**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-Q**








**QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005





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 þ No o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act). Yes þ No o





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 October 31, 2005**Common
                Stock, $.01 par value
            
            48,917,589



















































ECLIPSYS
      CORPORATION





FORM
      10-Q





FOR
      THE
      QUARTER ENDED SEPTEMBER 30, 2005





INDEX    PagePART
                  I.
              
              Financial
                  InformationItem 1.
              
              Condensed
                  Consolidated Balance Sheets (Unaudited) - As of September 30, 2005
                  and
                  December 30, 2004
              
              
              2Condensed
                  Consolidated Statements of Operations (Unaudited) - For the Three
                  and Nine
                  Months ended September 30, 2005 and 2004
              
              
              3Condensed
                  Consolidated Statements of Cash Flows (Unaudited) - For the Three
                  and Nine
                  Months ended September 30, 2005 and 2004
              
              
              4Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              
              5Item 2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              
              11Item 3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              
              27Item 4.
              
              Controls
                  and Procedures
              
              
              27PART
                  II.
              
              Other
                  InformationItem
                  1.
              
              Legal
                  Proceedings
              
              
              28Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              
              28Item 6.
              
              Exhibits
              
              
              29Signatures
              
              
              
              
              30
 
  
  PART
        I
 
 ITEM
        1.
 **ECLIPSYS
        CORPORATION**
 **Condensed
        Consolidated Balance Sheets - (Unaudited)**
 **(In
        thousands, except share and per share data)**
 
  September
                    30,
                
                December
                    31,2005
                
                2004AssetsCurrent
                    assets:Cash
                    and cash equivalents
                
                $
                23,439
                
                $
                122,031Marketable
                    securities
                
                
                83,643
                
                
                -Accounts
                    receivable, net of allowance for doubtful accounts of $4,821
                    and
                    $4,952at
                    September 30, 2005 and December 31, 2004
                
                
                75,195
                
                
                64,862Prepaid
                    and other current assets
                
                
                18,373
                
                
                15,586Inventory
                
                
                2,134
                
                
                1,644Total
                    current assets
                
                
                202,784
                
                
                204,123Property
                    and equipment, net
                
                
                37,578
                
                
                35,002Capitalized
                    software development costs, net
                
                
                33,551
                
                
                29,819Goodwill
                
                
                4,371
                
                
                2,863Acquired
                    technology and intangible assets, net
                
                
                3,813
                
                
                4,690Other
                    assets
                
                
                22,397
                
                
                14,923Total
                    assets
                
                $
                304,494
                
                $
                291,420Liabilities
                    and Stockholders' EquityCurrent
                    liabilities:Deferred
                    revenue
                
                $
                106,453
                
                $
                106,804Other
                    current liabilities
                
                
                33,187
                
                
                32,587Accrued
                    compensation
                
                
                14,386
                
                
                12,738Total
                    current liabilities
                
                
                154,026
                
                
                152,129Deferred
                    revenue
                
                
                17,809
                
                
                15,892Other
                    long-term liabilities
                
                
                1,258
                
                
                122Stockholders'
                    Equity
                
                
                131,401
                
                
                123,277$
                304,494
                
                $
                291,420
 The
            accompanying notes are an integral part of these unaudited condensed
            consolidated financial statements.
 -
            2
            -
  **ECLIPSYS
        CORPORATION**
 **Condensed
        Consolidated Statements of Operations - (Unaudited)**
 **(In
        thousands, except share amounts)**
 THREE
                    MONTHS
                
                NINE
                    MONTHSENDED
                    SEPTEMBER 30,
                
                ENDED
                    SEPTEMBER 30,2005
                
                2004
                
                2005
                
                2004REVENUESSystems
                    and services
                
                $
                94,806
                
                $
                71,352
                
                $
                269,491
                
                $
                201,756Hardware
                
                
                3,046
                
                
                8,463
                
                
                8,660
                
                
                20,086TOTAL
                    REVENUES
                
                
                97,852
                
                
                79,815
                
                
                278,151
                
                
                221,842COSTS
                    AND EXPENSESCosts
                    of systems and services revenues
                
                
                56,776
                
                
                42,694
                
                
                165,601
                
                
                124,079Costs
                    of hardware revenues
                
                
                2,575
                
                
                7,311
                
                
                7,233
                
                
                17,282Sales
                    and marketing
                
                
                14,076
                
                
                15,207
                
                
                47,136
                
                
                46,356Research
                    and development
                
                
                12,726
                
                
                15,032
                
                
                39,276
                
                
                44,306General
                    and administrative
                
                
                3,840
                
                
                3,281
                
                
                14,707
                
                
                10,856Depreciation
                    and amortization
                
                
                3,625
                
                
                3,355
                
                
                10,891
                
                
                9,731TOTAL
                    COSTS AND EXPENSES
                
                
                93,618
                
                
                86,880
                
                
                284,844
                
                
                252,610INCOME
                    (LOSS) FROM OPERATIONS
                
                
                4,234
                
                
                (7,065
                )
                
                (6,693
                )
                
                (30,768
                )Interest
                    income, net
                
                
                865
                
                
                415
                
                
                2,146
                
                
                1,094INCOME
                    (LOSS) BEFORE INCOME TAXES
                
                
                5,099
                
                
                (6,650
                )
                
                (4,547
                )
                
                (29,674
                )Provision
                    for income taxes
                
                
                -
                
                
                -
                
                
                -
                
                
                -NET
                    INCOME (LOSS)
                
                $
                5,099
                
                $
                (6,650
                )
                $
                (4,547
                )
                $
                (29,674
                )BASIC
                    NET INCOME (LOSS) PER COMMON SHARE
                
                $
                0.11
                
                $
                (0.14
                )
                $
                (0.10
                )
                $
                (0.64
                )DILUTED
                    NET INCOME (LOSS) PER COMMON SHARE
                
                $
                0.10
                
                $
                (0.14
                )
                $
                (0.10
                )
                $
                (0.64
                )BASIC
                    WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                
                
                48,304
                
                
                46,671
                
                
                47,751
                
                
                46,459DILUTED
                    WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
                
                
                51,316
                
                
                46,671
                
                
                47,751
                
                
                46,459
 The
          accompanying notes are an integral part of these unaudited condensed
          consolidated financial statements.
 -
          3
          -
   **ECLIPSYS
          CORPORATION**
 **Condensed
          Consolidated Statements of Cash Flows -
          (Unaudited)**
 **(In
          thousands)**
 THREE
                        MONTHS ENDED
                    
                    NINE MONTHS
                        ENDEDSEPTEMBER
                        30,
                    
                    SEPTEMBER
                        30,2005
                    
                    2004
                    
                    2005
                    
                    2004OPERATING
                        ACTIVITIESNet
                        Income (loss)
                    
                    $
                    5,099
                    
                    $
                    (6,650
                    )
                    $
                    (4,547
                    )
                    $
                    (29,674
                    )Adjustments
                        to reconcile net income (loss) to net cash provided by(used
                        in) operating activities:Depreciation
                        and amortization
                    
                    
                    8,319
                    
                    
                    7,468
                    
                    
                    24,425
                    
                    
                    19,719Provision
                        for bad debts
                    
                    
                    450
                    
                    
                    350
                    
                    
                    1,500
                    
                    
                    1,350Stock
                        compensation expense
                    
                    
                    570
                    
                    
                    132
                    
                    
                    1,720
                    
                    
                    293Changes
                        in operating assets and liabilities:Accounts
                        receivable
                    
                    
                    (10,697
                    )
                    
                    (8,195
                    )
                    
                    (11,832
                    )
                    
                    (8,301
                    )Inventory
                    
                    
                    (462
                    )
                    
                    (247
                    )
                    
                    (490
                    )
                    
                    (1,395
                    )Other
                        current assets
                    
                    
                    (450
                    )
                    
                    (1,705
                    )
                    
                    (2,787
                    )
                    
                    1,434Other
                        assets
                    
                    
                    38
                    
                    
                    (350
                    )
                    
                    (9,882
                    )
                    
                    (2,800
                    )Deferred
                        revenue
                    
                    
                    3,322
                    
                    
                    13,550
                    
                    
                    1,567
                    
                    
                    13,819Accrued
                        compensation costs
                    
                    
                    (1,765
                    )
                    
                    (2,790
                    )
                    
                    1,998
                    
                    
                    (4,297
                    )Other
                        current liabilities
                    
                    
                    4,345
                    
                    
                    521
                    
                    
                    600
                    
                    
                    (480
                    )Other
                        long-term liabilities
                    
                    
                    (8
                    )
                    
