UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





________________




FORM
      10-Q


________________







QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





FOR
      THE
      QUARTERLY PERIOD ENDED JUNE 30, 2006





COMMISSION
      FILE NUMBER: 000-24539





**ECLIPSYS
      CORPORATION**


(Exact
      name of registrant as specified in its charter)








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





**1750
      Clint Moore Road**


**Boca
      Raton, Florida**


**33487**


(Address
      of principal executive offices)





**561-322-4321**


(Telephone
      number of registrant)





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





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


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





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


Yes
      [
      ] No [ ü ]





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





**Class**
            **Shares
                outstanding as of July 31, 2006**Common
                Stock, $.01 par value
            52,199,066








Table
          of Contents


Part
                  I.
              
              Financial
                  InformationItem
                  1.
              
              Financial
                  Statements - UnauditedCondensed
                  Consolidated Balance Sheets (unaudited) -
                  As of June 30, 2006and
                  December 31, 2005
              
              3Condensed
                  Consolidated Statements of Operations
                  (unaudited) - For the Three andand
                  Six Months ended June 30, 2006 and 2005
              
              4Condensed
                  Consolidated Statements of Cash Flows (unaudited)
                  - For the Six
              
              5Months
                  ended June 30, 2006 and 2005Notes
                  to Condensed Consolidated Financial Statements
                  (unaudited)
              
              6Item
                  2.
              
              Management's
                  Discussion and Analysisof Financial
                  Condition and Resultsof
                  Operations
              
              14Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              
              21Item
                  4.
              
              Controls
                  and Procedures
              
              21Part
                  II.
              
              Other
                  InformationItem
                  1.
              
              Legal
                  Proceedings
              
              22Item
                  1A.
              
              Risk
                  Factors
              
              22Item
                  4.
              
              Submission
                  of Matters to a Vote of Security
                  Holders
              
              30Item
                  6.
              
              Exhibits
              
              30Signatures


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Condensed
                  Consolidated Balance Sheets(Unaudited)****(In
                  thousands)****June
                  30,**
              
              
              **December
                  31,****2006**
              
              
              **2005****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              28,588
              
              $
              76,693Marketable
                  securities
              
              
              92,375
              
              
              37,455Accounts
                  receivable, net of allowance for doubtful accounts of $4,503 and$5,676,
                  respectively
              
              
              75,573
              
              
              80,833Inventory
              
              
              1,611
              
              
              2,289Prepaid
                  expenses
              
              
              23,235
              
              
              17,909Other
                  current assets
              
              
              906
              
              
              2,184Total
                  current assets
              
              
              222,288
              
              
              217,363Property
                  and equipment, net
              
              
              42,390
              
              
              40,500Capitalized
                  software development costs, net
              
              
              31,303
              
              
              35,690Acquired
                  technology, net
              
              
              432
              
              
              584Intangible
                  assets, net
              
              
              2,515
              
              
              2,940Deferred
                  tax asset
              
              
              4,812
              
              
              4,124Goodwill
              
              
              6,669
              
              
              6,624Other
                  assets
              
              
              17,985
              
              
              20,964Total
                  assets
              
              $
              328,394
              
              $
              328,789**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Deferred
                  revenue
              
              $
              97,562
              
              $
              107,960Accounts
                  payable
              
              
              13,653
              
              
              26,103Accrued
                  compensation costs
              
              
              10,017
              
              
              15,974Deferred
                  tax liability
              
              
              4,812
              
              
              4,124Other
                  current liabilities
              
              
              18,970
              
              
              10,413Total
                  current liabilities
              
              
              145,014
              
              
              164,574Deferred
                  revenue
              
              
              14,057
              
              
              16,772Other
                  long-term liabilities
              
              
              156
              
              
              1,252Total
                  liabilities
              
              
              159,227
              
              
              182,598Stockholders’
                  equity:Total
                  stockholders’ equity
              
              
              169,167
              
              
              146,191Total
                  liabilities and stockholders’ equity
              
              $
              328,394
              
              $
              328,789


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


3
 Table
          of Contents


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Condensed
                  Consolidated Statements of Operations(Unaudited)****(In
                  thousands, except per share amounts)****Three
                  Months Ended**
              **Six
                  Months Ended****June
                  30,**
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenues:Systems
                  and services
              
              $
              97,754
              
              $
              91,557
              
              $
              193,977
              
              $
              174,685Hardware
              
              
              4,576
              
              
              4,308
              
              
              9,137
              
              
              5,615Total
                  revenues
              
              
              102,330
              
              
              95,865
              
              
              203,114
              
              
              180,300Costs
                  and expenses:Cost
                  of systems and services
              
              
              59,097
              
              
              55,248
              
              
              115,555
              
              
              107,513Cost
                  of hardware
              
              
              3,851
              
              
              3,557
              
              
              7,502
              
              
              4,658Sales
                  and marketing
              
              
              14,473
              
              
              16,196
              
              
              30,742
              
              
              34,372Research
                  and development
              
              
              14,296
              
              
              13,974
              
              
              31,258
              
              
              26,550General
                  and administrative
              
              
              5,559
              
              
              6,511
              
              
              11,199
              
              
              10,867Depreciation
                  and amortization
              
              
              3,894
              
              
              3,583
              
              
              7,696
              
              
              7,266Restructuring
                  charge
              
              
              1,349
              
              
              -
              
              
              8,547
              
              
              -Total
                  costs and expenses
              
              
              102,519
              
              
              99,069
              
              
              212,499
              
              
              191,226Loss
                  from operations
              
              
              (189
              )
              
              (3,204
              )
              
              (9,385
              )
              
              (10,926
              )Interest
                  income, net
              
              
              1,335
              
              
              719
              
              
              2,484
              
              
              1,280Income
                  (loss) before taxes
              
              
              1,146
              
              
              (2,485
              )
              
              (6,901
              )
              
              (9,646
              )Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              1,146
              
              $
              (2,485
              )
              $
              (6,901
              )
              $
              (9,646
              )Net
                  income (loss) per common share:Basic
                  net income (loss) per common share
              
              $
              0.02
              
              $
              (0.05
              )
              $
              (0.14
              )
              $
              (0.20
              )Diluted
                  net income (loss) per common share
              
              $
              0.02
              
              $
              (0.05
              )
              $
              (0.14
              )
              $
              (0.20
              )Weighted
                  average common shares outstandingBasic
              
              
              51,598
              
              
              47,629
              
              
              51,109
              
              
              47,444Diluted
              
              
              53,100
              
              
              47,629
              
              
              51,109
              
              
              47,444
  The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial statements.


4
 Table
          of Contents


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Condensed
                  Consolidated Statementsof Cash Flows
                  (Unaudited)****(In
                  thousands)****Six
                  Months Ended June 30,****2006**
              
              **2005**Operating
                  activities:Net
                  loss
              
              $
              (6,901
              )
              $
              (9,646
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              18,371
              
              
              16,106Provision
                  for bad debts
              
              
              818
              
              
              1,050Stock
                  compensation expense
              
              
              7,383
              
              
              1,150Changes
                  in operating assets and liabilities:Decrease
                  / (Increase) in accounts receivable
              
              
              4,418
              
              
              (1,135
              )Increase
                  in prepaid expenses and other current assets
              
              
              (3,242
              )
              
              (2,337
              )Decrease
                  / (Increase) in inventory
              
              
              676
              
              
              (28
              )Increase/(Decrease)
                  in other assets
              
              
              1,449
              
              
              (9,920
              )Decrease
                  in deferred revenue
              
              
              (12,881
              )
              
              (1,755
              )(Decrease)
                  / Increase in accrued compensation
              
              
              (5,979
              )
              
              3,763Decrease
                  in accounts payable and other current liabilities
              
              
              (4,454
              )
              
              (3,745
              )(Decrease)
                  / Increase in other long-term liabilities
              
              
              (1,095
              )
              
              1,143Total
                  adjustments
              
              
              5,464
              
              
              4,292Net
                  cash used in operating activities
              
              
              (1,437
              )
              
              (5,354
              )Investing
                  activities:Purchases
                  of property and equipment
              
              
              (9,167
              )
              
              (6,316
              )Purchase
                  of marketable securities
              
              
              (512,324
              )
              
              (159,866
              )Proceeds
                  from sale of marketable securities
              
              
              457,403
              
              
              122,712Capitalized
                  software development costs
              
              
              (4,626
              )
              
              (9,634
              )Cash
                  advances and cash paid for acquisitions
              
