardware
        revenues increased $1.3 million, or 41.2%, to $4.3 million for the quarter
        ended
        September 30, 2006, compared with $3.0 million for the third quarter of 2005.
        We
        expect hardware revenue to continue to fluctuate on a quarterly basis.
 
 17
 The
        adoption
        of SFAS No. 123(R) on January 1, 2006, which resulted in the expensing of
        stock
        based compensation, impacted costs and expenses as indicated in the table
        below
        (in thousands):
  Three
                    Months Ended
                  September
                    30, 2006Cost
                    of systems & services
                
                $
                1,415Sales
                    and marketing
                
                
                676Research
                    and development
                
                
                570General
                    and administrative
                
                
                701Total
                    stock-based compensation expense
                
                $
                3,362
 Cost
        of
        systems and services increased $4.7 million, or 8.4%, to $61.5 million, for
        the
        quarter ended September 30, 2006, compared to $56.8 million for the third
        quarter of 2005. The increase in cost of systems and services was a result
        of
        higher volumes of outsourcing, remote hosting and the hiring of professional
        service employees to increase our capacity and improve our support services.
        The
        impact of adopting SFAS No. 123(R), and an increase in amortization of
        capitalized software development costs, also contributed to the increase
        in the
        cost of systems and services. We expect the cost of third party software
        licensing fees and networking services to continue to fluctuate.
 
 Cost
        of
        hardware increased $914,000, or 35.5%, to $3.5 million for the quarter ended
        September 30, 2006, compared to $2.6 million for the third quarter of 2005.
        The
        increase in the cost of hardware was attributable to the increase in hardware
        revenues discussed above.
 
 Sales
        and
        marketing expenses increased $1.9 million, or 13.8%, to $16.0 million for
        the
        quarter ended September 30, 2006, compared to $14.1 million for the third
        quarter of 2005. The increase in sales and marketing expenses was driven
        by
        significantly higher sales bookings in the quarter which resulted in higher
        commissions, as well as, the impact of adopting SFAS No. 123(R). Bookings
        produce little if any revenue in the quarter in which the contract is signed,
        so
        sales commissions on these contracts may tend to increase sales and marketing
        expense as a percentage of revenue in that quarter.
 
 Research
        and
        development expenses increased $440,000, or 3.5%, to $13.2 million, for the
        quarter ended September 30, 2006, compared to $12.7 million for the third
        quarter of 2005. The increase in research and development expense was as
        a
        result of lower software capitalization, higher payroll costs in the quarter
        associated with our initiative in India, higher health benefit costs, and
        the
        impact of adopting SFAS No. 123(R). Amortization of capitalized software
        development costs, which is included as a component of cost of systems and
        services, increased by approximately $500,000 or 13.2%, to $4.3 million for
        the
        three months ended September 30, 2006, compared to $3.8 million for the third
        quarter of 2005, due to prior period increases in capitalized software.
 
 General
        and
        administrative expenses increased $2.9 million, or 76.1%, to $6.8 million,
        for
        the quarter ended September 30, 2006, compared to $3.8 million for the third
        quarter of 2005. The increase is attributable to an increase in expense in
        the
        current year related to stock based compensation cost as a result of the
        adoption of SFAS No. 123(R), higher costs associated with our enterprise
        resource planning system and higher employee related costs.
 
 Depreciation
        and amortization increased $260,000, or 7.2%, to $3.9 million for the quarter
        ended September 30, 2006, compared to $3.6 million, for the third quarter
        of
        2005. The increase was primarily the result of higher depreciation associated
        with the activation of our ERP solution during the second quarter in 2006.
 
 Interest
        income increased $524,000, or 60.6%, to $1.4 million for the quarter ended
        September 30, 2006, compared to $865,000 for the third quarter of 2005. The
        increase was due to an improvement in yields on higher cash
        balances.
 
 As
        a result
        of these factors, our net income of $5.1 million for the quarter ended September
        30, 2006 remained substantially the same as our net income for the third
        quarter
        in 2005.
  18
  **NINE
        MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
        2005**
 **(In
        thousands, except in per share amounts)**
 
 
 **%
                    of Total**
                
                
                
                **%
                    of Total****2006**
                
                **Revenues**
                
                **2005**
                
                **Revenues**
                
                **Change
                    $**
                
                **Change
                    %**RevenuesSystems
                    and services
                
                $
                298,243
                
                
                95.7
                %
                $
                269,491
                
                
                96.9
                %
                $
                28,752
                
                
                10.7
                %Hardware
                
                
                13,437
                
                
                4.3
                %
                
                8,660
                
                
                3.1
                %
                
                4,777
                
                
                55.2
                %Total
                    revenues
                
                
                311,680
                
                
                100.0
                %
                
                278,151
                
                
                100.0
                %
                
                33,529
                
                
                12.1
                %Costs
                    and expensesCost
                    of systems and services
                