                    (12
                    )
                    
                    1,135
                    
                    
                    (549
                    )Total
                        adjustments to reconcile net income (loss)to
                        net cash provided by (used in) operating activities
                    
                    
                    3,662
                    
                    
                    8,722
                    
                    
                    7,954
                    
                    
                    18,793NET
                        CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
                    
                    
                    8,761
                    
                    
                    2,072
                    
                    
                    3,407
                    
                    
                    (10,881
                    )INVESTING
                        ACTIVITIESPurchases
                        of property and equipment
                    
                    
                    (6,493
                    )
                    
                    (3,854
                    )
                    
                    (12,809
                    )
                    
                    (10,649
                    )Purchases
                        of marketable securities
                    
                    
                    (182,060
                    )
                    
                    (10,867
                    )
                    
                    (341,906
                    )
                    
                    (175,866
                    )Proceeds
                        from sales of marketable securities
                    
                    
                    135,570
                    
                    
                    10,748
                    
                    
                    258,282
                    
                    
                    134,929Capitalized
                        software development costs
                    
                    
                    (5,003
                    )
                    
                    (2,084
                    )
                    
                    (14,637
                    )
                    
                    (10,603
                    )Cash
                        paid for acquisitions
                    
                    
                    (926
                    )
                    
                    -
                    
                    
                    (946
                    )
                    
                    (2,500
                    )NET
                        CASH USED IN INVESTING ACTIVITIES
                    
                    
                    (58,912
                    )
                    
                    (6,057
                    )
                    
                    (112,016
                    )
                    
                    (64,689
                    )FINANCING
                        ACTIVITIESExercise
                        of stock options
                    
                    
                    2,296
                    
                    
                    1,278
                    
                    
                    9,919
                    
                    
                    4,192Proceeds
                        from employee stock purchase plan
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,664NET
                        CASH PROVIDED BY FINANCING ACTIVITIES
                    
                    
                    2,296
                    
                    
                    1,278
                    
                    
                    9,919
                    
                    
                    5,856EFFECT
                        OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
                    
                    
                    29
                    
                    
                    106
                    
                    
                    117
                    
                    
                    86NET
                        DECREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    (47,826
                    )
                    
                    (2,601
                    )
                    
                    (98,573
                    )
                    
                    (69,628
                    )CASH
                        AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                    
                    
                    71,265
                    
                    
                    84,656
                    
                    
                    122,031
                    
                    
                    151,683CASH
                        AND CASH EQUIVALENTS, END OF PERIOD
                    
                    $
                    23,439
                    
                    $
                    82,055
                    
                    $
                    23,458
                    
                    $
                    82,055SUPPLEMENTAL
                        DISCLOSURENon-cash
                        investing activities:Issuance
                        of shares for acquisition
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    2,500Contingent
                        purchase price of eSys and CPMRC
                    
                    $
                    913
                    
                    $
                    -
                    
                    $
                    1,275
                    
                    $
                    -
  The
          accompanying notes are an integral part of these unaudited condensed
          consolidated financial statements.
 -
            4
            -
 ECLIPSYS
        CORPORATION
 NOTES
        TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1.  BASIS
        OF
        PRESENTATION
  The
        accompanying unaudited condensed consolidated financial statements of Eclipsys
        Corporation, or the Company, and the notes thereto have been prepared in
        accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation
        S-X
        of the Securities and Exchange Commission, or SEC. These unaudited condensed
        consolidated financial statements do not include all of the information and
        disclosures required by accounting principles generally accepted in the United
        States of America. However, such information reflects all adjustments
        (consisting of normal recurring adjustments) that are, in the opinion of
        management, necessary for a fair statement of results for the interim periods
        presented.
  The
        results
        of operations for the nine months ended September 30, 2005 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, 2004 that was filed with the SEC on March 16,
        2005.
 
 
 2.  ACQUISITIONS
  In
        March
        2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting
        services and clinical content designed principally to improve and enhance
        the
        care process primarily related to the workflow of nurses and interdisciplinary
        healthcare professionals. At closing, we paid $2.5 million in cash and issued
        184,202 shares of common stock for CPMRC, for a total initial consideration
        of
        $5.0 million. The transaction provided for additional earn-out payments to
        the
        prior owner of CPMRC through 2008 based on future operating results. The
        earn-out consideration is payable half in cash and half in shares of our
        common
        stock. The number of shares of the common stock to be issued, if any, will
        be
        based upon the average of the last reported sale prices of our common stock
        on
        the NASDAQ National Market for the five consecutive trading days ending on
        the
        trading day that is one day prior to the date on which the earn-out
        consideration is paid. The operating results of CPMRC have been combined
        with
        those of Eclipsys since the date of acquisition. We did not present unaudited
        pro forma results of operations of Eclipsys and CPMRC for the nine months
        ended
        September 30, 2004 because our pro forma results for this period would not
        be
        materially different from our actual results.
  As
        a result
        of the CPMRC acquisition, we originally recorded approximately $1.7 million
        in
        non-amortizable goodwill and $3.2 million in amortizable intangible assets.
        Since the date of acquisition we have recorded an additional $1.4 million
        in
        non-amortizable goodwill related to the earn-out provisions of the agreement.
        The first such earn-out payment, totaling $723,000 was paid in the quarter
        ended
        September 30, 2005. Amortizable intangible assets include customer relationships
        and acquired technology, and are being amortized over seven- and five-year
        periods, respectively, which we believe reflects the estimated expected utility
        of these assets. The non-amortizable goodwill is not tax deductible. The
        increase in non-amortizable goodwill recorded during the period ended September
        30, 2005 reflects approximately $700,000 of incremental consideration that
        the
        prior owner earned in the third quarter of 2005 as part of the earn-out
        provisions of the agreement. All consideration paid under the earn-out
        provisions of the agreement will be recorded as non-amortizable
        goodwill.
  In
        December
        of 2004, we acquired eSys Medical Inc. (eSys). eSys develops and markets
        radiology information systems (RIS). We paid $2.3 million in cash consideration
        for the eSys acquisition. The transaction provided for two additional payments
        to the prior owners of eSys related to certain milestones in connection with
        future development efforts of the acquired technology. The first payment,
        totaling $750,000 and payable 25% in cash and 75% in our common stock, was
        earned during the quarter ended September 30, 2005. The second payment, which
        is
        worth $1.75 million to the former owners of eSys and also payable 25% in
        cash
        and 75% in our common stock, is pending based on attainment of the defined
        milestone in the purchase agreement between Eclipsys and the former owners.
        As
        of September 30, 2005, this milestone has not been met. Additionally, the
        agreement contains an earn-out provision in which the prior owners can earn
        up
        to an additional $5.0 million in future consideration based on sales of the
        acquired technology through 2008, payable in shares of our common stock.
        Since
        the date of acquisition, the prior owners of eSys have earned approximately
        $58,000, paid in cash, related to sales of the acquired technology. The number
        of shares of our common stock issued as earn-out consideration will be based
        on
        the average closing prices of our common stock on the NASDAQ National Market
        for
        the calendar quarter preceding the payment of the earn-out
        consideration.
  As
        a result
        of the eSys acquisition, we originally recorded approximately $2.0 million
        in
        amortizable intangible assets. These amortizable intangible assets include
        customer relationships ($1.1 million) and acquired technology ($914,000),
        which
        are being amortized over five- and three-year periods, respectively. We believe
        these amortization periods reflect the estimated expected utility of
        these
        assets. The operating results of eSys have been combined with those of Eclipsys
        since the date of acquisition. We did not present unaudited pro forma results
        of
        operations of Eclipsys and eSys for the three and nine months ended September
        30, 2004 because our pro forma results for this period would not be materially
        different from our actual results. The majority of future consideration,
        if
        earned, will be recorded as non-amortizable goodwill.
  With
        respect
        to the acquisitions of CPMRC and eSys, we assigned the total purchase price
        to
        the net assets and liabilities of the businesses, with any remaining amount
        assigned to goodwill. The value assigned to the identifiable intangible assets
        was based on an analysis as of the date of acquisitions.
 