              
              (800
              )
              
              (20
              )Net
                  cash used in investing activities
              
              
              (69,514
              )
              
              (53,124
              )Financing
                  activities:Proceeds
                  from stock options exercised
              
              
              22,449
              
              
              7,623Proceeds
                  from issuance of common stock inemployee
                  stock purchase plan
              
              
              223
              
              
              -Net
                  cash provided by financing activities
              
              
              22,672
              
              
              7,623Effect
                  of exchange rates on cash and cash equivalents
              
              
              174
              
              
              89Net
                  decrease in cash and cash equivalents
              
              
              (48,105
              )
              
              (50,766
              )Cash
                  and cash equivalents — beginning of period
              
              
              76,693
              
              
              122,031Cash
                  and cash equivalents — end of period
              
              $
              28,588
              
              $
              71,265


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


5
 Table
          of Contents


ECLIPSYS
      CORPORATION AND SUBSIDIARIES


NOTES
      TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.
      BASIS
      OF PRESENTATION





The
      accompanying unaudited condensed consolidated financial statements of Eclipsys
      Corporation, or the Company, and the notes thereto have been prepared in
      accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation
      S-X
      of the Securities and Exchange Commission, or SEC. The year-end condensed
      balance sheet data included in these unaudited condensed consolidated financial
      statements was derived from audited financial statements. These statements
      do
      not include all of the information and disclosures required by accounting
      principles generally accepted in the United States of America but do reflect
      all
      adjustments (consisting of normal recurring adjustments) that are, in the
      opinion of management, necessary for a fair statement of results for the interim
      periods presented.




The
      results
      of operations for the three and six months ended June 30, 2006 are not
      necessarily indicative of annual results. The Company manages its business
      as
      one reportable segment.





The
      unaudited
      condensed consolidated financial statements included herein should be read
      in
      conjunction with the audited consolidated financial statements and the notes
      thereto that are included in the Company's Annual Report on Form 10-K for the
      year ended December 31, 2005 that was filed with the SEC on March 7,
      2006.





2.
      STOCK-BASED COMPENSATION





Prior
      to
      January 1, 2006, we accounted for our stock-based employee compensation
      arrangements under the intrinsic value method prescribed by Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
      No. 25), as allowed by Statement of Financial Accounting Standards (“SFAS”) No.
      123, Accounting for Stock-based Compensation (SFAS No. 123), as amended by
      SFAS
      No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure
      (SFAS
      No. 148). As a result, no expense was recognized for options to purchase our
      common stock that were granted with an exercise price equal to fair market
      value
      at the date of grant and no expense was recognized in connection with purchases
      under our employee stock purchase plan for the year ended December
      31, 2005, nor in the six months ended June 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 six months
      ended June 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 options’ vesting period, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006, based
      on the grant-date fair value estimated in accordance with the provisions of
      SFAS
      No. 123(R) amortized on a straight-line basis over the options’ vesting period.
      The option vesting period ranges from three to five years and all options have
      a
      contractual life of ten years. The fair value is estimated at the date of grant
      using the Black - Scholes option pricing model with weighted average assumptions
      for the activity under our stock plans. Option pricing model input assumptions
      such as expected term, expected volatility, and risk free interest rate, impact
      the fair value estimate. Further, the forfeiture rate impacts the amount of
      aggregate compensation. These assumptions are subjective and generally require
      significant analysis and judgment to develop. When estimating fair value, some
      of the assumptions were based on or determined from external data (for example
      the risk free interest rate) and other assumptions were derived from our
      historical experience with share-based payment arrangements (for example,
      volatility and expected term). The appropriate weight to place on historical
      experience is a matter of judgment, based on relevant facts and circumstances.
      Pro forma results for prior periods have not been restated. As a result of
      the
      adoption of SFAS No. 123(R), we recorded an additional $2.6 million and $4.8
      million in stock option expense which is included in our net income
      of
      $1.1 million and net loss of  $6.9 million for the three and six months
      ended June 30, 2006, respectively.   The adoption of  SFAS No.
      123(R)  reduced earnings per diluted common share by $0.05 and $0.09 for
      the three and six months ended June 30, 2006, respectively.  The adoption
      of SFAS No. 123(R) had no impact on cash flows from operations or financing
      activities.






6
 Table
          of Contents


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


The
      following
      table illustrates the effect on net loss and net loss per share had we applied
      the fair value recognition provisions of SFAS No. 123 to account for our
      employee stock option plan for the three and six months ended June 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 June 30, 2005
              
              Six
                  Months Ended June 30, 2005Net
                  loss:As
                  reported
              
              $
              (2,485
              )
              $
              (9,646
              )Add:
                  Stock-based employee compensation expense includedin
                  reported net loss, net of related tax effects
              
              
              734
              
              
              1,150Deduct:
                  Total stock-based compensation expense determinedunder
                  fair value based method for all awards, net of related tax
                  effects
              
              
              (3,395
              )
              
              (5,811
              )Pro
                  forma net loss
              
              $
              (5,146
              )
              $
              (14,307
              )Basic
                  net loss per common share:As
                  reported
              
              $
              (0.05
              )
              $
              (0.20
              )Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.30
              )Diluted
                  net loss per common share:As
                  reported
              
              $
              (0.05
              )
              $
              (0.20
              )Pro
                  forma
              
              $
              (0.11
              )
              $
              (0.30
              )


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 six months ended June 30, 2006. The following table shows
      total stock-based employee compensation expense included in the condensed
      consolidated statement of operations (in thousands):







Three
                  Months Ended June 30, 2006
              
              Six
                  Months Ended June 30, 2006Costs
                  and expenses:Cost
                  of systems & services
              
              $
              1,438
              
              $
              2,363Sales
                  and marketing
              
              
              708
              
              
              1,565Research
                  and development
              
              
              565
              
              
              922General
                  and administrative
              
              
              631
              
              
              1,371Restructuring
                  charge
              
              
              267
              
              
              1,162Total
                  stock-based compensation expense
              
              $
              3,609
              
              $
              7,383
  7
 Table
            of Contents
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


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 $639,000 and $1.3 million for the
      three and six months ended June 30, 2006. In the three and six months ended
      June
      30, 2005, recorded stock-based compensation for restricted stock was $730,000
      and $1.1 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"). 
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 issued for deferred cash compensation shall
      be
      fully vested from date of issuance.





We
      granted
      23,460 deferred stock units during the second quarter of 2006 at a market value
      of $19.18. The value of these deferred stock units is amortized to compensation
      expense ratably over the vesting period and totaled $116,000 for the six months
      ended June 30, 2006. The provisions of SFAS No. 123R do not change the
      accounting for deferred stock units.




3.
      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 June 30, 2006, there were 2,148,938 shares available
      for future issuance under the 2005 Plan.




We
      issued
      400,000 stock options and 100,000 shares of restricted stock in the six months
      ended June 30, 2006 as an inducement grant made without shareholder approval
      and outside the 2005 Stock Incentive Plan pursuant to Section
      4350(i)(1)(A)(iv) of the NASD Marketplace Rules. The grant date fair value
      of
      the restricted stock was $21.15.




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
            
            
            1,072,000
            
            $
            21.37Options
                exercised
            
            
            (2,200,670
            )
            $
            10.19
            
            
            
            
            $
            26,997Options
                canceled
            
            
            (449,639
            )
            $
            14.96Outstanding
                at June 30, 2006
            
            
            6,027,300
            
            $
            15.11
            
            
            6.62
            
            $
            25,321Vested
                and expected to vest at June 30, 2006
            
            
            5,620,987
            
            $
            14.91
            
            
            0.75
            
            $
            24,627Exercisable
                at June 30, 2006
            
            
            3,199,243
            
            $
            13.34
            
            
            4.70
            
            $
            18,725






8
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          of Contents


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Non-vested
          stock award activity including inducement grants made under NASD Marketplace
          Rules for the six months ended June 30, 2006 is summarized as
          follows:




Non-vested
                  Number of Shares
              
              Weighted
                  Average Grant-Date Fair ValueNon-vested
                  balance at January 1, 2006
              
              
              623,994
              
              $
              16.89Granted
              
              
              100,000
              
              $
              21.14Vested
              
              
              (152,585
              )
              $
              16.76Forfeited
              
              
              (52,500
              )
              $
              18.91Non-vested
                  balance at June 30, 2006
              
              
              518,909
              
              $
              17.33


As
      of June
      30, 2006, $26.6 million of total unrecognized compensation costs related to
      stock options is expected to be recognized over a weighted average period of
      2.6
      years. As of June 30, 2006, $8.1 million of total unrecognized compensation
      costs related to nonvested awards is expected to be recognized over a weighted
      average period of 3.72 years.  The total fair value of shares vested during
      the six months ended June 30, 2006 was $3.8 million.