                
                177,073
                
                
                56.8
                %
                
                165,601
                
                
                59.5
                %
                
                11,472
                
                
                6.9
                %Cost
                    of hardware
                
                
                10,991
                
                
                3.5
                %
                
                7,233
                
                
                2.6
                %
                
                3,758
                
                
                52.0
                %Sales
                    and marketing
                
                
                46,766
                
                
                15.0
                %
                
                47,136
                
                
                16.9
                %
                
                (370
                )
                
                -0.8
                %Research
                    and development
                
                
                44,424
                
                
                14.3
                %
                
                39,276
                
                
                14.1
                %
                
                5,148
                
                
                13.1
                %General
                    and administrative
                
                
                17,961
                
                
                5.8
                %
                
                14,707
                
                
                5.3
                %
                
                3,254
                
                
                22.1
                %Depreciation
                    and amortization
                
                
                11,581
                
                
                3.7
                %
                
                10,891
                
                
                3.9
                %
                
                690
                
                
                6.3
                %Restructuring
                    charge
                
                
                8,547
                
                
                2.7
                %
                
                -
                
                
                0.0
                %
                
                8,547
                
                
                n/aTotal
                    costs and expenses
                
                
                317,343
                
                
                101.8
                %
                
                284,844
                
                
                102.4
                %
                
                32,499
                
                
                11.4
                %Loss
                    from operations
                
                
                (5,663
                )
                
                -1.8
                %
                
                (6,693
                )
                
                -2.4
                %
                
                1,030
                
                
                15.4
                %Interest
                    income, net
                
                
                3,873
                
                
                1.2
                %
                
                2,146
                
                
                0.8
                %
                
                1,727
                
                
                80.5
                %Loss
                    before taxes
                
                
                (1,790
                )
                
                -0.6
                %
                
                (4,547
                )
                
                -1.6
                %
                
                2,757
                
                
                60.6
                %Provision
                    for income taxes
                
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %
                
                -
                
                
                0.0
                %Net
                    loss
                
                $
                (1,790
                )
                
                -0.6
                %
                $
                (4,547
                )
                
                -1.6
                %
                $
                2,757
                
                
                60.6
                %Basic
                    net loss per common share
                
                $
                (0.03
                )
                
                
                
                $
                (0.10
                )
                
                
                
                $
                0.07Diluted
                    net loss per common share
                
                $
                (0.03
                )
                
                
                
                $
                (0.10
                )
                
                
                
                $
                0.07
 **RESULTS
        OF OPERATIONS**
 
 Total
        revenues increased $33.5 million, or 12.1%, to $311.7 million for the nine
        months ended September 30, 2006, compared with $278.2 million for the same
        period in 2005.
 
 Systems
        and
        services revenues increased $28.8 million, or 10.7%, to $298.2 million for
        the
        nine months ended September 30, 2006, compared with $269.5 million for the
        same
        period in 2005. The increase in systems and services revenues resulted primarily
        from an increase in revenues associated with subscription-based software,
        maintenance, outsourcing and remote hosting services, which increased $20.4
        million from $184.3 million to $204.7 million, or 11.1% over the prior year.
        Additionally, professional services revenues, which include implementation
        and
        consulting related services were, $72.1 million, an increase of $12.5 million
        or
        21.0% over the prior year. Revenues related to software license fees, third
        party software licenses and networking services were $21.4 million, a decrease
        of $4.2 million, or 16.4% over the prior year.
 
 The
        increase
        in revenues from software, maintenance, outsourcing and remote hosting was
        primarily related to higher sales bookings in prior quarters. The higher
        sales
        bookings were associated with successful sales of our advanced clinical systems
        as well as outsourcing and remote hosting related services. The increase
        in
        professional services was related to higher volume of 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 as a result of the expansion of our product offering
        with the release of SunriseXA 4.5. The decrease in software license fees,
        third
        party software licenses and networking services was primarily due to a lower
        volume of these transactions in 2006.
 
 Hardware
        revenues increased $4.8 million, or 55.2%, to $13.4 million for the nine
        months
        ended September 30, 2006, compared with $8.7 million for the same period
        in
        2005. We expect hardware revenue to continue to fluctuate.
  19
 The
        adoption
        of SFAS No. 123(R) on January 1, 2006, which resulted in the expensing of
        stock
        based compensation, impacted costs and expenses as indicated in the table
        below
        (in thousands):
  Nine
                      Months Ended September 30, 2006Cost
                      of systems & services
                  
                  $
                  3,778Sales
                      and marketing
                  
                  
                  2,241Research
                      and development
                  
                  
                  1,492General
                      and administrative
                  
                  
                  2,072Restructuring
                      charge
                  
                  
                  1,162Total
                      stock-based compensation expense
                  
                  $
                  10,745
 The
            restructuring charge of $1.2 million reflected in the table above, is
            included
            in the $8.5 million restructuring charge disclosed separately on the
            Statement
            of Operations.
 Cost
        of
        systems and services increased $11.5 million, or 6.9%, to $177.1 million,
        for
        the nine months ended September 30, 2006, compared to $165.6 million for
        the
        same period in 2005. The increase in cost of systems and services was a
        result of higher volumes of outsourcing, remote hosting and professional
        services, the impact of adopting SFAS No. 123(R), as well as the hiring of
        professional service employees during the first nine months of 2006, to increase
        our capacity and improve our support services.
 