 -
            5
            -
 3.  STOCK-BASED
        COMPENSATION
  The
        Company
        accounts for stock-based compensation using the intrinsic value method
        prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock
        Issued to Employees” and related Interpretations. Under this method,
        compensation cost for stock options is measured as the excess, if any, of
        the
        estimated market price of the Company’s stock at the date of the grant over the
        amount an employee must pay to acquire the stock. Accordingly, the Company
        provides the additional disclosures required under Statement of Financial
        Accounting Standards, or SFAS No. 123, “Accounting for Stock-Based Compensation”
        as amended by SFAS No. 148 “Accounting for Stock-Based Compensation - Transition
        and Disclosure.”
  The
        Company
        has adopted the disclosure-only provision of SFAS 123. Had compensation cost
        for
        the Company’s stock option grants described above been determined based on the
        fair value at the grant date of the respective awards, consistent with the
        provisions of SFAS 123, the Company’s net income (loss) and earnings (loss) per
        share would have been the pro forma amounts indicated below for the three
        month
        and nine month periods ended September 30, (in thousands, except per share
        data):
  Three
                    Months Ended September 30,
                
                Nine
                    Months Ended September 30,2005
                
                2004
                
                2005
                
                2004Net
                    Income (Loss):As
                    reported
                
                $
                5,099
                
                $
                (6,650
                )
                $
                (4,547
                )
                $
                (29,674
                )Add:
                    Stock-based employee compensation expense includedin
                    reported net income (loss), net of related tax effects
                
                
                570
                
                
                132
                
                
                1720
                
                
                293Deduct:
                    Total stock-based compensation expense determinedunder
                    fair value based method for all awards, net of related tax
                    effects
                
                
                (2,331
                )
                
                (2,147
                )
                
                (8,142
                )
                
                (7,627
                )Pro
                    forma
                
                
                3,338
                
                
                (8,665
                )
                
                (10,969
                )
                
                (37,008
                )Basic
                    net income (loss) per share:As
                    reported
                
                
                0.11
                
                
                (0.14
                )
                
                (0.10
                )
                
                (0.64
                )Pro
                    forma
                
                
                0.07
                
                
                (0.19
                )
                
                (0.23
                )
                
                (0.80
                )Diluted
                    net income (loss) per share:As
                    reported
                
                
                0.10
                
                
                (0.14
                )
                
                (0.10
                )
                
                (0.64
                )Pro
                    forma
                
                
                0.07
                
                
                (0.19
                )
                
                (0.23
                )
                
                (0.80
                )
 4.  MARKETABLE
        SECURITIES
 Security
                      Type
                  
                  September
                  
                  December(in
                      thousands)
                  
                  30,
                      2005
                  
                  31,
                      2004**Auction
                      Rate Securities:**Debt
                      securities issued by the U.S. Treasury and other U.S. government
                      corporations and agencies
                  
                  $
                  46,577
                  
                  $
                  -Debt
                      securities issued by states of the United States and political
                      subdivisions of the states
                  
                  
                  23,280
                  
                  
                  -69,857
                  
                  
                  -**Other
                      Securities:**Government
                      Bonds/Agencies
                  
                  
                  5,999
                  
                  
                  -Other
                      debt securities
                  
                  
                  7,787
                  
                  
                  -Total
                  
                  $
                  83,643
                  
                  $
                  -
  Marketable
        securities consist of funds that are highly liquid and are classified as
        available-for-sale. Marketable securities are recorded at a fair value, and
        unrealized gains and losses are recorded as a component of other comprehensive
        income.
 As
                of
                September 30, 2005, all marketable securities except for auction
                rate securities
                have a maturity of less than 2 years. Auction rate
                securities of $69.9 million held at September 30, 2005 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 September 30, 2005, we believe that these
                investments
                are considered a part our working capital and are appropriately classified
                as
                current assets.
  -
                    6
                    -
 In
                  an effort
                  to increase our interest income we moved excess cash from money
                  market
                  investment to marketable securities, which include auction rates
                  securities and
                  government bonds. We do not foresee any additional risks and the
                  funds remain
                  highly liquid.
  For
                    the three
                    and nine months ended September 30, 2004, we revised our statements
                    of cash
                    flows to reflect the maturities and purchases of marketable securities
                    in cash
                    flows from investing activities for the three and nine months
                    ended September
                    30, 2004 as follows (in
                    thousands):
 *Three
                    months ended September 30, 2004***Previously**
                
                
                
                **As****Reported**
                
                **Reclass**
                
                **Reclassified**Maturities
                    of short-term investments securities
                
                $
                -
                
                $
                10,748
                
                $
                10,748Purchases
                    of short-term investments securities
                
                
                (119
                )
                $
                (10,748
                )
                $
                (10,867
                )Net
                    change
                
                $
                (119
                )
                $
                -
                
                $
                (119
                )*Nine
                    months ended September 30, 2004***Previously**
                
                
                
                
                
                **As****Reported**
                
                
                **Reclass**
                
                
                **Reclassified**Maturities
                    of short-term investments securities
                
                $
                -
                
                $
                134,929
                
                $
                134,929Purchases
                    of short-term investments securities
                
                
                (40,937
                )
                $
                (134,929
                )
                $
                (175,866
                )Net
                    change
                
                $
                (40,937
                )
                $
                -
                
                $
                (40,937
                )
  5.  ACCOUNTS
        RECEIVABLE
 
 **Unbilled
        Accounts Receivable and Deferred Revenue**
  The
        timing of
        revenue recognition and contractual billing terms under certain multiple
        element
        arrangements may not precisely coincide, resulting in the recording of unbilled
        accounts receivable or deferred revenue. Customer payments are due under
        these
        arrangements in varying amounts upon the achievement of certain contractual
        milestones throughout the implementation periods, which generally range from
        12
        to 24 months. The current portion of unbilled accounts receivable is included
        in
        accounts receivable.
  In
        addition,
        we maintain certain long-term contracts used to finance a portion of certain
        customer hardware and software fees owed. These arrangements generally provide
        for payment terms that range from 3 to 5 years and carry interest rates that
        range from 7% to 10%. Such amounts are recorded as non-current unbilled accounts
        receivable. The non-current portion of amounts due related to these arrangements
        was $1.2 million and $1.1 million as of September 30, 2005 and December 31,
        2004, respectively, and is included in other assets in the accompanying
        financial statements. The current portion of amounts due related to these
        arrangements is included in accounts receivable in the accompanying financial
        statements. Accounts receivable was composed of the following (in
        thousands):
 
 **September
                    30, 2005**
                
                **December
                    31, 2004****Accounts
                    Receivable:**Billed
                    accounts receivable, net
                
                $
                62,803
                
                $
                53,698Total
                    unbilled accounts receivable, net
                
                
                12,392
                
                
                11,164Total
                    accounts receivable, net
                
                $
                75,195
                
                $
                64,862
 
 -
            7
            -
 6.  WARRANTY
        RESERVE
  The
        agreements that we use to license our software to our customers generally
        include a limited warranty providing that the product, in its unaltered form,
        will perform substantially in accordance with the related documentation.
        Through
        September 30, 2003, Eclipsys had not incurred any material warranty costs
        related to its products. Due to the response time issues that we identified
        during the fourth quarter of 2003, we recorded provisions related to warranty
        costs of $4.6 million to date. Warranty costs are charged to cost of systems
        and
        services revenues when they are probable and reasonably estimable. A summary
        of
        the activity in our warranty reserve was as follows (in thousands):
  **2005**
                
                **2004****Beginning
                    Balance, January 1,**
                
                $
                    2,057
                
                $
                    4,400Provision
                    for warranty
                
                
                -
                
                
                450Provision
                    reduction
                
                
                -
                
                
                (252
                )Warranty
                    utilized
                
                
                (742
                )
                
                (2,222
                )**Ending
                    Balance September 30,**
                
                $
                1,315
                
                $
                2,376
  7.  GOODWILL
        AND OTHER INTANGIBLE ASSETS
 
 The
        components of goodwill and other intangible assets were as follows (in
        thousands):
 
 As
                    of September 30, 2005
                
                As
                    of December 31, 2004Gross
                    Carrying
                
                Accumulated
                
                
                
                Gross
                    Carrying
                
                AccumulatedAmount
                
                Amortization
                
                Net
                    Balance
                
                Amount
                
                Amortization
                
                Net
                    Balance**Amortized
                    intangible assets:**Customer
                    relationships
                
                $
                4,335
                
                $
                (1,182
                )
                $
                3,153
                
                $
                4,335
                
                $
                (531
                )
                $
                3,804Acquired
                    technology
                
                
                914
                
                
                (254
                )
                
                660
                
                
                914
                
                
                (28
                )
                
                886**Subtotal**
                
                $
                5,249
                
                $
                (1,436
                )
                $
                3,813
                
                $
                5,249
                
                $
                (559
                )
                $
                4,690**Unamortized
                    intangible assets:**Goodwill
                