The
      weighted
      average estimated fair value of our employee stock options granted at grant
      date
      market prices was $16.70 per share during six months ended June 30, 2006. There
      were 15,853 shares granted under our stock purchase plan as a result of employee
      participation during the six months ended June 30, 2006.




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:


Six
                  Months Ended June 30,2006
              
              2005Expected
                  term (in years)
              
              
              6.46
              
              
              6.01Risk
                  free interest rate
              
              
              5.08
              %
              
              4.02
              %Expected
                  volatility
              
              
              77.54
              %
              
              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.






9
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          of Contents


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




4.
      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)June
                  30,
              
              December
                  31,2006
              
              2005Security
                  TypeAuction
                  Rate Securities:Debt
                  securities issued by the U.S. Treasury and other U.S. government
                  corporations and agencies
              
              $
              13,272
              
              $
              14,117Debt
                  securities issued by states of the United States and political
                  subdivisions of the states
              
              
              71,948
              
              
              17,08485,220
              
              
              31,201Other
                  Securities:Government
                  Bonds/Agencies
              
              
              7,117
              
              
              6,206Other
                  debt securities
              
              
              38
              
              
              48Total
              
              $
              92,375
              
              $
              37,455


As
      of June
      30, 2006, all marketable securities except for auction rate securities have
      a
      maturity of less than 2 years. Auction rate securities of $71.9 million
      held at June 30, 2006 have an underlying maturity of greater than ten years,
      but
      typically have an interest rate reset feature every 30 days pursuant to
      which we can sell or reset the interest rate on the security. At June 30, 2006,
      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.





5.
      ACCOUNTS RECEIVABLE




Accounts
      receivable was comprised of the following (in thousands):


June
                  30,
              
              December
                  31,2006
              
              2005Accounts
                  Receivable:Billed
                  accounts receivable, net
              
              $
              62,730
              
              $
              69,772Unbilled
                  accounts receivable, net
              
              
              12,843
              
              
              11,061Total
                  accounts receivable, net
              
              $
              75,573
              
              $
              80,833






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ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




6.
      WARRANTY RESERVE





The
      agreements that we use to license software to our customers generally include
      limited warranties including a warranty that the product, in its unaltered
      form,
      will perform substantially in accordance with the related documentation.
      Warranty costs are charged to costs of systems of services revenues when they
      are probable and reasonably estimable. A summary of the activity in our warranty
      reserve was as follows (in thousands):


Balance
                  at January 1, 2005
              
              $
              2,057Warranty
                  utilized
              
              
              (986
              )Balance
                  at December 31, 2005
              
              
              1,071Provision
                  reduction
              
              
              (290
              )Warranty
                  utilized
              
              
              (154
              )Balance
                  at June 30, 2006
              
              $
              627
 During
      the
      six months ended June 30, 2006, the warranty reserve was reduced by $290,000
      as
      a result of a decrease in the estimation of expected warranty costs.





7.
      GOODWILL AND OTHER INTANGIBLE ASSETS





Acquired
      technology and other intangible assets are amortized over their estimated useful
      lives on a straight-line basis. The carrying values of acquired technology
      and
      other intangible assets are reviewed if the facts and circumstances suggest
      that
      they may be impaired, and goodwill is reviewed annually in accordance with
      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 six months ended June 30, 2006 and fiscal year ended December 31,
      2005.




The
      gross and
      net amounts for acquired technology, goodwill, and other intangible assets
      consist of the following (in thousands):


June
                  30, 2006
              
              December
                  31, 2005Gross
                  Carrying
              
              Accumulated
                  Amortization
              
              Net
                  Book Value
              
              Gross
                  Carrying
              
              Accumulated
                  Amortization
              
              Net
                  Book ValueIntangibles
                  subject to amortization:Acquired
                  technology
              
              $
              914
              
              $
              482
              
              $
              432
              
              $
              914
              
              $
              330
              
              $
              584Ongoing
                  customer relationships
              
              
              4,335
              
              
              1,820
              
              
              2,515
              
              
              4,335
              
              
              1,395
              
              
              2,940Total
              
              $
              5,249
              
              $
              2,302
              
              $
              2,947
              
              $
              5,249
              
              $
              1,725
              
              $
              3,524Intangibles
                  not subject to amortization:Goodwill
              
              $
              6,669
              
              
              
              
              $
              6,669
              
              $
              6,624
              
              
              
              
              $
              6,624
  Estimated
                  aggregate amortization expense (in thousands):For
                  the remainder of2006
              
              
              2007
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              TotalAcquired
                  technology
              
              $
              153
              
              $
              279
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              432Ongoing
                  customer relationships
              
              
              426
              
              
              851
              
              
              851
              
              
              340
              
              
              47
              
              
              2,515Total
                  amortization expense
              
              $
              579
              
              $
              1,130
              
              $
              851
              
              $
              340
              
              $
              47
              
              $
              2,947






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ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


8.
      OTHER
      COMPREHENSIVE INCOME (LOSS)





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


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2006
              
              2005
              
              2006
              
              2005Net
                  income (loss)
              
              $
              1,146
              
              $
              (2,485
              )
              $
              (6,901
              )
              $
              (9,646
              )Foreign
                  currency translation adjustment
              
              
              193
              
              
              8
              
              
              528
              
              
              89Total
                  comprehensive income (loss)
              
              $
              1,339
              
              $
              (2,477
              )
              $
              (6,373
              )
              $
              (9,557
              )


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





For
      all
      periods presented, basic and diluted income (loss) per common share is presented
      in accordance with SFAS 128, “Earnings per Share,” which provides for the
      accounting principles used in the calculation of income (loss) per share. Basic
      income (loss) per common share excludes dilution and is calculated by dividing
      net income (loss) available to common shareholders by the weighted average
      number of shares of common stock outstanding during the period. Diluted income
      (loss) per common share reflects the potential dilution from assumed conversion
      of all dilutive securities such as stock options and unvested restricted stock
      using the treasury stock method. When the effect of the outstanding stock
      options are anti-dilutive, they are not included in the calculation of diluted
      income (loss) per common share.




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


Three
                  Months Ended June 30,2006
              
              2005Net
                  Income
              
              Shares
              
              Per
                  Share Amount
              
              Net
                  Loss
              
              Shares
              
              Per
                  Share AmountBasic
                  EPS
              
              $
              1,146
              
              
              51,598
              
              $
              0.02
              
              $
              (2,485
              )
              
              47,629
              
              $
              (0.05
              )Effect
                  of dilutive securities:Stock
                  options and other dilutive securities
              
              
              -
              
              
              1,453
              
              
              
              
              
              -
              
              
              -Shares
                  issuable pursuant to earn-out agreement
              
              
              -
              
              
              49
              
              
              
              
              
              -
              
              
              -Diluted
                  EPS
              
              $
              1,146
              
              
              53,100
              
              $
              0.02
              
              $
              (2,485
              )
              
              47,629
              
              $
              (0.05
              )Six
                  Months Ended June 30,2006
              
              
              2005Net
                  Income
              
              
              Shares
              
              
              Per
                  Share Amount
              
              
              Net
                  Loss
              
              
              Shares
              
              
              Per
                  Share AmountBasic
                  EPS
              
              $
              (6,901
              )
              
              51,109
              
              $
              (0.14
              )
              $
              (9,646
              )
              
              47,444
              
              $
              (0.20
              )Effect
                  of dilutive securities:Stock
                  options and other dilutive securities
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -Shares
                  issuable pursuant to earn-out agreement
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -Diluted
                  EPS
              
              $
              (6,901
              )
              
              51,109
              
              $
              (0.14
              )
              $
              (9,646
              )
              
              47,444
              
              $
              (0.20
              )






12
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          of Contents


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)


10.
      RESTRUCTURING





In
      January
      2006, we effected a restructuring of our operations which included a reduction
      in headcount of approximately 100 individuals, and the reorganization of our
      company. This was undertaken to better align our organization, reduce costs,
      and
      re-invest some of the cost savings into client-related activities including
      client support and professional services. We completed the restructuring during
      the second quarter of 2006. This resulted in restructuring charges of
      approximately $1.3 million and $8.5 million in the three and six months ended
      June 30, 2006, respectively, which have been recorded in our statements of
      operations as “restructuring charge.” At June 30, 2006, the remaining unpaid
      severance liability was $3.8 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
              
              $
              3,808





11.
      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.