 Cost
        of
        hardware increased $3.8 million, or 52.0% to $11.0 million for the nine months
        ended September 30, 2006, compared to $7.2 million for the same period in
        2005.
        The increase is in line with higher hardware revenues.
 
 Sales
        and
        marketing expenses decreased $370,000, or 0.8%, to $46.8 million for the
        nine
        months ended September 30, 2006, compared to $47.1 million for the same period
        in 2005. The decrease in sales and marketing expenses was related to lower
        expenditures on trade shows and other marketing events. This decrease in
        expenditure was offset by the adoption of SFAS No. 123R and higher commissions
        as a result of higher sales bookings.
 
 Research
        and
        development expenses increased $5.1 million, or 13.1%, to $44.4 million,
        for the
        nine months ended September 30, 2006, compared to $39.3 million for the same
        period in 2005. The increase in research and development expense was primarily
        related to a decrease in capitalized software development costs of $4.4 million
        from $13.9 million in the nine months ended September 30, 2005, to $9.5 million
        for the nine months ended September 30, 2006. The decrease in capitalized
        software was due to a lower level of capitalization associated with coding
        and
        development as a result of the release of SunriseXA 4.5 in January 2006.
        Amortization of capitalized software development costs, which is included
        as a
        component of cost of systems and services,  increased by approximately
        $2.4
        million, to $13.3 million for the nine months ended September 30, 2006, compared
        to $10.9 million for the same period in 2005, due to prior period increases
        in
        capitalized software development costs.
 
 General
        and
        administrative expenses increased $3.3 million, or 22.1%, to $18.0 million,
        for
        the nine months ended September 30, 2006, compared to $14.7 million for the
        same
        period in 2005. The increase in expenses was related to stock based compensation
        costs as a result of the adoption of SFAS No. 123(R), higher employee related
        costs, as well as costs associated with the enterprise resource planning
        implementation. The company recorded a charge of $2.2 million during the
        nine
        months ended September 30, 2005, associated with the transition of our prior
        CEO.
 
 Depreciation
        and amortization increased $690,000, or 6.3%, to $11.6 million for the nine
        months ended September 30, 2006, compared to $10.9 million, for the same
        period
        in 2005. The increase was primarily the result of higher depreciation associated
        with the activation of our enterprise resource planning solution during the
        second quarter of 2006.
 
 In
        the nine
        months ended September 30, 2006, we completed a restructuring of the company's
        operations to better align our resources towards customer related activities.
        We
        recorded a charge of $8.5 million in connection with the restructuring. The
        restructuring was implemented to re-invest some of the cost savings into
        client-related activities, including client support and professional
        services.
 
 Interest
        income increased $1.7 million, or 80.5%, to $3.9 million for the nine months
        ended September 30, 2006, compared to $2.1 million for the same period in
        2005.
        The increase was due to an improvement in yields on higher cash
        balances.
 
 As
        a result
        of these factors, we had a net loss of $1.8 million for the nine months ended
        September 30, 2006, compared to a net loss of $4.5 million for the same period
        in 2005.
 
 20
 LIQUIDITY
        AND CAPITAL RESOURCES
  During
        the
        nine months ended September 30, 2006, cash provided by operating activities
        was
        $8.9 million, primarily related to non-cash adjustments to our net loss for
        depreciation and amortization and stock based compensation offset by a decrease
        in deferred revenue and accounts payable balances. Investing activities used
        $75.2 million of cash, consisting of a net $51.5 million purchase of marketable
        securities, $10.2 million for the purchase of property and equipment, $9.5
        million for the funding of capitalized software development costs, and $4.0
        million for the acquisition of Sysware. The purchase of property and equipment
        was related to our continued investment in the infrastructure of our Technology
        Solutions Center to expand our remote hosting services as well as our enterprise
        resource planning implementation. Financing activities provided $23.9 million
        of
        cash from the exercise of stock options. Stock option exercises were higher
        than
        usual during the nine months ended September 30, 2006 as a result of exercises
        of options from option holders whose employment was terminated in connection
        with our restructuring.
  At
        September
        30, 2006, our principal source of liquidity was our combined cash and cash
        equivalents and marketable securities balance of $123.2 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, the success and market acceptance of our future product
        releases, and other related items. We believe that our current cash and cash
        equivalents and marketable securities balances, combined with our anticipated
        cash collections from customers will be adequate to meet our currently
        anticipated liquidity requirements for the next twelve months.
 
 The unpaid
        liability, related to the restructuring of our operations effected in January
        2006, will be paid out in 2006 and 2007. The remaining liability at September
        30, 2006 was $2.4 million.
 
 These
        amounts
        are expected to be funded from current cash and cash equivalent
        balances.
  OFF-BALANCE
        SHEET ARRANGEMENTS
  At
        September
        30, 2006, we do not have any material off-balance sheet
        arrangements.
 