                $
                2,863
                
                $
                -
                
                $
                2,863
                
                $
                454
                
                $
                -
                
                $
                454Goodwill
                    acquired during the period
                
                
                1,508
                
                
                -
                
                
                1,508
                
                
                2,409
                
                
                -
                
                
                2,409**Subtotal**
                
                $
                4,371
                
                $
                -
                
                $
                4,371
                
                $
                2,863
                
                $
                -
                
                $
                2,863**Total
                    goodwill and other intangibles**
                
                $
                9,620
                
                $
                (1,436
                )
                $
                8,184
                
                $
                8,112
                
                $
                (559
                )
                $
                7,553The
                    estimated amortization for the next five fiscal years is as follows
                    (in
                    thousands):For
                    the year ending December 31,2005
                
                
                
                
                
                
                $
                2892006
                
                
                
                
                
                
                
                1,1552007
                
                
                
                
                
                
                
                1,1302008
                
                
                
                
                
                
                
                8512009
                
                
                
                
                
                
                
                340Thereafter
                
                
                
                
                
                
                48$
                3,813
  Acquired
          technology and intangible assets are amortized over their estimated useful
          lives
          generally on a straight-line basis. The carrying values of acquired technology
          and intangible assets are reviewed if the facts and circumstances suggest
          that
          they may be impaired and goodwill is reviewed at least annually. This review
          indicates whether assets will be recoverable based on future expected cash
          flows. We perform our review for impairment of our intangible assets including
          goodwill during the fourth quarter of each fiscal year. Such a review was
          performed in the fourth quarter of 2004 and no impairment related issues
          were
          noted.
  -
            8
            -
   8.  OTHER
        COMPREHENSIVE LOSS
  The
        components of other comprehensive loss were as follows (in
        thousands):
  Three
                    Months Ended
                  September
                    30,
                
                Nine
                    Months Ended
                  September30,2005
                
                2004
                
                2005
                
                2004Net
                    Income (Loss)
                
                $
                5,099
                
                $
                (6,650
                )
                $
                (4,547
                )
                $
                (29,674
                )Foreign
                    currency translation adjustment
                
                
                29
                
                
                106
                
                
                117
                
                
                86Total
                    comprehensive income (loss)
                
                $
                5,128
                
                $
                (6,544
                )
                $
                (4,430
                )
                $
                (29,588
                )
 
 9.  NET INCOME (LOSS) PER
        COMMON SHARE
  Net
          income
          (loss) per share is computed in accordance with SFAS No. 128, "Earnings
          Per
          Share."  We compute basic net income (loss) per share by dividing
          net
          income (loss) by the weighted average number of common shares outstanding
          for
          each period.  Diluted net income (loss) per share is based upon
          the
          addition of the effect of common stock equivalents (stock options and restricted
          stocks) to the denominator of the basic net income (loss) per share calculation
          using the treasury stock method, if their effect is dilutive. The
          computation of net income (loss) per share for the three and nine months
          ended
          September 30, 2005 and 2004 is as follows (in thousands, except
          per share
          data):
  **Three
                      Months Ended**
                  
                  **Nine
                      months Ended****September
                      30,**
                  
                  **September
                      30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004****Basic
                      earnings (loss) per share:**Income
                      (loss) from continuing operations
                  
                  $
                  5,099
                  
                  $
                  (6,650
                  )
                  $
                  (4,547
                  )
                  $
                  (29,674
                  )Amount
                      allocated to participating preferred stockholders
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Income
                      (loss) available to common stockholders - basic
                  
                  $
                  5,099
                  
                  $
                  (6,650
                  )
                  $
                  (4,547
                  )
                  $
                  (29,674
                  )Weighted
                      average common shares outstanding
                  
                  
                  48,304
                  
                  
                  46,671
                  
                  
                  47,751
                  
                  
                  46,459Basic
                      earnings (loss) from continuing operations per share
                  
                  
                  0.11
                  
                  
                  (0.14
                  )
                  
                  (0.10
                  )
                  
                  (0.64
                  )**Diluted
                      earnings (loss) per share:**Income
                      (loss) from continuing operations
                  
                  $
                  5,099
                  
                  $
                  (6,650
                  )
                  $
                  (4,547
                  )
                  $
                  (29,674
                  )Amount
                      allocated to participating preferred stockholders
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Income
                      (loss) available to common stockholders - diluted
                  
                  $
                  5,099
                  
                  $
                  (6,650
                  )
                  $
                  (4,547
                  )
                  $
                  (29,674
                  )Weighted
                      average common shares outstanding
                  
                  
                  48,304
                  
                  
                  46,671
                  
                  
                  47,751
                  
                  
                  46,459Weighted
                      average effect of common stock equivalents:Stock
                      options outstanding
                  
                  
                  2,490
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Restricted
                      stock outstanding
                  
                  
                  522
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Weighted
                      average diluted shares outstanding
                  
                  
                  51,316
                  
                  
                  46,671
                  
                  
                  47,751
                  
                  
                  46,459Diluted
                      earnings (loss) from continuing operations per share
                  
                  $
                  0.10
                  
                  $
                  (0.14
                  )
                  $
                  (0.10
                  )
                  $
                  (0.64
                  )
   10.NEW
          ACCOUNTING PRONOUNCEMENTS


On
      December 16, 2004, the FASB issued SFAS No. 123R, “Share-Based
      Payment”, (SFAS 123R) which is a revision of SFAS No. 123, “Accounting for
      Stock-Based Compensation” (SFAS 123). Statement 123R supersedes APB Opinion
      No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS
      No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS 123R is
      similar to the approach described in SFAS 123. SFAS 123R requires all
      share-based payments to employees to be recognized in the income statement
      over
      the corresponding service period based on their grant date fair values and
      also
      requires an estimation of forfeitures when calculating compensation expense.
      We
      must adopt SFAS 123R no later than January 1, 2006. SFAS 123R permits
      public companies to adopt its requirements using one of three methods. We have
      not yet determined which adoption method we will utilize, but we believe it
      will
      have an impact on our results of operations (footnote 3).





-
          9
          -







In
      May 2005,
      the FASB issued SFAS No. 154, “ Accounting
      Changes and Error Corrections” (“SFAS No. 154”) which supersedes APB Opinion No.
      20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements”. SFAS No. 154 changes the requirements for
      accounting for and reporting of changes in accounting principle. The statement
      requires the retroactive application to prior periods' financial statements
      of
      changes in accounting principles, unless it is impracticable to determine either
      the period specific effects or the cumulative effect of the change. SFAS No.
      154
      does not change the guidance for reporting the correction of an error in
      previously issued financial statements or the change in accounting estimate.
      SFAS No. 154 is effective for accounting changes and corrections of errors
      made
      in fiscal years beginning after December 15, 2005. We do not believe SFAS No.
      154 will have a significant impact on our consolidated financial position or
      results of operations.





11.  LITIGATION




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.  MANAGEMENT
      TRANSITION




On
      April 29,
      2005, we announced that Eugene V. Fife, our Chairman of the Board of Directors,
      had been named interim Chief Executive Officer (CEO) and President, replacing
      our prior CEO and President who had left the company. In connection with the
      transition of our prior CEO, we recorded severance and other transition related
      costs of approximately $2.2 million in the nine months-ended September 30,
      2005.




On
      October
      20, 2005, we announced that the Board of Directors has appointed R. Andrew
      Eckert to replace Mr. Fife as CEO and President, effective as of November 14,
      2005. Mr. Fife will continue as Chairman of the Board. Mr. Eckert’s employment
      commenced on October 24, 2005. He has entered into an employment agreement
      with
      the Company pursuant to which he is entitled to an annual salary of $650,000,
      a
      guaranteed bonus of $400,000 for 2006, and a performance-based bonus in
      subsequent years with a target payment of $400,000. In
      addition, Mr. Eckert’s compensation includes 150,000 restricted shares of
      Eclipsys common stock and non-qualified options to purchase up to 525,000 shares
      of Eclipsys common stock, all to be granted to him on November 14, 2005. The
      restricted stock has a purchase price of $.01 per share, is subject to
      contractual restrictions on transfer until vested, and vests over five years,
      with the first 20 percent vesting on December 1, 2006, and an additional 10
      percent vesting each June 1 and December 1 thereafter for the following four
      years. The stock options have a 10-year term, an exercise price per share equal
      to the fair market value of Eclipsys common stock on the date of grant, and
      vest
      over five years, with the first 20 percent vesting on December 1, 2006, and
      the
      remaining 80 percent vesting in 48 equal consecutive monthly installments
      thereafter. Vesting of the restricted stock and stock options is contingent
      upon
      continued employment and is subject to acceleration under certain circumstances.








-
          10
          -











ITEM
      2.





MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




This
      report
      contains forward-looking statements that are based on our current expectations,
      assumptions, estimates and projections about our company and our industry.
      When
      used in this report, the words “may”, “will”, “should”, “predict”, “continue”,
“plans”, “expects”, “anticipates”, “estimates”, “intends”, “believe”, and
“could”, and similar expressions are intended to identify forward-looking
      statements. These statements may include, but are not limited to, statements
      concerning our anticipated performance, including revenue, margin, cash flow,
      balance sheet and profit expectations; development and implementation of our
      software; duration, size, scope and revenue expectations associated with client
      contracts; benefits provided by Eclipsys software, outsourcing and consulting
      services; business mix; sales and growth in our client base; market
      opportunities; industry conditions; and our accounting, including its effects
      and potential changes in accounting.




Actual
      results might differ materially from the results projected due to a number
      of
      risks and uncertainties. Software development may take longer and cost more
      than
      expected, and incorporation of anticipated features and functionality may be
      delayed, due to various factors including programming and integration challenges
      and resource constraints. We may change our product strategy in response to
      client requirements, market factors, resource availability, and other factors.
      Implementation of some of our software is complex and time consuming. Clients’
      circumstances vary and may include unforeseen issues that make it more difficult
      or costly than anticipated to implement or derive benefit from software,
      outsourcing or consulting services. The success and timeliness of our services
      often depends at least in part upon client involvement, which can be difficult
      to control. We are required to meet specified performance standards, and
      contracts can be terminated or their scope reduced under certain circumstances.
      Competition is vigorous, and competitors may develop more compelling offerings
      or offer more aggressive pricing. New business is not assured and existing
      clients may migrate to competing offerings. Financial performance targets might
      not be achieved due to various risks, including slower-than-expected business
      development or new account implementation, or higher-than-expected costs to
      develop products, meet service commitments or sign new contracts. Our cash
      consumption may exceed expected levels if profitability does not meet
      expectations or strategic opportunities require cash investments. These and
      other risks and uncertainties are described in this report under the headings
      “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” and in our other filings made from time to time with
      the Securities and Exchange Commission. The cautionary statements made in this
      report should be read as being applicable to all related forward-looking
      statements wherever they appear. These statements are only predictions. We
      cannot guarantee future results, levels of activity, performance or
      achievements. We assume no obligation to publicly update or revise these
      forward-looking statements for any reason, or to update the reasons actual
      results could differ materially from those anticipated in these forward-looking
      statements, even if new information becomes available in the future. We
      nonetheless reserve the right to make such updates from time to time without
      the
      need for specific reference to this report. No such update shall be deemed
      to
      indicate that other statements not addressed by such updates remain correct
      or
      create an obligation to provide any other updates.





**Executive
      Overview**




Eclipsys
      is a
      healthcare information technology company. We develop and license our
      proprietary software and content to hospitals and other healthcare
      organizations. Our software allows the organizations to automate many of the
      key
      clinical, administrative and financial functions that they require. Our software
      is designed to improve patient care and patient satisfaction for our customers,
      and allow them to reduce their operating costs and enhance their revenues.
      Our
      content provides practice guidelines for use in hospitals and other healthcare
      organizations.




Our
      Web site
      address is www.eclipsys.com .
      We make
      available free of charge, on or through our Web site, our annual report on
      Form
      10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
      amendments to those reports as soon as reasonably practicable after such
      material is electronically filed with or furnished to the Securities and
      Exchange Commission.





*Background*




We
      were
      founded in December 1995 and initially grew through a series of strategic
      acquisitions completed in 1999. Our acquisitions were focused on acquiring
      strong customer bases and advanced software for the healthcare
      industry.




In
      addition
      to these acquisitions, in 1996 we licensed certain intellectual property on
      an
      exclusive basis from Partners HealthCare System, Inc., or Partners. This
      intellectual property related to clinical workflows including order management
      and clinical decision support. The Partners technology has been incorporated
      within our product offerings.




In
      March
      2004, we acquired CPM Resource Center, Ltd., or CPMRC. CPMRC provides consulting
      services and clinical content designed principally to improve and enhance the
      care process primarily related to the workflow of nurses and interdisciplinary
      healthcare professionals who provide the majority of hands-on care at the point
      of service.





-
          11
          -
 
  In
        December
        of 2004, we acquired eSys Medical Inc. or eSys. eSys develops and markets
        radiology information systems, or RIS. We believe eSys’ RIS will enhance our
        diagnostic imaging solution and extend our clinical workflow solutions in
        radiology.





*Product
      Development*




In
      June 1999,
      we began re-expressing the intellectual property that we acquired through
      acquisitions on a common platform to provide integrated software to our
      customers. In 1999, we announced the general availability of Sunrise Clinical
      Manager, or SCM, the first version of our Sunrise TM suite of
      software products. SCM provides advanced knowledge-based clinical
      decision-support capabilities including computerized physician order
      entry.




In
      2001, we
      announced our SunriseXA TM strategy. This strategy was to migrate our Sunrise suite of products to an
      open
      architecture and platform. Sunrise XA’s architecture is built on Microsoft’s
      .NET Framework, Microsoft SQL Server and the Microsoft Windows family of
      operating systems. In 2002 and 2003, we announced the general availability
      of
      certain components of our SunriseXA product offerings.




In
      October
      2003, we identified and announced response time issues within some components
      of
      the version of our next-generation core clinical software that we were
      developing at that time. Although some of the software components had been
      implemented in and were working at some customer sites, we determined that
      the
      software did not produce acceptable response times for complex, high-volume
      hospital environments. The response time issue resulted in a product delivery
      delay for some of our advanced clinical software functionality and also
      adversely affected the implementation schedules for a number of our customers.
      As previously disclosed, this announcement had an adverse effect on our sales
      for 2004.




In
      June 2004,
      we released Sunrise Clinical Manager 3.5 XA and in March 2005 we released
      Sunrise Clinical Manager 4.0 XA. The general availability of these releases
      fulfilled key deliverables expected by our customers in connection with the
      earlier response time issue. These releases were consistent with our strategy
      and contained enhanced functionality as planned. Sunrise Clinical Manager 4.5
      XA
      is scheduled for release in December 2005 - January 2006.





*Operational
      Initiatives*




During
      2001,
      our management made two strategic decisions that significantly impacted our
      operating results. First, we substantially increased our gross research and
      development spending, which includes research and development expenses and
      capitalized software development costs. This decision was made to enable us
      to
      bring components of our SunriseXA product line to market more rapidly. Second,
      we invested heavily in sales and marketing to enhance market awareness
      surrounding Eclipsys and its products and services. We did this to capitalize
      on
      perceived market demand for our products and services. Additionally, in 2002,
      we
      moved aggressively to change our contracting model, offering our customers
      payment terms which are more evenly distributed over the term of the contract
      compared to the traditional licensing model we used previously, in which
      software license fees were paid in advance. We did this to meet the needs of
      our
      customers, by matching the timing of their payments to the value that we deliver
      to them. We believe that this contracting model makes purchasing decisions
      easier for our customers.




The
      change in
      our contracting model has had a material affect on our business. Most notably,
      our revenues, gross margins, and cash flows have been affected by our adoption
      of this approach. Because the payments from our customers for software license
      fees are more evenly distributed over the term of the contract, our revenue
      from
      a particular transaction is recognized over a longer period of time compared
      to
      the traditional licensing model, while a significant portion of our operating
      expenses remain relatively fixed and are recognized early in the contract term.
      In some periods, our gross margins, operating margins, and cash flow from
      operating activities were negatively affected by lower upfront software
      payments. However, we believe that this contracting model provides for more
      predictable revenues on a year-over-year basis.




During
      the
      quarter-ended June 30, 2005, we announced that Eugene V. Fife our Chairman
      of the Board of Directors had been named interim Chief Executive Officer and
      President. On October 20, 2005, we announced that the Board of Directors has
      appointed R. Andrew Eckert to replace Mr. Fife as CEO and President, effective
      as of November 14, 2005. Mr. Fife will continue in his role as Chairman of
      the
      Board of Directors of Eclipsys.




We
      consumed
      cash in 2003, 2004 and the first three quarters of 2005, primarily because
      cash
      collections from new contract signings were not sufficient to offset our higher
      operating expenses. To fund our business, we used a portion of our cash on
      hand.