12.
      SUBSEQUENT EVENT





On
      June 11,
      2006, we entered into an agreement to acquire the assets of Sysware Health
      Care
      Systems, Inc. (“Sysware”) and the stock of Sysware’s sister company Mosum
      Technology (India) Private Limited ("Mosum"). Mosum acts as Sysware’s software
      development organization in India. In July 2006, we closed the acquisition
      of
      the assets of Sysware. The closing of the acquisition of the stock of Mosum
      is
      pending certain Indian regulatory approvals which we expect to receive during
      the third quarter of 2006. As we await those approvals, we are operating Mosum
      under a management agreement. The acquisition 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 provide
      us with the foundation for a development and support organization in India.





The
      aggregate
      purchase consideration includes closing payments for a total of
      $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 over
      a
      two-year period, based on the attainment of conditions defined in the
      acquisition agreement.




13.
      RECENT ACCOUNTING PRONOUNCEMENTS




In
      June 2006, the
      Financial Accounting Standards Board (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 Statement of Financial Accounting Standard (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.





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 Table
          of Contents





ITEM
      2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND


RESULTS
      OF OPERATIONS





This
      report
      contains forward-looking statements that are based on our current expectations,
      assumptions, estimates and projections about our company and our industry.
      When
      used in this report, the words “may”, “will”, “should”, “predict”, “continue”,
“plans”, “expects”, “anticipates”, “estimates”, “intends”, “believe”, “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, and 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.


14
 Table
          of Contents




We
      market our
      software to small, stand-alone hospitals, large multi-entity healthcare systems,
      academic medical centers and community hospitals. We have one or more of our
      software applications installed in, or licensed to be installed at approximately
      1,500 facilities. All 16 of the top-ranked U.S. hospitals named to the Honor
      Roll of “America’s Best Hospitals” in the July 18, 2005 issue of *U.S.
      News & World Report* use
      one
      or more of our solutions.




*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 XA TM and
      Pocket Sunrise TM 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 end-to-end medication
      management capabilities and builds upon recent enhancements to our Sunrise
      Patient Financial Manager and Sunrise Decision Support Manager
      solutions.




*Competitive
      Environment and Other Challenges for 2006*




Our
      releases
      of  SCM 4.0 XA in March 2005 and SCM 4.5 XA in January 2006 included
      significant new functionality, and we are implementing this new software with
      a
      significant 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 we must accelerate software sales in the second half of 2006 in order to
      achieve our projections for 2006 revenue and earnings and to provide a solid
      foundation for growth in 2007.




15
 Table
          of Contents


**THREE
      MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30,
      2005**


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


**%
                  of Total**
              
              
              
              **%
                  of Total****2006**
              
              **Revenues**
              
              **2005**
              
              **Revenues**
              
              **Change
                  $**
              
              **Change
                  %**RevenuesSystems
                  and services
              
              $
              97,754
              
              
              95.5
              %
              $
              91,557
              
              
              95.5
              %
              $
              6,197
              
              
              6.8
              %Hardware
              
              
              4,576
              
              
              4.5
              %
              
              4,308
              
              
              4.5
              %
              
              268
              
              
              6.2
              %Total
                  revenues
              
              
              102,330
              
              
              100.0
              %
              
              95,865
              
              
              100.0
              %
              
              6,465
              
              
              6.7
              %Costs
                  and expensesCost
                  of systems and services
              
              
              59,097
              
              
              57.8
              %
              
              55,248
              
              
              57.6
              %
              
              3,849
              
              
              7.0
              %Cost
                  of hardware
              
              
              3,851
              
              
              3.8
              %
              
              3,557
              
              
              3.7
              %
              
              294
              
              
              8.3
              %Sales
                  and marketing
              
              
              14,473
              
              
              14.1
              %
              
              16,196
              
              
              16.9
              %
              
              (1,723
              )
              
              -10.6
              %Research
                  and development
              
              
              14,296
              
              
              14.0
              %
              
              13,974
              
              
              14.6
              %
              
              322
              
              
              2.3
              %General
                  and administrative
              
              
              5,559
              
              
              5.4
              %
              
              6,511
              
              
              6.8
              %
              
              (952
              )
              
              -14.6
              %Depreciation
                  and amortization
              
              
              3,894
              
              
              3.8
              %
              
              3,583
              
              
              3.7
              %
              
              311
              
              
              8.7
              %Restructuring
                  charge
              
              
              1,349
              
              
              1.3
              %
              
              -
              
              
              0.0
              %
              
              1,349
              
              
              n/aTotal
                  costs and expenses
              
              
              102,519
              
              
              100.2
              %
              
              99,069
              
              
              103.3
              %
              
              3,450
              
              
              3.5
              %Loss
                  from operations
              
              
              (189
              )
              
              -0.2
              %
              
              (3,204
              )
              
              -3.3
              %
              
              3,015
              
              
              94.1
              %Interest
                  income, net
              
              
              1,335
              
              
              1.3
              %
              
              719
              
              
              0.8
              %
              
              616
              
              
              85.7
              %Income
                  (loss) before taxes
              
              
              1,146
              
              
              1.1
              %
              
              (2,485
              )
              
              -2.6
              %
              
              3,631
              
              
              146.1
              %Provision
                  for income taxes
              
              
              -
              
              
              0.0
              %
              
              -
              
              
              0.0
              %
              
              -
              
              
              0.0
              %Net
                  income (loss)
              
              $
              1,146
              
              
              1.1
              %
              $
              (2,485
              )
              
              -2.6
              %
              $
              3,631
              
              
              146.1
              %Basic
                  net income (loss) per share
              
              $
              0.02
              
              
              
              
              $
              (0.05
              )
              
              
              
              $
              0.07Diluted
                  net income (loss) per share
              
              $
              0.02
              
              
              
              
              $
              (0.05
              )
              
              
              
              $
              0.07





**RESULTS
      OF OPERATIONS**





Total
      revenues increased $6.5 million, or 6.7%, to $102.3 million for the quarter
      ended June 30, 2006, compared with $95.9 million for the second quarter of
      2005.





Systems
      and
      services revenues increased $6.2 million, or 6.8%, to $97.8 million for the
      quarter ended June 30, 2006, compared with $91.6 million for the second quarter
      of 2005. The increase in systems and services revenues was primarily a result
      of
      an increase in revenues associated with revenues recognized on a subscription
      basis including software, maintenance, outsourcing and remote hosting which
      increased $ 5.1 million from $63.0 million to $68.1 million or 8.1% over the
      prior year. Professional services revenues, which include implementation and
      consulting related services, were $23.5 million, an increase of $2.3 million
      or
      10.8% over the prior year. Revenues related to third party software and
      networking services were $4.8 million, a decrease of $920,000 or 15.8% over
      the
      prior year.





The
      increase
      in revenues from software, maintenance, outsourcing and remote hosting was
      primarily related to higher sales bookings in the second half of 2005 and the
      achievement of software implementation milestones for various clients. 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 software and networking services was primarily due to a lower
      volume of these transactions in 2006.


16
 Table
          of Contents


Hardware
      revenues increased $268,000, or 6.2%, to $4.6 million for the quarter ended
      June
      30, 2006, compared with $4.3 million for the second quarter of 2005. We expect
      hardware and networking services revenue to continue to fluctuate on a quarterly
      basis. During
      the next few quarters, we expect to enhance our marketing effort around remote
      hosting to expand this portion of our business to increase our service offerings
      to our customers. In the event we are successful, hardware volumes may be
      negatively impacted.





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 June 30, 2006Cost
                  of systems & services
              
              $
              1,438Sales
                  and marketing
              
              
              708Research
                  and development
              
              
              565General
                  and administrative
              
              
              631Total
                  stock-based compensation expense
              
              $
              3,342


Cost
      of
      systems and services increased $3.8 million, or 7.0%, to $59.1 million, for
      the
      quarter ended June 30, 2006, compared to $55.3 million for the second 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. They are
      expected to be deployed on customer implementations in the second half of the
      year. The impact of adopting SFAS No. 123(R), as well as, an increase in
      amortization of capitalized software development costs, also resulted in an
      increase in the cost of systems and services.