 CRITICAL
        ACCOUNTING POLICIES
  We
        believe
        there are several accounting policies that are critical to understanding
        our
        historical and future performance as these policies affect the reported amount
        of 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. The preparation of financial statements in
        conformity with accounting principles generally accepted in the United States
        of
        America requires management to make estimates and assumptions that affect
        the
        reported amounts of assets, liabilities, revenues and expenses and the
        disclosure of contingencies. Due to the inherent uncertainty involved in
        making
        estimates, actual results reported in future periods may be materially different
        from those estimates. There were no changes to our Critical Accounting Policies
        as previously disclosed in our Annual Report on Form 10-K for the year ended
        December 31, 2005 filed with the SEC on March 7, 2006, except as noted
        below.
 
 *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 nine months ended
        September 30, 2005.
 
 In
        December
        2004, FASB issued SFAS No. 123(R), which amended SFAS No. 123. SFAS
        No. 123(R) required 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
        annual
        period after June 15, 2005. Subsequent to the effective date, the pro forma
        disclosures previously made 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 nine months
        ended September 30, 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 awards 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 awards vesting period.
        The fair value of stock options 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)
        resulted in $3.4 million and $10.7 million in stock option expense during
        the
        three and nine months ended September 30 2006, respectively. The adoption
        of
        SFAS No. 123(R) had no impact on cash flows from operations or financing
        activities.
 
 21
 ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We
        do not
        currently use derivative financial instruments. We do not currently enter
        into
        foreign currency hedge transactions. Foreign currency fluctuations, through
        September 30, 2006, have not had a material impact on our financial position
        or
        results of operations.
 
 We
        generally
        invest in high quality debt instruments with relatively short maturities.
        Based
        upon the nature of our investments, we do not expect any material loss from
        our
        investments. Nevertheless, investments in both fixed rate and floating rate
        interest earning instruments carry a degree of interest rate risk. Fixed
        rate
        securities may have their fair market value adversely impacted due to a rise
        in
        interest rates, while floating rate securities may produce less income than
        expected if interest rates fall. Due in part to these factors, our future
        investment income may fall short of expectations due to changes in interest
        rates or we may suffer losses in principal if forced to sell securities that
        have seen a decline in market value due to changes in interest
        rates.
  The
        following
        table illustrates potential fluctuation in annualized interest income based
        upon
        hypothetical values for blended interest rates for marketable securities
        balances.
 
 Hypothetical
                
                Marketable
                    securities balances
                  (in
                    thousands)Interest
                    Rate
                
                $
                    100,000
                
                $
                    110,000
                
                $
                    120,0001.5%
                
                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
 
 We
        estimate
        that a one-percentage point decrease in interest rates for our marketable
        securities portfolio as of September 30, 2006 would have resulted in a decrease
        in interest income of $889,000 for a twelve month period.   This
        sensitivity analysis contains certain simplifying assumptions (for example,
        it
        does not consider the impact of changes in the portfolio as a result of our
        business needs or as a response to changes in the market). Therefore, although
        it gives an indication of our exposure to changes in interest rates, it is
        not
        intended to predict future results and our actual results will likely
        vary.
 
 We
        account
        for cash equivalents and marketable securities in accordance with SFAS No.
        115.
“Accounting for Certain Investments in Debt and Equity Securities.” Cash
        equivalents are short-term highly liquid investments with original maturity
        dates of three months or less. Cash equivalents are carried at cost, which
        approximates fair market value.
  ITEM
        4. CONTROLS
        AND PROCEDURES
 
 *Evaluation
        of Disclosure Controls and Procedures*
  Our
        management, with the participation of our Chief Executive Officer and Chief
        Financial Officer, evaluated the effectiveness of our disclosure controls
        and
        procedures as defined in Rule 13a-15(e) under the Exchange Act as of September
        30, 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 accumulated and communicated to our management, including our Chief
        Executive Officer and Chief Financial Officer, as appropriate to allow timely
        decisions regarding required disclosures, and is recorded, processed, summarized
        and reported, within the time periods specified in the SEC's rules and
        forms.  There is no assurance that our disclosure controls and procedures
        will operate effectively under all circumstances.  Based upon the
        evaluation described above our Chief Executive Officer and Chief Financial
        Officer concluded that, as of September 30, 2006, our disclosure controls
        and
        procedures were effective at the reasonable assurance level.
 
 *Changes
        in Internal Controls over Financial Reporting*
 
 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 September
        30, 2006 that has materially affected, or is reasonably likely to materially
        affect, our internal control over financial reporting.
  PART
        II.
 ITEM
        1. LEGAL
        PROCEEDINGS
 
 The
        information set forth under Note 13 to the unaudited condensed consolidated
        financial statements of this quarterly report on Form 10-Q is incorporated
        herein by reference.
  ITEM
        1A. RISK
        FACTORS
 
 Many
        risks
        affect our business.  These risks include, but are not limited to,
        those
        described below, each of which may be relevant to decisions regarding ownership
        of our stock.  We have attempted to organize the description of these
        risks
        into logical groupings to enhance readability, but many of the risks interrelate
        or could be grouped in other ways, so no special significance should be
        attributed to these groupings.  Any of these risks could have a significant
        adverse effect on our reputation, business, financial condition or results
        of
        operations.
  22
 **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. Due to this
        recent history, the marketplace can be expected to be particularly sensitive
        to
        additional technical issues we may encounter with our software.
 