*Operational
      Environment and Other Challenges for 2005*




During
      the
      fourth quarter of 2004, we experienced a slow down in sales transactions as
      a
      result of increasing competition within our sector, and this continued through
      the first half of 2005.  In particular, second quarter sales were
      disappointing.  Third quarter sales showed improvement over second quarter
      levels and fourth quarter prospects appear promising, but second half sales
      in
      the aggregate are unlikely to compensate fully for below-target sales in the
      second quarter.  Because new sales in 2005 are the primary source of





-
          12
          -





revenue
      growth for 2006, we anticipate that our revenues for 2006 will be somewhat
      less
      than our prior expectations. ** Additionally,
      we have a significant number of customers scheduled to activate one or more
      modules of our software applications in the next several months. The successful
      implementation of these customers will be critical to our success. We are
      scheduled to release Sunrise Clinical Manager 4.5 XA, our newest version of
      our
      core clinical software, in December 2005 - January 2006.





**Critical
      Accounting Policies**




We
      believe
      there are several accounting policies that are critical to understanding our
      historical and future performance, as these policies affect the reported amount
      of revenue and other significant areas involving management’s judgments and
      estimates. On an ongoing basis, management evaluates and adjusts its estimates
      and judgments, if necessary. These significant accounting policies relate to
      revenue recognition, allowance for doubtful accounts, capitalized software
      development costs and our warranty reserve.





*Revenue
      Recognition*




We
      generally
      contract under multiple element arrangements, which include software license
      fees, hardware and services including consulting, implementation, and software
      maintenance, for periods of 3 to 10 years. We evaluate revenue recognition
      on a contract-by-contract basis as the terms of each arrangement vary. The
      evaluation of our contractual arrangements often requires judgments and
      estimates that affect the timing of revenue recognized in our statements of
      operations. Specifically, we may be required to make judgments
      about:





·  whether
      the fees associated with our products and services are fixed or
      determinable;





·  whether
      collection of our fees is reasonably assured;





·  whether
      professional services are essential to the functionality of the related software
      product;





·  whether
      we have the ability to make reasonably dependable estimates in the application
      of the percentage-of-completion method; and





·  whether
      we have verifiable objective evidence of fair value for our products and
      services.




We
      recognize
      revenues in accordance with the provisions of Statement of Position, or SOP,
      No. 97-2, “Software Revenue Recognition” as amended by SOP No. 98-9,
      Staff Accounting Bulletin, or SAB, 104, “Revenue Recognition” and Emerging
      Issues Task Force, or EITF 00-21, “Revenue Arrangements with Multiple
      Deliverables.” SOP 97-2 and SAB 104, as amended, require, among other things,
      that there be a signed contract evidencing that an arrangement exists, delivery
      has occurred, the fee is fixed or determinable, and collectibility is
      probable.




Many
      of our
      contracts with our customers are multiple element arrangements that provide
      for
      multiple software products, including the rights to future products we may
      offer
      within the software suites the customer purchases or rights to software versions
      that support different hardware or operating platforms, and that do not qualify
      as exchange rights. We refer to these arrangements as subscription contracts.
      Additionally, we sometimes enter into multiple element arrangements that do
      not
      include these rights to future products or platform protection rights. We refer
      to these arrangements as traditional software contracts. Finally, we offer
      many
      of our products and services on a stand-alone basis. Revenue under each of
      these
      arrangements is recognized as follows:





*Subscription
      Contracts*




Our
      subscription contracts typically include the following
      deliverables:





·  software
      license;





·  maintenance;





·  professional
      services; and





·  third
      party hardware or remote hosting services.




Software
      license fees are recognized ratably over the term of the contract, commencing
      upon the delivery of the software provided that (1) there is evidence
      of an
      arrangement, (2) the fee is fixed or determinable and (3) collection
      of our fee is considered probable. The value of the software is determined
      using
      the residual method pursuant to Statement of Position 98-9, “Modification of
      Statement





-
          13
          -





of
      Position 97-2 With Respect to Certain Transactions,” or SOP 98-9. These
      contracts contain the rights to unspecified future products within
      the product suite purchased and/or unspecified platform transfer rights that
      do
      not qualify for exchange accounting. Accordingly, these arrangements are
      accounted for pursuant to paragraphs 48 and 49 of Statement of Position 97-2,
      “Software Revenue Recognition,” or SOP 97-2. Under certain arrangements, we
      capitalize related direct costs consisting of third party software costs and
      direct software implementation costs. These costs are amortized over the term
      of
      the arrangement.




In
      the case
      of maintenance revenues, vendor-specific objective evidence, or VSOE, of fair
      value is based on substantive renewal prices, and the revenues are recognized
      ratably over the maintenance period.




In
      the case
      of professional services revenues, VSOE is based on prices from stand-alone
      sale
      transactions, and the revenues are recognized as services are performed pursuant
      to paragraph 65 of SOP 97-2.




Third
      party
      hardware revenues are recognized upon delivery, pursuant to SAB
      104.




In
      the case
      of remote hosting services, where VSOE is based upon consistent pricing charged
      to customers based on volumes and performance requirements on a stand-alone
      basis and substantive renewal terms, the revenues are recognized ratably over
      the contract term as the services are performed. Our remote hosting arrangements
      generally require us to perform one-time set-up activities and include a
      one-time set-up fee. This one-time set-up fee is generally paid by the customer
      at contract execution. We have determined that these set-up activities do not
      constitute a separate unit of accounting, and accordingly the related set-up
      fees are recognized ratably over the term of the contract.




We
      consider
      the applicability of Emerging Issues Task Force 00-3, or EITF 00-3, “Application
      of AICPA Statement of Position 97-2 to Arrangements That Include the Right
      to
      Use Software Stored On Another Entity’s Hardware,” to our remote hosting
      services arrangements on a contract-by-contract basis. If we determine that
      the
      customer has the contractual right to take possession of our software at any
      time during the hosting period without significant penalty, and can feasibly
      run
      the software on its own hardware or enter into another arrangement with a third
      party to host the software, a software element covered by SOP 97-2 exists.
      When
      a software element exists in a remote hosting services arrangement, we recognize
      the license, professional services and remote hosting services revenues pursuant
      to SOP 97-2, whereby the fair value of the remote hosting services is recognized
      as revenue ratably over the term of the remote hosting contract. If we determine
      that a software element covered by SOP 97-2 is not present in a remote hosting
      services arrangement; we recognize revenue for the remote hosting services
      arrangement ratably over the term of the remote hosting contract pursuant to
      SAB
      104.





*Traditional
      Software Contracts*





We
      enter into
      traditional multiple-element arrangements that include the following
      elements:





·  software
      license;





·  maintenance;





·  professional
      services; and





·  third
      party hardware or remote hosting services.





Revenue
      for
      each of the elements is recognized as follows:




Software
      license fees are recognized upon delivery of the software provided that
      (1) there is evidence of an arrangement, (2) the fee is fixed
      or
      determinable and (3) collection of our fee is considered probable. For
      those arrangements in which the fee is not considered fixed or determinable,
      the
      software license revenue is recognized as the payments become due. For
      arrangements where VSOE only exists for the undelivered elements, we account
      for
      the delivered elements (software license revenue) using the residual method
      in
      accordance with SOP 98-9.




In
      addition
      to the software license fees, these contracts may also contain maintenance,
      professional services and hardware or remote hosting services. VSOE and revenue
      recognition for these elements is determined using the same methodology as
      noted
      above for subscription contracts.





*Software
      Contracts Requiring Contract Accounting*




We
      enter into
      multiple element arrangements containing milestone provisions in which the
      professional services are considered essential to the functionality of the
      software. Under these arrangements, software license fees and professional
      service revenues are recognized using the percentage-of-completion method over
      the implementation period, which generally ranges from 12 to 24 months.
      Under the percentage-of-completion method, revenue and profit are recognized
      throughout the term of the implementation based upon





-
          14
          -





estimates
      of total labor hours incurred and revenues to be generated over the term of
      the
      implementation. Changes in estimates of total labor hours and the related effect
      on the timing of revenues and profits are recognized in the period in which
      they
      are determinable. Accordingly, changes in these estimates could occur and have
      a
      material effect on our operating results in the period of change.





*Stand-Alone
      Products and Services*





We
      also
      market products and services on a stand-alone basis. These products and services
      include the following:





·  software
      license;





·  maintenance;





·  professional
      services;





·  hardware;





·  network
      services;





·  remote
      hosting services;





·  outsourcing.




Revenue
      related to these products and services is recognized as follows:




Software
      license fees and maintenance are marketed on a stand-alone basis and may be
      licensed either under traditional contracts or under subscription arrangements.
      Software license fees under traditional contracts are recognized pursuant to
      SOP
      97-2 if, when the software has been delivered, persuasive evidence of an
      arrangement exists, the fee is fixed or determinable and collectibility is
      probable. Under subscription agreements for stand-alone products, software
      license fees are recognized ratably over the term of the contract. With respect
      to maintenance, VSOE is determined based on substantive renewal prices contained
      in the contracts. Maintenance is recognized ratably over the term of the
      contract.