Cost
      of
      hardware increased $294,000, or 8.3%, to $3.9 million for the quarter ended
      June
      30, 2006, compared to $3.6 million for the second quarter of 2005. The increase
      in the cost of hardware was attributable to the increase in hardware revenues
      discussed above.





Sales
      and
      marketing expenses decreased $1.7 million, or 10.6%, to $14.5 million for the
      quarter ended June 30, 2006, compared to $16.2 million for the second quarter
      of
      2005. The decrease in sales and marketing expenses was primarily related to
      lower expenditures in the quarter related to trade shows and other marketing
      events. The 2006 restructuring also reduced expenditures during the current
      quarter as a result of lower headcount.





Research
      and
      development expenses increased $322,000, or 2.3%, to $14.3 million, for the
      quarter ended June 30, 2006, compared to $14.0 million for the second quarter
      of
      2005. The increase in research and development expense was primarily related
      to
      a decrease in capitalized software development costs of $200,000 from $3.2
      million in the quarter ended June 30, 2005, to $3.0 million for the quarter
      ended June 30, 2006. Gross research and development costs were $17.3 million
      in
      the quarter, compared to $17.2 million in the second quarter of 2005. The
      decrease in capitalized software development expense was due to a lower level
      of
      capitalization associated with coding and development following the release
      of
      SunriseXA 4.5 in January 2006, and preceding coding and development on the
      next
      Sunrise XA release. Amortization of capitalized software development costs,
      which is included as a component of cost of systems and services, increased
      by
      approximately $600,000, to $4.5 million for the three months ended June 30,
      2006, compared to $3.9 million for the second quarter of 2005. We expect
      capitalized software development costs to continue increasing during the
      remainder of 2006 as a result of increased focus on new development initiatives.





General
      and
      administrative expenses decreased $1.0 million, or 14.6%, to $5.6 million,
      for
      the quarter ended June 30, 2006, compared to $6.5 million for the second quarter
      of 2005. The decrease is attributable to transition costs associated with our
      prior CEO reflected in the second quarter of 2005, offset by an increase in
      expense in the current year related to stock based compensation cost of $631,000
      as a result of the adoption of SFAS No. 123(R) as described
      previously.


Depreciation
      and amortization increased $311,000, or 8.7%, to $3.9 million for the quarter
      ended June 30, 2006, compared to $3.6 million, for the second quarter of 2005.
      The increase was primarily the result of higher depreciation associated with
      the
      May 2006 activation of our Enterprise Resource Planning (“ERP”)
      solution.





During
      the
      second quarter of 2006, we completed our sales and marketing function
      restructuring, and we recorded additional restructuring charges of $1.3 million.
      This was undertaken to better align our organization, reduce costs and to
      re-invest some of the cost savings into client-related activities including
      client support and professional services. At June 30, 2006, the remaining unpaid
      liability was $3.8 million which we expect to pay out during 2006 and
      2007.





Interest
      income increased $616,000, or 85.7%, to $1.3 million for the quarter ended
      June
      30, 2006, compared to $719,000 for the second quarter of 2005. The increase
      was
      due to an improvement in yields on higher cash balances.





As
      a result
      of these factors, we had a net income of $1.1 million for the quarter ended
      June
      30, 2006, compared to a net loss of $2.5 million for the second quarter in
      2005.


17
 Table
          of Contents





**SIX
      MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005**


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





**%
                  of Total**
              
              
              
              **%
                  of Total****2006**
              
              **Revenues**
              
              **2005**
              
              **Revenues**
              
              **Change
                  $**
              
              **Change
                  %**RevenuesSystems
                  and services
              
              $
              193,977
              
              
              95.5
              %
              $
              174,685
              
              
              96.9
              %
              $
              19,292
              
              
              11.0
              %Hardware
              
              
              9,137
              
              
              4.5
              %
              
              5,615
              
              
              3.1
              %
              
              3,522
              
              
              62.7
              %Total
                  revenues
              
              
              203,114
              
              
              100.0
              %
              
              180,300
              
              
              100.0
              %
              
              22,814
              
              
              12.7
              %Costs
                  and expensesCost
                  of systems and services
              
              
              115,555
              
              
              56.9
              %
              
              107,513
              
              
              59.6
              %
              
              8,042
              
              
              7.5
              %Cost
                  of hardware
              
              
              7,502
              
              
              3.7
              %
              
              4,658
              
              
              2.6
              %
              
              2,844
              
              
              61.1
              %Sales
                  and marketing
              
              
              30,742
              
              
              15.1
              %
              
              34,372
              
              
              19.1
              %
              
              (3,630
              )
              
              -10.6
              %Research
                  and development
              
              
              31,258
              
              
              15.4
              %
              
              26,550
              
              
              14.7
              %
              
              4,708
              
              
              17.7
              %General
                  and administrative
              
              
              11,199
              
              
              5.5
              %
              
              10,867
              
              
              6.0
              %
              
              332
              
              
              3.1
              %Depreciation
                  and amortization
              
              
              7,696
              
              
              3.8
              %
              
              7,266
              
              
              4.0
              %
              
              430
              
              
              5.9
              %Restructuring
                  charge
              
              
              8,547
              
              
              4.2
              %
              
              -
              
              
              0.0
              %
              
              8,547
              
              
              n/aTotal
                  costs and expenses
              
              
              212,499
              
              
              104.6
              %
              
              191,226
              
              
              106.1
              %
              
              21,273
              
              
              11.1
              %Loss
                  from operations
              
              
              (9,385
              )
              
              -4.6
              %
              
              (10,926
              )
              
              -6.1
              %
              
              1,541
              
              
              14.1
              %Interest
                  income, net
              
              
              2,484
              
              
              1.2
              %
              
              1,280
              
              
              0.7
              %
              
              1,204
              
              
              94.1
              %Loss
                  before taxes
              
              
              (6,901
              )
              
              -3.4
              %
              
              (9,646
              )
              
              -5.3
              %
              
              2,745
              
              
              28.5
              %Provision
                  for income taxes
              
              
              -
              
              
              0.0
              %
              
              -
              
              
              0.0
              %
              
              -
              
              
              0.0
              %Net
                  loss
              
              $
              (6,901
              )
              
              -3.4
              %
              $
              (9,646
              )
              
              -5.3
              %
              $
              2,745
              
              
              28.5
              %Basic
                  net loss per share
              
              $
              (0.14
              )
              
              
              
              $
              (0.20
              )
              
              
              
              $
              0.06Diluted
                  net loss per share
              
              $
              (0.14
              )
              
              
              
              $
              (0.20
              )
              
              
              
              $
              0.06


**RESULTS
      OF OPERATIONS**





Total
      revenues increased $22.8 million, or 12.7%, to $203.1 million for the six months
      ended June 30, 2006, compared with $180.3 million for the same period in
      2005.





Systems
      and
      services revenues increased $19.3 million, or 11%, to $194.0 million for the
      six
      months ended June 30, 2006, compared with $174.7 million for the same period
      in
      2005. The increase in systems and services revenues was primarily a result
      of an
      increase in revenues associated with revenues recognized on a subscription
      basis
      including software, maintenance, outsourcing and remote hosting which increased
      $ 12.6 million from $122.6 million to $135.2 million, or 10.3% over the prior
      year. Additionally, professional services revenues, which include implementation
      and consulting related services were,  $47.1 million, an increase of $9.7
      million or 26.0% over the prior year. Revenues related to software and
      networking services were $8.0 million, a decrease of $2.9 million, or 26.7%
      over
      the prior year.





The
      increase
      in revenues from software, maintenance, outsourcing and remote hosting was
      primarily related to higher sales bookings in the second half of 2005. The
      higher sales bookings were associated with successful sales of our advanced
      clinical systems as well as outsourcing and remote hosting related services
      which is the result of an ongoing industry-wide trend in the adoption of such
      systems. The increase in professional services was related to 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 and networking services was primarily due to a lower volume of these
      transactions in 2006.





Hardware
      revenues increased $3.5 million, or 62.7%, to $9.1 million for the six months
      ended June 30, 2006, compared with $5.6 million for the same period in 2005.
      We
      expect hardware and networking services revenue to continue to fluctuate on
      a
      quarterly basis. During the next few quarters,  we expect to enhance our
      marketing effort around remote hosting to expand this portion of our business
      to
      increase our service offerings to our customers. In the event we are successful,
      hardware volumes may be negatively impacted.