 We
        took steps
        to address these issues, and our subsequent releases of Sunrise Clinical
        Manager
        3.5 XA (3.5) in June 2004, Sunrise Clinical Manager 4.0 XA (4.0) in
        March 2005 and Sunrise Clinical Manager 4.5 XA (4.5) in January 2006
        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,
        these
        are still relatively recent releases and issues may appear in the
        future.
        In particular, 4.5 incorporates a large number of new features and
        functions.  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
        we
        encounter serious issues with our software, 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 we may fail
        to
        meet client expectations regarding new or enhanced features and
        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.
 
 23
 ***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
        or
        more from initial contact to contract execution.  Our implementation
        cycle
        has generally ranged from 6 to 36 months from contract execution to
        completion of implementation. During the sales and implementation cycles,
        we
        will expend substantial time, effort and resources preparing contract proposals,
        negotiating the contract and implementing the software. We may not realize
        any
        revenues to offset these expenditures and, if we do, accounting principles
        may
        not allow us to recognize the revenues during corresponding periods.
        Additionally, any decision by our clients to delay purchasing or implementing
        our software may adversely affect our revenues.
  ***We
        may experience implementation delays that could harm our reputation and violate
        contractual commitments.***
  Some
        of our
        software is complex and requires a lengthy and expensive implementation
        process.  Each client's situation is different, and unanticipated
        difficulties and delays may arise as a result of failures by us or the client
        to
        meet our respective implementation responsibilities.  Because of the
        complexity of the implementation process, delays are sometimes difficult
        to
        attribute solely to us or the client.  Implementation delays could
        motivate
        clients to delay payments or attempt to cancel their contracts with us or
        seek
        other remedies from us. Any inability or perceived inability to implement
        consistent with a client's schedule may be a competitive disadvantage for
        us as
        we pursue new business.  Implementation also requires our clients
        to make a
        substantial commitment of their own time and resources and to make significant
        organizational and process changes, and if our clients are unable to fulfill
        their implementation responsibilities in a timely fashion our projects may
        be
        delayed or become less profitable.
  ***Implementation
        costs may exceed expectations, which can negatively affect our operating
        results*** **.**
  Each
        client's
        circumstances may include unforeseen issues that make it more difficult or
        costly than anticipated to implement our software. We may fail to project,
        price
        or manage our implementation services correctly.  If we do not have
        sufficient qualified personnel to fulfill our implementation commitments
        in a
        timely fashion, related revenue may be delayed, and if we must supplement
        our
        capabilities with expensive third-party consultants, our costs will
        increase.
  ***Our
        performance depends upon improved software
        sales.***
  Our
        software
        sales in the first half of 2006 did not meet our internal targets, and in
        the
        future we must achieve higher levels of software sales, consistent with our
        projections, in order to achieve our expectations for 2006 revenue and earnings
        and to provide a solid foundation for future growth. Our ability to improve
        sales depends upon many factors, including completion of implementation and
        successful use of our new software releases, particularly our pharmacy and
        ambulatory solutions, in live environments for referenceable
        clients.
 
 **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. 
        The
        ability to access the systems and the data the Technology Solution Center
        hosts
        and supports on demand is critical to our clients.  Our operations
        and
        facilities are vulnerable to interruption and/or damage from a number of
        sources, many of which are beyond our control, including, without limitation:
        (i) power loss and telecommunications failures; (ii) fire, flood, hurricane
        and
        other natural disasters; (iii) software and hardware errors, failures or
        crashes; and (iv) computer viruses, hacking and similar disruptive
        problems.  We attempt to mitigate these risks through various means
        including redundant infrastructure, disaster recovery plans, separate test
        systems and change control and system security measures, but our
        precautions  may not protect against all problems.  If clients'
        access
        is interrupted because of problems in the operation of our facilities, we
        could
        be exposed to significant claims by clients or their patients, particularly
        if
        the access interruption is associated with problems in the timely delivery
        of
        medical care.  We must maintain disaster recovery and business continuity
        plans that rely upon third-party providers of related services, and if those
        vendors fail us at a time that our center is not operating correctly, we
        could
        incur a loss of revenue and liability for failure to fulfill our contractual
        service commitments.  Any significant instances of system downtime
        could
        negatively affect our reputation and ability to sell our remote hosting
        services.
 