Professional
      services represent incremental services marketed to customers including
      implementation and consulting services. Professional services revenues, where
      VSOE is based on prices from stand-alone transactions, are recognized as
      services are performed.




Hardware
      is
      recognized upon delivery pursuant to SAB 104.




Network
      services arrangements include the assessment, assembly and delivery of a
      wireless network, which may include wireless carts or other wireless equipment
      to the customer. Our network services arrangements are sold to a customer for
      a
      fixed fee. All services are performed prior to the delivery of the equipment.
      These contracts are typically 60 to 90 days in length and are recognized
      pursuant to SAB 104, upon the delivery of the network to the
      customer.




Remote
      hosting contracts that are sold on a stand-alone basis are recognized ratably
      over the contract term pursuant to SAB 104. Our remote hosting arrangements
      generally require us to perform one-time set-up activities and include a
      one-time set-up fee. This one-time set-up fee is generally paid by the customer
      at contract execution. We have determined that these set-up activities do not
      constitute a separate unit of accounting, and accordingly we recognize the
      related set-up fees ratably over the term of the contract.




We
      provide
      outsourcing services to our customers. Under these arrangements we assume all
      responsibilities for a healthcare organization’s information technology
      operations using our employees. Our outsourcing services include facilities
      management, network outsourcing and transition management. These arrangements
      typically range from five to ten years in duration. Revenues from these
      arrangements are recognized when services are performed.




If
      other
      judgments or assumptions had been used in the evaluation of our revenue
      arrangements, the timing and amounts of revenue recognized might have been
      significantly different.





*Allowance
      for Doubtful Accounts*




In
      evaluating
      the collectibility of our accounts receivable, we assess a number of factors,
      including a specific customer’s ability to meet its financial obligations to us,
      as well as general factors such as the length of time the receivables are past
      due and historical collection experience. Based on these assessments, we record
      a reserve for specific account balances as well as a reserve based on our
      historical experience for bad debt to reduce the related receivables to the
      amount we ultimately expect to collect from customers. If circumstances related
      to specific customers change, or economic conditions deteriorate such that
      our
      past collection experience is no





-
          15
          -





longer
      relevant, our estimate of the recoverability of our accounts receivable could
      be
      further reduced from the levels provided for in our consolidated financial
      statements.





*Capitalized
      Software Development Costs*




We
      capitalize
      software development costs in accordance with FASB Statement No. 86,
      “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
      Marketed.” We capitalize software development costs incurred subsequent to
      establishing technological
      feasibility of the software being developed. These costs include salaries,
      benefits, consulting and other directly related costs incurred in connection
      with coding and testing software products. Capitalization ceases when the
      products are generally released for sale to customers, at which time
      amortization of the capitalized costs begins. This amortization is reflected
      in
      the costs of systems and services revenues. At each balance sheet date, we
      perform a detailed assessment of our capitalized software development costs,
      which includes a review of, among other factors, projected revenues, customer
      demand requirements, product lifecycle, changes in software and hardware
      technologies, and product development plans. Based on this analysis we record
      adjustments, when appropriate, to reflect the net realizable value of our
      capitalized software development costs. The estimates of expected future
      revenues generated by the software, the remaining economic life of the software,
      or both, could change, materially affecting the carrying value of capitalized
      software development costs, as well as our consolidated operating results in
      the
      period of change.





*Warranty
      Reserve*




The
      agreements that we use to license our software generally include a limited
      warranty providing that our software, in its unaltered form, will perform
      substantially in accordance with the related documentation. Through
      September 30, 2003 we did not incur any material warranty costs related
      to
      our products. In October 2003, we identified and announced response
      time
      issues within some components of the version of our next-generation core
      clinical software that we were developing at that time. Although some of the
      software components had been implemented in and were working at some customer
      sites, we determined that the software did not produce acceptable response
      times
      for complex, high-volume hospital environments. The response time issue resulted
      in a product delivery delay for some of our advanced clinical software
      functionality and also adversely affected the implementation schedules for
      a
      number of our customers. In connection with this issue, we have recorded
      warranty provisions to date of $4.6 million.




Warranty
      costs are charged to costs of systems and services revenues when they are
      probable and reasonably estimable. In determining this warranty reserve, we
      used
      significant judgments and estimates for the additional professional service
      hours and third party costs that will be necessary to remedy this issue on
      a
      customer-by-customer basis. The timing and amount of our warranty reserve could
      have been different if we had used other judgments or assumptions in our
      evaluation.





-
          16
          -




**THREE
                  MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED
                  SEPTEMBER
                  30, 2004****(In
                  thousands except per share data)****Three
                  Months Ended September 30,****%
                  of Total**
              
              
              
              **%
                  of Total****2005**
              
              **Revenues**
              
              **2004**
              
              **Revenues**
              
              **Change
                  $**
              
              **Change
                  %**RevenuesSystems
                  and services
              
              $
              94,806
              
              
              96.9
              %
              $
              71,352
              
              
              89.4
              %
              $
              23,454
              
              
              32.9
              %Hardware
              
              
              3,046
              
              
              3.1
              %
              
              8,463
              
              
              10.6
              %
              
              (5,417
              )
              
              -64.0
              %Total
                  revenues
              
              
              97,852
              
              
              100.0
              %
              
              79,815
              
              
              100.0
              %
              
              18,037
              
              
              22.6
              %Costs
                  and expensesCosts
                  of systems and services revenues
              
              
              56,776
              
              
              58.0
              %
              
              42,694
              
              
              53.5
              %
              
              41,082
              
              
              33.0
              %Costs
                  of Hardware revenues
              
              
              2,575
              
              
              2.6
              %
              
              7,311
              
              
              9.2
              %
              
              (4,736
              )
              
              -64.8
              %Sales
                  and marketing
              
              
              14,076
              
              
              14.4
              %
              
              15,207
              
              
              19.0
              %
              
              (1,131
              )
              
              -7.4
              %Research
                  and development
              
              
              12,726
              
              
              13.0
              %
              
              15,032
              
              
              18.8
              %
              
              (2,306
              )
              
              -15.3
              %General
                  and administrative
              
              
              3,840
              
              
              3.9
              %
              
              3,281
              
              
              4.1
              %
              
              559
              
              
              17.0
              %Depreciation
                  and amortization
              
              
              3,625
              
              
              3.7
              %
              
              3,355
              
              
              4.2
              %
              
              270
              
              
              8.0
              %Total
                  costs and expenses
              
              
              93,618
              
              
              95.7
              %
              
              86,880
              
              
              108.9
              %
              
              6,738
              
              
              7.8
              %Income
                  (loss) from operations
              
              
              4,234
              
              
              4.3
              %
              
              (7,065
              )
              
              -8.9
              %
              
              11,299Interest
                  income, net
              
              
              865
              
              
              0.9
              %
              
              415
              
              
              0.5
              %
              
              450
              
              
              108.4
              %Income
                  (loss) before income taxes
              
              
              5,099
              
              
              5.2
              %
              
              (6,650
              )
              
              -8.3
              %
              
              11,749Provision
                  for income taxes
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Net
                  Income (loss)
              
              $
              5,099
              
              
              5.2
              %
              $
              (6,650
              )
              
              -8.3
              %
              $
              11,749Basic
                  net income (loss) per common share
              
              $
              0.11
              
              
              
              
              $
              (0.14
              )
              
              
              
              $
              0.25Diluted
                  net income (loss) per common share
              
              $
              0.10
              
              
              
              
              $
              (0.14
              )
              
              
              
              $
              0.24




**RESULTS
      OF OPERATIONS**




Total
      revenues increased by $18.0 million, or 22.6%, to $97.9 million for the
      quarter-ended September 30, 2005, compared with $79.8 million for the third
      quarter of 2004.