18
 Table
          of Contents





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):


Six
                  Months Ended June 30, 2006Cost
                  of systems & services
              
              $
              2,363Sales
                  and marketing
              
              
              1,565Research
                  and development
              
              
              922General
                  and administrative
              
              
              1,371Total
                  stock-based compensation expense
              
              $
              6,221
 Cost
      of
      systems and services increased $8.0 million, or 7.5%, to $115.6 million, for
      the
      six months ended June 30, 2006, compared to $107.5 million for the same period
      in 2005. The increase in cost of systems and services was a result of the
      increase in higher volumes of outsourcing, remote hosting and the delivery
      of
      professional services, the impact of adopting SFAS No. 123(R), as well as the
      hiring of approximately 70 professional service employees to increase our
      capacity and improve our support services. They are expected to be deployed
      on
      customer implementations in the second half of the year.





Cost
      of
      hardware increased $2.8 million, or 61.1% to $7.5 million for the six months
      ended June 30, 2006, compared to $4.7 million for the same period in
      2005.





Sales
      and
      marketing expenses decreased $3.6 million, or 10.6%, to $30.7 million for the
      six months ended June 30, 2006, compared to $34.4 million for the same period
      in
      2005. The decrease in sales and marketing expenses was primarily related to
      lower expenditures in the period related to trade shows and other marketing
      events. The 2006 restructuring also reduced expenditures during the current
      period as a result of lower headcount.





Research
      and
      development expenses increased $4.7 million, or 17.7%, to $31.3 million, for
      the
      six months ended June 30, 2006, compared to $26.6 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 $5.0 million from $9.6
      million in the six months ended June 30, 2005, to $4.6 million for the six
      months ended June 30, 2006. Gross research and development costs were $35.9
      million for the six months ended June 30, 2006, compared to $36.2 million in
      the
      same period in 2005. 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. Additionally,  in the first
      quarter of 2006, we made a concentrated effort to dedicate research and
      development resources on reducing our backlog of open customer support cases
      as
      part of our focus on customer service resulting in lower capitalization activity
      in the first quarter. Amortization of capitalized software development costs,
      which is included as a component of cost of systems and services,
 increased by approximately $1.9 million, to $9.0 million for the six
      months ended June 30, 2006, compared to $7.1 million for the same period in
      2005. We expect capitalized software development costs to continue increasing
      during the remainder of 2006 as we begin to focus more heavily on new
      development initiatives.





General
      and
      administrative expenses increased $332,000, or 3.1%, to $11.2 million, for
      the
      six months ended June 30, 2006, compared to $10.9 million for the same period
      in
      2005. The increase in expenses was related to stock based compensation costs
      of
      $1.4 million as a result of the adoption of SFAS No. 123(R) as described
      previously, as well as costs associated with the ERP implementation. The company
      recorded a one time cost of $2.2 million during the six months ended June 30,
      2005, associated with the transition of our prior CEO.





Depreciation
      and amortization increased $430,000, or 5.9%, to $7.7 million for the six months
      ended June 30, 2006, compared to $7.3 million, for the same period in 2005.
      The
      increase was primarily the result of higher depreciation associated with the
      May
      2006 activation of our ERP solution.





In
      the six
      months ended June 30, 2006, we completed a restructuring of the company's
      operations which resulted in a reduction of headcount. 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. At June
      30, 2006, the remaining unpaid liability was $3.8 million which we expect to
      pay
      out during 2006 and 2007.





Interest
      income increased $1.2 million, or 94.1%, to $2.5 million for the six months
      ended June 30, 2006, compared to $1.3 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 $6.9 million for the six months ended
      June 30, 2006, compared to a net loss of $9.6 million for the same period in
      2005.





LIQUIDITY
      AND CAPITAL RESOURCES





During
      the
      six months ended June 30, 2006, cash used in operating activities was $1.4
      million, primarily related to a decrease in deferred revenue, accrued
      compensation and accounts payable balances, as well as costs associated with
      the
      restructuring initiative. Investing activities used $69.5 million of cash,
      consisting of a net $54.9 million for the purchase of marketable securities,
      $9.2 million for the purchase of property and equipment, and $4.6 million for
      the funding of capitalized software development costs. 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 ERP implementation. Financing activities provided $22.4 million of cash
      from
      the exercise of stock options. Stock option exercises were higher than usual
      during the six months ended June 30, 2006 as a result of exercises of options
      from option holders whose employment was terminated in connection with our
      restructuring.





19
 Table
          of Contents





At
        June 30,
        2006, our principal source of liquidity was our combined cash and cash
        equivalents and marketable securities balance of $121.0 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 liquidity
        requirements through 2006.


On
      June 11,
      2006, we entered into an agreement to acquire the assets of Sysware Health
      Care
      Systems, Inc. (“Sysware”) and the stock of Sysware’s sister company Mosum
      Technology (India) Private Limited ("Mosum"). Mosum acts as Sysware’s software
      development organization in India. In July 2006, we closed the acquisition
      of
      the assets of Sysware. The closing of the acquisition of the stock of Mosum
      is
      pending certain Indian regulatory approvals which we expect to receive during
      the third quarter of 2006. As we await those approvals, we are operating Mosum
      under a management agreement. The acquisition 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 provide
      us with the foundation for a development and support organization in India.


The
      aggregate
      purchase consideration includes closing payments for a total of
      $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 over
      a
      two-year period, based on the attainment of conditions defined in the
      acquisition agreement.





The
      remaining
      $3.8 million unpaid liability related to the restructuring will be paid out
      in
      2006 and 2007.





These
      amounts
      are expected to be funded from current cash and cash equivalent
      balances.




OFF-BALANCE
      SHEET ARRANGEMENTS




We
      do not
      have any significant 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 six months ended June 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 six months
      ended June 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 options’ vesting period, and (b) compensation
      cost for all share-based payments granted subsequent to January 1, 2006, based
      on the grant-date fair value estimated in accordance with the provisions of
      SFAS
      No. 123(R) amortized on a straight-line basis over the options’ vesting period.
      The fair value is estimated at the date of grant using the Black - Scholes
      option pricing model with weighted average assumptions for the activity under
      our stock plans. Option pricing model input assumptions such as expected term,
      expected volatility, and risk-free interest rate, impact the fair value
      estimate. Further, the forfeiture rate impacts the amount of aggregate
      compensation. These assumptions are subjective and generally require significant
      analysis and judgment to develop. When estimating fair value, some of 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 $2.6 million and $4.8 million in stock option expense during the
      three and six months ended June 30 2006, respectively. The adoption of SFAS
      No.
      123(R) had no impact on cash flows from operations or financing
      activities.








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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
      June
      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 June 30, 2006 would have resulted in a decrease
      in
      interest income of $920,000 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 ANDPROCEDURES




During
      the
      second quarter of fiscal 2006, the Company implemented an ERP system. As a
      result of the implementation, there have been changes in our internal controls
      over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
      the
      Securities Exchange Act of 1934 (the “Exchange Act”). The general design of the
      Company’s internal controls has not changed, but various processes and reports
      that are enabled through the ERP system and that implement and support the
      internal controls have replaced analogous process and report features of the
      Company’s predecessor systems. We believe we have taken the necessary steps to
      monitor and maintain appropriate internal controls during this period of
      change.





Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures as defined in Rule 13a-15(e) under the Exchange Act as of June 30,
      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 June 30, 2006, our disclosure controls and
      procedures were effective at the reasonable assurance level.


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PART
      II.





ITEM
      1.LEGALPROCEEDINGS





The
      Company
      and its subsidiaries are from time to time parties to legal proceedings,
      lawsuits and other claims incident to their business activities. Such matters
      may include, among other things, assertions of contract breach or intellectual
      property infringement, claims for indemnity arising in the course of our
      business and claims by persons whose employment with us has been terminated.
      Such matters are subject to many uncertainties and outcomes are not predictable
      with assurance. Consequently, management is unable to ascertain the ultimate
      aggregate amount of monetary liability, amounts which may be covered by
      insurance or recoverable from third parties, or the financial impact with
      respect to these matters as of the date of this report. However, based on our
      knowledge at the time of this report, management believes that the final
      resolution of such matters pending at the time of this report, individually
      and
      in the aggregate, will not have a material adverse effect upon our consolidated
      financial position, results of operations or cash flows.








ITEM
      1A.
RISK FACTORS





Many
      risks
      affect our business.  We believe the following risks have emerged recently
      due to changes in our business and the environment in which we operate, and
      should be considered in addition to risk factors we have previously disclosed,
      which are set forth below.