 ***Any
        breach of confidentiality of client or patient data in our service center
        could
        expose us to significant expense and 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 Technology Solution Center.  Notwithstanding the
        efforts
        we undertake to protect data, our measures can be vulnerable to infiltration
        as
        well as unintentional lapse, and if confidential information is compromised
        we
        could face 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 clients’ IT
        operations may adversely affect our profitability.***
  We
        provide
        outsourcing services that involve operating clients' IT departments using
        our
        employees.  At the initiation of these relationships, clients often
        require
        us to hire, at substantially the same compensation, the entire IT staff that
        had
        been performing the services we take on.  In these circumstances our
        costs
        may be higher than we target unless and until we are able to transition the
        workforce, methods and systems to a more scalable model.  Various
        factors
        can make this difficult, including geographic dispersion of client facilities
        and variation in client needs, IT environments, and system configurations. 
        Also, under some circumstances we may incur unanticipated costs as a successor
        employer by inheriting
 24
 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,
        Computer Sciences Corp., Perot Systems Corporation, as well as smaller
        firms.  Several of our existing and potential competitors are better
        established, benefit from greater name recognition and have significantly
        more
        financial, technical and marketing resources than we do.  Some competitors,
        particularly those with a more diversified revenue base or that are privately
        held, may have greater flexibility than we do to compete aggressively on
        the
        basis of price.  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 are a finite number
        of
        hospitals and other healthcare providers in our target market.  As
        costs
        fall, technology improves, and market factors continue to compel investment
        by
        healthcare organizations in software and services like ours, market saturation
        may change the competitive landscape in favor of larger competitors with
        greater
        scale.
  ***Clients
        that use our legacy software are vulnerable to
        competition.***
  A
        significant
        part of our revenue comes from relatively high-margin legacy software that
        was
        installed by our clients many years ago. We attempt to convert these clients
        to
        our newer generation software, but such conversions require significant
        investments of time and resources by clients. This reduces our advantage
        as the
        incumbent vendor and has allowed our competitors to target these clients,
        with
        some success.  If we are not successful in retaining a large portion
        of
        these clients by continuing to support legacy software - which is increasingly
        expensive to maintain - or by converting them to our newer software, our
        results
        of operations will be negatively affected.
 
 ***The
        healthcare industry faces financial constraints that could adversely affect
        the
        demand for our software and services.***
  The
        healthcare industry faces significant financial constraints. For example,
        the
        shift to managed healthcare in the 1990's put pressure on healthcare
        organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically
        reduced Medicare reimbursement to healthcare organizations. Our software
        often
        involves a significant financial commitment by our clients. Our ability to
        grow
        our business is largely dependent on our clients' information technology
        budgets.  If healthcare information technology spending declines or
        increases more slowly than we anticipate, demand for our software could be
        adversely affected.
  ***Healthcare
        industry consolidation could impose pressure on our software prices, reduce
        our
        potential client base and reduce demand for our
        software.***
  Many
        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
        first three quarters of 2006, we had a net loss of $1.8 million. We also
        had a
        net loss or operating loss for each of the five preceding years. 
        We may
        incur losses in the future, and it is not certain that we will achieve sustained
        or increasing profitability.
  25
 ***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 our new services, software and software enhancements
                  by us
                  or our competitors;
 ·
              client
                  decisions regarding renewal or termination of their
                  contracts;
 ·
              software
                  and price competition;
 ·
              personnel
                  changes;
 ·
              significant
                  judgments and estimates made by management in the application of
                  generally
                  accepted accounting principles;
 ·
              healthcare
                  reform measures and healthcare regulation in general;
                  and
 ·
              fluctuations
                  in general economic and financial market conditions; including
                  interest
                  rates.
 
 It
        is
        difficult to predict the timing of revenues that we receive from software
        sales,
        because the sales cycle can vary depending upon several factors. These include
        the size and terms of the transaction, the changing business plans of the
        client, the effectiveness of the client's management, general economic
        conditions and the regulatory environment. In addition, the timing of our
        revenue recognition could vary considerably depending upon whether our clients
        license our software under our subscription model or our traditional licensing
        arrangements. Because a significant percentage of our expenses are relatively
        fixed, a variation in the timing of sales and implementations could cause
        significant variations in operating results from quarter to quarter. We believe
        that period-to-period comparisons of our historical results of operations
        are
        not necessarily meaningful. Investors should not rely on these comparisons
        as
        indicators of future performance.
  ***Early
        termination of client contracts or contract penalties could adversely affect
        results of operations.***
  Client
        contracts can change or terminate early for a variety of reasons. 
        Change
        of control, financial issues, or other changes in client circumstances may
        cause
        us or the client to seek to modify or terminate a contract.  Further,
        either we or the client may generally terminate a contract for material uncured
        breach by the other.  If we breach a contract or fail to perform in
        accordance with contractual service levels, we may be required to refund
        money
        previously paid to us by the client, or to pay penalties or other damages. 
        Even if we have not breached, we may deal with various situations from time
        to
        time for the reasons described above which may result in the amendment of
        a
        contract.  These steps can result in significant current period charges
        and/or reductions in current or future revenue.
  ***Because
        in many cases we recognize revenues for our software monthly over the term
        of a
        client contract, downturns or upturns in sales will not be fully reflected
        in
        our operating results until future periods.***
  We
        recognize
        a significant portion of our revenues from clients monthly over the terms
        of
        their agreements, which are typically 5-7 years and can be up to
        10 years. As a result, much of the revenue that we report each quarter
        is
        attributable to agreements executed during prior quarters. Consequently,
        a
        decline in sales, client renewals, or market acceptance of our software in
        one
        quarter will not necessarily be reflected in lower revenues in that quarter,
        and
        may negatively affect our revenues and profitability in future quarters.
        In
        addition, we may be unable to adjust our cost structure to compensate for
        these
        reduced revenues. This monthly revenue recognition also makes it difficult
        for
        us to rapidly increase our revenues through additional sales in any period,
        as a
        significant portion of revenues from new clients must generally be recognized
        over the applicable agreement term.
  ***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.
  26
 ***Failure
        to maintain effective internal controls could adversely affect our operating
        results and the market price of our common stoc*** **k.**
  Section
        404
        of the Sarbanes-Oxley Act of 2002 requires that we maintain internal controls
        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 will be required to disclose those 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 which could result
        in a
        negative market reaction.
  ***Inability
        to obtain additional financing could limit our ability to conduct necessary
        development activities and make strategic investments*** **.**
  While
        our
        available cash and cash equivalents and the cash we anticipate generating
        from
        operations appear at this time to be adequate to meet our foreseeable needs,
        we
        could incur significant expenses as a result of unanticipated events in our
        business or competitive, regulatory, or other changes in our market. 
        As a
        result, we may in the future need to obtain additional financing. 
        If
        additional financing is not available on acceptable terms, we may not be
        able to
        respond adequately to these changes, which could adversely affect our operating
        results and the market price of our common stock.
 
 **Risk
        of liability to third parties**
  ***Our
        software and content are used to assist clinical decision-making and provide
        information about patient medical histories and treatment plans. If our software
        fails to provide accurate and timely information or is associated with faulty
        clinical decisions or treatment, clients, clinicians or their patients could
        assert claims against us that could result in substantial cost to us, harm
        our
        reputation in the industry and cause demand for our software to
        decline.***
  We
        provide
        software and content that provides practice guidelines and potential treatment
        methodologies, and other information and tools for use in clinical
        decision-making, provides access to patient medical histories and
        assists
        in creating patient treatment plans. If our software fails to provide accurate
        and timely information, or if our content or any other element of our software
        is associated with faulty clinical decisions or treatment, we could have
        liability to clients, clinicians or patients. The assertion of such claims,
        whether or not valid, and ensuing litigation, regardless of its outcome,
        could
        result in substantial cost to us, divert management's attention from operations
        and decrease market acceptance of our software. We attempt to limit by contract
        our liability for damages and to require that our clients assume responsibility
        for medical care and approve all system rules and protocols. Despite these
        precautions, the allocations of responsibility and limitations of liability
        set
        forth in our contracts may not be enforceable, may not be binding upon patients,
        or may not otherwise protect us from liability for damages. We maintain general
        liability and errors and omissions insurance coverage, but this coverage
        may not
        continue to be available on acceptable terms or may not be available in
        sufficient amounts to cover one or more large claims against us. In addition,
        the insurer might disclaim coverage as to any future claim. One or more large
        claims could exceed our available insurance coverage.
  Complex
        software such as ours may contain errors or failures that are not detected
        until
        after the software is introduced or updates and new versions are released.
        It is
        challenging for us to envision and test our software for all potential problems
        because it is difficult to simulate the wide variety of computing environments
        or treatment methodologies that our clients may deploy or rely upon. Despite
        extensive testing by us and clients, from time to time we have discovered
        defects or errors in our software, and such defects or errors can be expected
        to
        appear in the future.  Defects and errors that are not timely detected
        and
        remedied could expose us to risk of liability to clients, clinicians and
        patients and cause delays in software introductions and shipments, result
        in
        increased costs and diversion of development resources, require design
        modifications or decrease market acceptance or client satisfaction with our
        software.
  ***Our
        software and our vendors' software that we include in our offering could
        infringe third-party intellectual property rights, exposing us to costs that
        could be significant.***
  Infringement
        or invalidity claims or claims for indemnification resulting from infringement
        claims could be asserted or prosecuted against us based upon design or use
        of
        software we provide to clients, including software we develop as well as
        software provided to us by vendors. Regardless of the validity of any claims,
        defending against these claims could result in significant costs and diversion
        of our resources, and vendor indemnity might not be available. The assertion
        of
        infringement claims could result in injunctions preventing us from distributing
        our software, or require us to obtain a license to the disputed intellectual
        property rights, which might not be available on reasonable terms or at
        all.  We might also be required to indemnify our clients at significant
        expense.
  **Risks
        related to our strategic relationships and initiatives**
  ***We
        depend on licenses from third parties for rights to some technology we use,
        and
        if we are unable to continue these relationships and maintain our rights
        to this
        technology, our business could suffer.***
  We
        depend
        upon licenses for some of the technology used in our software from a number
        of
        third-party vendors. Most of these licenses expire within one to five years,
        can
        be renewed only by mutual consent and may be terminated if we breach the
        terms
        of the license and fail to cure the breach within a specified period of time.
        We
        may not be able to continue using the technology made available to us under
        these licenses on commercially reasonable terms or at all. As a result, we
        may
        have to discontinue, delay or reduce software shipments until we obtain
        equivalent technology, which could hurt our business. Most of our third-party
        licenses are non-exclusive. Our competitors may obtain the right to use any
        of
        the technology covered by these licenses and use the technology to compete
        directly with us. In addition, if our vendors choose to discontinue support
        of
        the licensed technology in the future or are unsuccessful in their continued
        research and development efforts, particularly with regard to Microsoft,
        we may
        not be able to modify or adapt our own software.
  ***Our
        offering often includes software modules provided by third parties, and if
        these
        third parties do not meet their commitments, our relationships with our clients
        could be impaired.***
  Some
        of the
        software modules we offer to clients are provided by third parties. 
        We
        often rely upon these third parties to produce software that meets clients'
        needs and to implement and maintain that software.  If these third
        parties
        fail to fulfill their responsibilities, our relationships with affected clients
        could be impaired, and we could be responsible to clients for the
        failures.  We might not be able to recover from these third parties
        for all
        of the costs we incur as a result of their failures.
  27
 ***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.
 