***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.





***Our
      performance depends upon improved software sales.***




Our
      software
      sales in the first half of 2006 did not meet our internal targets, and we must
      accelerate software sales in the second half of 2006 and beyond in order to
      achieve our projections 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.





Other
      risks
      include, but are not limited to, those described below, each of which may be
      relevant to decisions regarding ownership of our stock.  We have attempted
      to organize the description of these risks into logical groupings to enhance
      readability, but many of the risks interrelate or could be grouped in other
      ways, so no special significance should be attributed to these groupings. 
Any of these risks could have a significant adverse effect on our business,
      financial condition or results of operations.




**Risks
      relating to development and operation of our software**




***Since
      October 2003, we have worked to overcome the effects of technical issues we
      experienced at that time, and the success of our recent software releases,
      particularly Sunrise Clinical Manager 4.5 XA, is critical.***




In
      October 2003, we announced the existence of response time issues within
      some components of the version of our next-generation core clinical software
      that we were developing at that time. We concluded that this was attributable
      to
      the technical design of the software, which did not adequately support the
      throughput required in the highly interactive patient care
      environment.   These issues harmed our reputation in the marketplace
      and set back our software development plans.  In addition, they resulted in
      significant expense associated with re-development and warranty claims. 
Our 2003 operating results include a $1.2 million write-down of capitalized
      software development costs for some of our software components, and to date
      we
      have recorded provisions related to warranty costs of $4.6 million. We
      still have warranty and related issues with clients associated with the October
      2003 problem.  Our sales bookings, market position, and financial
      performance have suffered as a result.


We
      took steps
      to address these issues, and our subsequent releases of Sunrise Clinical Manager
      3.5 XA (3.5) in June 2004 and Sunrise Clinical Manager 4.0 XA (4.0) in
      March 2005 to date have not manifested these same throughput
      shortcomings.  Combined, these versions have been installed in
      approximately 60 locations; we believe they have performed well and achieved
      market acceptance.  However, they are still relatively recent releases
      and issues may appear in the future.  Due to our recent history, the
      marketplace can be expected to be particularly sensitive to any future technical
      issues we may encounter with our software, so any serious issues associated
      with
      3.5 or 4.0 that may emerge could seriously impair our reputation, sales, client
      relationships and results of operations.




We
      believe
      that Sunrise Clinical Manager 4.5 XA (4.5), which we released in January 2006,
      largely completes the development objectives that we had envisioned before
      October 2003.  Many clients, investors and market observers have
      anticipated the 4.5 release as an important milestone in the evolution of our
      software offering and our market position.  However, 4.5 has not yet been
      widely implemented in clinical environments, so it is too early to assess its
      operational performance.  It is an ambitious software release that
      incorporates a large number of new features and functions and was completed
      relatively quickly.  As is typical with new software releases in general,
      4.5 may require additional work to add functionality and to address issues
      that
      may be discovered as the software comes into use in our client base.  If
      these issues are significant, our reputation, sales, client relationships and
      results of operations could be significantly impaired.







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***Our
      software may not operate properly, which could damage our reputation and impair
      our sales.***




Software
      development is time consuming, expensive and complex.  Unforeseen
      difficulties can arise. We may encounter technical obstacles, and it is possible
      that we could discover additional problems that prevent our software from
      operating properly. If our software contains errors or does not function
      consistent with product specifications or client expectations, clients could
      assert liability claims against us and/or attempt to cancel their contracts
      with
      us.  It is also possible that future releases of our software, which would
      typically include additional features for our software, may be delayed. This
      could damage our reputation and impair our sales.





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




We
      continuously strive to develop new software, and improve our existing software
      to add new features and functionality. We schedule and prioritize these
      development efforts according to a variety of factors, including our perceptions
      of market trends, client requirements, and resource availability. Our software
      is complex and requires a significant investment of time and resources to
      develop, test and introduce into use. Sometimes this takes longer than we
      expect. Sometimes we encounter unanticipated difficulties that require us to
      re-direct or scale-back our efforts. Sometimes we change our plans in response
      to changes in client requirements, market demands, resource availability,
      regulatory requirements, or other factors. All of this can result in
      acceleration of some initiatives and delay of others.  If we make the wrong
      choices or do not manage our development efforts well, we may fail to produce
      software that responds appropriately to our clients’ needs or fails to meet
      client expectations regarding new or enhanced features and 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.




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***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.




**Risks
      related to our outsourcing services**




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




We
      provide
      remote hosting services that involve running our software and third- party
      vendor’s software for clients in our Technology Solutions Center (TSC). 
The ability to access the systems and the data the TSC hosts and supports on
      demand is critical to our clients.  Our operations and facilities are
      vulnerable to interruption and/or damage from a number of sources, many of
      which
      are beyond our control, including, without limitation: (i) power loss and
      telecommunications failures; (ii) fire, flood, hurricane and other natural
      disasters; (iii) software and hardware errors, failures or crashes, and (iv)
      computer viruses, hacking and similar disruptive problems.  We attempt to
      mitigate these 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.




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***Any
      breach of confidentiality of client or patient data in our service center could
      expose us to significant expense and reputational
      harm.***




We
      must
      maintain facility and systems security measures to preserve the confidentiality
      of data belonging to our clients and their patients that resides on computer
      equipment in our TSC.  Notwithstanding the efforts we undertake to protect
      data, our measures can be vulnerable to infiltration as well as unintentional
      lapse, and if confidential information is compromised we could face damages
      for
      contract breach, penalties for violation of applicable laws or regulations,
      significant costs for remediation and re-engineering to prevent future
      occurrences, and serious harm to our reputation.




***Recruiting
      challenges and higher than anticipated costs in outsourcing our client’s IT
      operations may adversely affect our profitability.***




We
      provide
      outsourcing services that involve operating clients’ IT departments using our
      employees.  At the initiation of these relationships, clients often require
      us to hire, at substantially the same compensation, the entire IT staff that
      had
      been performing the services we take on.  In these circumstances our costs
      may be higher than we target unless and until we are able to transition the
      workforce, methods and systems to a more scalable model.  Various factors
      can make this difficult, including geographic dispersion of client facilities
      and variation in client needs, IT environments, and system configurations. 
Also, under some circumstances we may incur unanticipated costs as a successor
      employer by inheriting unforeseen liabilities that the client had to these
      employees.  Further, facilities management contracts require us to provide
      the IT services specified by contract, and in some places it can be difficult
      to
      recruit qualified IT personnel.  Changes in circumstances or failure to
      assess the client’s environment and scope our services accurately can mean we
      must hire more staff than we anticipated in order to meet our
      responsibilities.  If we have to increase salaries or relocate personnel,
      or hire more people than we anticipated, our costs may increase under fixed
      fee
      contracts.




***Inability
      to obtain consents needed from third parties could impair our ability to provide
      remote outsourcing services.***




We
      and our
      clients need consent from some third-party software providers as a condition
      to
      running their software in our data center, or to allowing our employees who
      work
      in client locations under facilities management arrangements to have access
      to
      their software.  Vendors’ refusal to give such consents, or insistence upon
      unreasonable conditions to such consents, could reduce our revenue opportunities
      and make our outsourcing services less viable for some clients.




**Risks
      related to the healthcare IT industry and market**




***We
      operate in an intensely competitive market that includes companies that have
      greater financial, technical and marketing resources than we
      do.***




We
      face
      intense competition in the marketplace. We are confronted by rapidly changing
      technology, evolving user needs and the frequent introduction of new software
      to
      meet the needs of our current and future clients. Our principal competitors
      in
      our software business include Cerner Corporation, Epic Systems Corporation,
      Meditech, GE Medical Systems (which recently acquired IDX Systems Corporation,
      formerly a separate competitor), McKesson Corporation, QuadraMed Corporation
      and
      Siemens AG. Other software competitors include providers of practice management,
      general decision support and database systems, as well as segment-specific
      applications and healthcare technology consultants.  Our services business
      competes with large consulting firms such as Deloitte & Touche and Cap
      Gemini, as well as independent providers of technology implementation and other
      services.  Our outsourcing business competes with large national providers
      of technology solutions such as International Business Machines Corporation
      (IBM), Computer Sciences Corp. (CSC), Perot Systems Corporation, as well as
      smaller firms.  Several of our existing and potential competitors are
      better established, benefit from greater name recognition and have significantly
      more financial, technical and marketing resources than we do.  Some
      competitors, particularly those with a more diversified revenue base or that
      are
      privately held, may have greater flexibility than we do to compete aggressively
      on the basis of price.  We expect that competition will continue to
      increase, which could lead to a loss of market share or pressure on our prices
      and could make it more difficult to grow our business profitably.




The
      principal
      factors that affect competition within our market include software
      functionality, performance, flexibility and features, use of open industry
      standards, speed and quality of implementation and client service and support,
      company reputation, price and total cost of ownership.  We anticipate that
      competition will increase as a result of continued consolidation in both the
      information technology and healthcare industries.  We expect large
      integrated technology companies to become more active in our markets, both
      through acquisition and internal investment.  There is a finite number of
      hospitals and other healthcare providers in our target market.  As costs
      fall, technology improves, and market factors continue to compel investment
      by
      healthcare organizations in software and services like ours, market saturation
      may change the competitive landscape in favor of larger competitors with greater
      scale.




***Clients
      that use our legacy software are vulnerable to
      competition.***




A
      significant
      part of our revenue comes from relatively high-margin legacy software that
      was
      installed by our clients many years ago. We attempt to convert these clients
      to
      our newer generation software, but such conversions require significant
      investments of time and resources by clients. This reduces our advantage as
      the
      incumbent vendor and has allowed our competitors to target these clients, with
      some success.  If we are not successful in retaining a large portion of
      these clients by continuing to support legacy software - which is increasingly
      expensive to maintain - or by converting them to our newer software, our results
      of operations will be negatively affected.




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***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 half of 2006, we had a net loss of $6.9 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.




***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.





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***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.




***Failure
      to maintain effective internal controls could adversely affect our operating
      results and the market price of our common stock.***




Section
      404
      of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control
      over financial reporting that meets applicable standards.  If we fail to
      maintain effective internal controls and procedures in accordance with the
      requirements of Section 404, as such standards may be modified, supplemented
      or
      amended, we may be required to disclose our deficiencies.  If we are
      unable, or are perceived as unable, to produce reliable financial reports due
      to
      internal controls deficiencies, investors could lose confidence in our reported
      financial information and our operating results 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.





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**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.






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***If
        we undertake additional acquisitions, they may be disruptive to our business
        and
        could have an adverse effect on our future operations and the market price
        of
        our common stock.***
  An
        important
        element of our business strategy has been expansion through acquisitions.
        Since
        1997, we have completed ten acquisitions.  While there is no assurance that
        we will complete any future acquisitions, any future acquisitions would involve
        a number of risks, including the following:
 ·
              The
                  anticipated benefits from any acquisition may not be achieved.
                  The
                  integration of acquired businesses requires substantial attention
                  from
                  management. The diversion of management’s attention and any difficulties
                  encountered in the transition process could hurt our
                  business. ·
              In
                  future acquisitions, we could issue additional shares of our capital
                  stock, incur additional indebtedness or pay consideration in excess
                  of
                  book value, which could have dilutive effect on future net income,
                  if any,
                  per share. ·
              New
                  business acquisitions must be accounted for under the purchase
                  method of
                  accounting. These acquisitions may generate significant intangible
                  assets
                  and result in substantial related amortization charges to
                  us.




**Risks
      related to industry regulation**




***Potential
      regulation by the U.S. Food and Drug Administration of our software and content
      as medical devices could impose increased costs, delay the introduction of
      new
      software and hurt our business.***




The
      U.S. Food
      and Drug Administration, or FDA, is likely to become increasingly active in
      regulating computer software or content intended for use in the healthcare
      setting. The FDA has increasingly focused on the regulation of computer software
      and computer-assisted products as medical devices under the Food, Drug, and
      Cosmetic Act, or the FDC Act. If the FDA chooses to regulate any of our
      software, or third party software that we resell, as medical devices, it could
      impose extensive requirements upon us, including the following:





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


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


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




If
      we fail to comply
      with applicable requirements, the FDA could respond by imposing fines,
      injunctions or civil penalties, requiring recalls or software corrections,
      suspending production, refusing to grant pre-market clearance or approval of
      software, withdrawing clearances and approvals, and initiating criminal
      prosecution. Any FDA policy governing computer products or content, may increase
      the cost and time to market of new or existing software or may prevent us from
      marketing our software.




***Changes
      in federal and state regulations relating to patient data could depress the
      demand for our software and impose significant software redesign costs on
      us.***




Clients
      use
      our systems to store and transmit highly confidential patient health information
      and data.  State and federal laws and regulations and their foreign
      equivalents govern the collection, use, transmission and other disclosures
      of
      health information. These laws and regulations may change rapidly and may be
      unclear or difficult to apply.




Federal
      regulations under the Health Insurance Portability and Accountability Act of
      1996, or HIPAA, impose national health data standards on healthcare providers
      that conduct electronic health transactions, healthcare clearinghouses that
      convert health data between HIPAA-compliant and non-compliant formats and health
      plans. Collectively, these groups are known as covered entities. The HIPAA
      standards prescribe transaction formats and code sets for electronic health
      transactions; protect individual privacy by limiting the uses and disclosures
      of
      individually identifiable health information; and require covered entities
      to
      implement administrative, physical and technological safeguards to ensure the
      confidentiality, integrity, availability and security of individually
      identifiable health information in electronic form. Though we are not a covered
      entity, most of our clients are and require that our software and services
      adhere to HIPAA standards. Any failure or perception of failure of our software
      or services to meet HIPAA standards could adversely affect demand for our
      software and services and force us to expend significant capital, research
      and
      development and other resources to modify our software or services to address
      the privacy and security requirements of our clients.




States
      and
      foreign jurisdictions in which we or our clients operate have adopted, or may
      adopt, privacy standards that are similar to or more stringent than the federal
      HIPAA privacy standards. This may lead to different restrictions for handling
      individually identifiable health information. As a result, our clients may
      demand information technology solutions and services that are adaptable to
      reflect different and changing regulatory requirements which could increase
      our
      development costs. In the future, federal or state governmental authorities
      may
      impose new data security standards or additional restrictions on the collection,
      use, transmission and other disclosures of health information. We cannot predict
      the potential impact that these future rules, may have on our business. However,
      the demand for our software and services may decrease if we are not able to
      develop and offer software and services that can address the regulatory
      challenges and compliance obligations facing our clients.




***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.






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**Risks
        related to our personnel and organization**
  ***Recent
        changes in our executive team could distract management and cause uncertainty
        that could result in delayed or lost sales.***
  From
        April until November 2005, our Chairman, Eugene V. Fife, served as our
        President and Chief Executive Officer on an interim basis, pending a search
        for
        a new, long-term Chief Executive Officer.  In November 2005, R. Andrew
        Eckert replaced Mr. Fife as CEO and President.  Including Mr. Eckert, five
        of our executive officers have joined the Company or assumed their current
        roles
        within the past year.  In January, 2006, we announced a headcount reduction
        of approximately 100 persons, including seven senior executives, and
        reorganization of our management structure.  These changes may disrupt
        continuity in our organization, disrupt established relationships with clients,
        prospects and vendors, divert our management’s time and attention from the
        operation of our business, delay important operational initiatives, and cause
        some level of uncertainty among our clients and potential clients that could
        lead to delays in closing new business or ultimately in lost sales.


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





(a) The
      Annual Meeting of Stockholders was held on May 10, 2006.





(b) Two
      Class II directors - Steven A. Denning and Jay B. Pieper - were elected to
      serve for a term of three years ending at the 2009 annual meeting of
      stockholders. Continuing directors included Class I directors R. Andrew
      Eckert, Eugene V. Fife, and Braden L. Kelly, and Class III directors Dan L.
      Crippen and Edward A. Kangas.





(c) The
      following describes the voting on each matter considered at the meeting.





Matter
              
              
              Votes
                  For
              
              
              Votes
                  Against or Withheld
              
              
              Abstain
              
              
              Broker
                Non-votesElection
                  of DirectorsSteven
                  A. Denning
              
              
              45,638,003
              
              
              1,909,740Jay
                  B. Pieper
              
              
              45,876,199
              
              
              1,671,574Ratification
                  of the selection of PricewaterhouseCoopersLLP
                  as the Company's independent registered publicaccounting
                  firm for the fiscal year ending December 31.2206
              
              
              47,332,371
              
              
              203,443
              
              
              11,959


ITEM
      6.
EXHIBITS





See
      Index
      to exhibits.








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SIGNATURES





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





Date:
      August 9, 2006


/s/
      Robert J. Colletti


Robert
      J.
      Colletti


Senior
      Vice President, Chief Financial Officer and Chief Accounting
      Officer








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          of Contents


**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.