 ***Additional
        investment will be required to realize the potential of our Sysware
        acquisition.***
  We
        must make
        significant investments of money and management time in software development
        and
        infrastructure in order to realize the potential of our acquisition of the
        business of Sysware and Mosum, as described elsewhere in this report, to
        (i)
        have a fully integrated and leverageable laboratory information system to
        sell
        to our diversified client base, and (ii) build Mosum's India operations into
        an
        integrated development and support organization that can cost-effectively
        augment our onshore resources.
 
 **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 the FDC Act regarding general controls including
                  establishment registration, device listing, compliance with good
                  manufacturing practices, reporting of specified device malfunctions
                  and
                  adverse device events.
 
 If
        we fail to
        comply with applicable requirements, the FDA could respond by imposing fines,
        injunctions or civil penalties, requiring recalls or software corrections,
        suspending production, refusing to grant pre-market clearance or approval
        of
        software, withdrawing clearances and approvals, and initiating criminal
        prosecution. Any FDA policy governing computer products or content, may increase
        the cost and time to market of new or existing software or may prevent us
        from
        marketing our software.
  ***Changes
        in federal and state regulations relating to patient data could depress the
        demand for our software and impose significant software redesign costs on
        us.***
  Clients
        use
        our systems to store and transmit highly confidential patient health information
        and data.  State and federal laws and regulations and their foreign
        equivalents govern the collection, use, transmission and other disclosures
        of
        health information. These laws and regulations may change rapidly and may
        be
        unclear or difficult to apply.
  Federal
        regulations under the Health Insurance Portability and Accountability Act
        of
        1996, or HIPAA, impose national health data standards on healthcare providers
        that conduct electronic health transactions, healthcare clearinghouses that
        convert health data between HIPAA-compliant and non-compliant formats and
        health
        plans. Collectively, these groups are known as covered entities. The HIPAA
        standards prescribe transaction formats and code sets for electronic health
        transactions; protect individual privacy by limiting the uses and disclosures
        of
        individually identifiable health information; and require covered entities
        to
        implement administrative, physical and technological safeguards to ensure
        the
        confidentiality, integrity, availability and security of individually
        identifiable health information in electronic form. Though we are not a covered
        entity, most of our clients are and require that our software and services
        adhere to HIPAA standards. Any failure or perception of failure of our software
        or services to meet HIPAA standards could adversely affect demand for our
        software and services and force us to expend significant capital, research
        and
        development and other resources to modify our software or services to address
        the privacy and security requirements of our clients.
  28
 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**
 
 ***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.
  ***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
        since 2005.  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.
 
 **Risks
        related to our equity structure**
  ***Provisions
        of our charter documents and Delaware law may inhibit potential acquisition
        bids
        that a stockholder may believe is desirable, and the market price of our
        common
        stock may be lower as a result.***
  Our
        board of
        directors has the authority to issue up to 4,900,000 shares of preferred
        stock.
        The board of directors can fix the price, rights, preferences, privileges
        and
        restrictions of the preferred stock without any further vote or action by
        our
        stockholders. The issuance of shares of preferred stock may discourage, delay
        or
        prevent a merger or acquisition of our company. The issuance of preferred
        stock
        may result in the loss of voting control to other stockholders. We have no
        current plans to issue any shares of preferred stock. In August 2000,
        our
        board of directors adopted a 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.
  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
        6. EXHIBITS
 
 See
        Index
        to exhibits.
 
  28
  
 
 
 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:
        November 8, 2006
 /s/
        Robert J. Colletti
 Robert
        J.
        Colletti
 Senior
        Vice President, Chief Financial Officer and
 Chief
        Accounting Officer
 
 
 
  
 
  
   
 **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.