Systems
      and
      services revenues increased by $23.5 million, or 32.9 %, to $94.8 million for
      the quarter-ended September 30, 2005, compared with $71.4 million for
      the
      third quarter of 2004.  Systems
      and services revenues increased primarily as a result of an increase in revenues
      generated under long-term contracts including remote hosting, outsourcing,
      software and software maintenance.  Revenues under these arrangements
      are
      generally recognized ratably over the term of the contract.  These revenues
      increased by $11.0 million or 21.6%.  This increase was primarily a
      result
      of contracts executed in the second half of 2004 and early 2005. 
       Additionally, in conjunction with the delivery of these contracts,
      professional services revenues, which include implementation and consulting
      services, increased by $8.2 million to $22.2 million, an increase of 58.7%,
      compared to $14.0 million in the third quarter of 2004.  The increase
      in
      professional services was associated with the activation of our advanced
      clinical and financial products at numerous customer sites. The increase in
      volume of professional services is expected to continue throughout the remainder
      of 2005 as a significant number of our customers continue to activate these
      applications.  Additionally, systems and services revenues increased
      as a
      result of a higher volume of software license fees, which increased to $5.3
      million in 2005, compared
      to $1.0 million in 2004,primarily as a result of license fees under our
      clinical practice content remarketing arrangement.  There were no fees
      from
      this remarketing arrangement in the 2004 period.  We do not foresee
      significant revenue from the remarketing arrangement in the fourth quarter,
      and
      there is no assurance that we will generate comparable levels of revenue from
      the remarketing arrangement in any future periods.  Revenue increases
      in
      any period are attributable, to a significant degree, to prior-year sales. 
      Because 2005 sales have fallen short of our expectations, the percentage revenue
      increases experienced in 2005 may not be repeated in
      2006.




Hardware
      revenues decreased by $5.4 million, or 64.0%, to $3.0 million for the
      quarter-ended September 30, 2005, compared with $8.5 million for the
      third
      quarter of 2004. Hardware revenues in 2005 are expected to remain at levels
      that
      are lower than 2004 as a significant number of customers purchased hardware
      in
      the prior year based on the scheduled activation of their respective
      implementations. Additionally, sales volumes of hardware decreased as some
      customers have elected to obtain remote hosting services from us in lieu of
      hardware purchases in connection with the purchase of our applications.
      Furthermore, hardware revenues have been negatively impacted as a result of
      our
      sales performance to date in 2005.




Costs
      of
      systems and services revenues increased by $14.1million, or 33.0%, to
      $56.8 million, for the quarter-ended September 30, 2005, compared to
      $42.7 million for the third quarter of 2004. The increase in costs of
      systems and services revenues was primarily a result of incremental costs
      associated with higher levels of outsourcing and remote hosting revenues.
      Additionally, costs in the quarter increased as a result of a higher level
      of
      third party consulting costs used to supplement the delivery of implementation
      and consulting services on our customer engagements. The heightened level of
      spending associated with third party consulting costs is





-
          17
          -





expected
      to continue through the remainder of 2005, which will negatively impact our
      overall results. Amortization of capitalized software development costs, which
      is included as a component of costs of systems and services revenues, increased
      by approximately $400,000, to $3.8 million for the three months ended
      September 30, 2005, compared to $3.4 million for third quarter of 2004.
      The
      increase in amortization was the result of releases of Sunrise Clinical Manager
      3.5 XA and 4.0 XA.




Costs
      of
      hardware revenues decreased by $4.7 million, or 64.8%, to $2.6 million
      for
      the quarter-ended September 30, 2005, compared to $7.3 million for the
      third quarter of 2004. Gross margins on hardware revenues were 15.5% in the
      third quarter of 2005 and 13.6% in the third quarter of 2004. The decrease
      in
      the costs of hardware revenues was a result of lower hardware
      volume.




Sales
      and
      marketing expenses decreased by $1.1 million or 7.4%, to $14.1 million
      for
      the quarter-ended September 30, 2005, compared to $15.2 million for
      the
      third quarter of 2004. The decrease in sales and marketing expenses was
      primarily related to a decrease in payroll and travel related
      costs.




Research
      and
      development expenses decreased by $2.3 million, or 15.3%, to $12.7 million,
      for the quarter-ended September 30, 2005, compared to $15.0 million
      for the
      third quarter of 2004. Research and development costs decreased as a result
      of
      higher software capitalization in the third quarter of 2005 compared to the
      third quarter of 2004. Software capitalization increased to $5.0 million,
      compared to $2.1 million in the prior year. The higher level of capitalized
      software development costs primarily relates to activities associated with
      our
      Sunrise Clinical Manger 4.5 XA release which is scheduled
      for general availability in December 2005 - January 2006.




General
      and
      administrative expenses increased by $559,000, or 17.0%, to $3.8 million for
      the
      quarter-ended September 30, 2005, compared to $3.3 million for the third quarter
      of 2004. These expenses increased due to incremental payroll related
      expenses.




Depreciation
      and amortization increased by $270,000, or 8.0%, to $3.6 million, for
      the
      quarter-ended September 30, 2005, compared to $3.4 million, for the
      third
      quarter of 2004. The increase was primarily the result of higher depreciation
      related to fixed assets purchased to expand our corporate
      infrastructure.




Interest
      income increased by $450,000, or 108.4%, to $865,000 for the quarter-ended
      September 30, 2005, compared to $415,000 for the third quarter of 2004. The
      increase was due to a significant improvement in yields resulting from higher
      interest rates in the quarter.




As
      a result
      of these factors, we had a net income of $5.1 million for the quarter-ended
      September 30, 2005, compared to a net loss of $6.7 million for the third
      quarter in 2004.





-
          18
          -





**NINE
                  MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER
                  30, 2004****(In
                  thousands except per share data)****Nine
                  Months Ended September 30,****%
                  of Total**
              
              
              
              **%
                  of Total****2005**
              
              **Revenues**
              
              **2004**
              
              **Revenues**
              
              **Change
                  $**
              
              **Change
                  %**RevenuesSystems
                  and services
              
              $
              269,491
              
              
              96.9
              %
              $
              201,756
              
              
              90.9
              %
              $
              67,735
              
              
              33.6
              %Hardware
              
              
              8,660
              
              
              3.1
              %
              
              20,086
              
              
              9.1
              %
              
              (11,426
              )
              
              -56.9
              %Total
                  revenues
              
              
              278,151
              
              
              100.0
              %
              
              221,842
              
              
              100.0
              %
              
              56,309
              
              
              25.4
              %Costs
                  and expensesCosts
                  of systems and services revenues
              
              
              165,601
              
              
              59.5
              %
              
              124,079
              
              
              55.9
              %
              
              41,522
              
              
              33.5
              %Costs
                  of Hardware revenues
              
              
              7,233
              
              
              2.6
              %
              
              17,282
              
              
              7.8
              %
              
              (10,049
              )
              
              -58.1
              %Sales
                  and marketing
              
              
              47,136
              
              
              16.9
              %
              
              46,356
              
              
              20.9
              %
              
              780
              
              
              1.7
              %Research
                  and development
              
              
              39,276
              
              
              14.1
              %
              
              44,306
              
              
              20.0
              %
              
              (5,030
              )
              
              -11.4
              %General
                  and administrative
              
              
              14,707
              
              
              5.3
              %
              
              10,856
              
              
              4.9
              %
              
              3,851
              
              
              35.5
              %Depreciation
                  and amortization
              
              
              10,891
              
              
              3.9
              %
              
              9,731
              
              
              4.4
              %
              
              1,160
              
              
              11.9
              %Total
                  costs and expenses
              
              
              284,844
              
              
              102.4
              %
              
              252,610
              
              
              113.9
              %
              
              32,234
              
              
              12.8
              %Loss
                  from operations
              
              
              (6,693
              )
              
              -2.4
              %
              
              (30,768
              )
              
              -13.9
              %
              
              24,075
              
              
              78.2
              %Interest
                  income, net
              
              
              2,146
              
              
              0.8
              %
              
              1,094
              
              
              0.5
              %
              
              1,052
              
              
              96.2
              %Loss
                  before income taxes
              
              
              (4,547
              )
              
              -1.6
              %
              
              (29,674
              )
              
              -13.4
              %
              
              25,127
              
              
              84.7
              %Provision
                  for income taxes
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -Net
                  Loss
              
              $
              (4,547
              )
              
              -1.6
              %
              $
              (29,674
              )
              
              -13.4
              %
              $
              25,127
              
              
              84.7
              %Basic
                  net loss per common share
              
              $
              (0.10
              )
              
              
              
              $
              (0.64
              )
              
              
              
              $
              0.54Diluted
                  net loss per common share
              
              $
              (0.10
              )
              
              
              
              $
              (0.64
              )
              
              
              
              $
              0.54





**RESULTS
      OF OPERATIONS**




Total
      revenues increased $56.3 million, or 25.4%, to $278.2 million for the
      nine
      months ended September 30, 2005, compared with $221.8 million for the
      same
      period in 2004.




Systems
      and
      services revenues increased $67.7 million, or 33.6 %, to $269.5 million for
      the
      nine months ended September 30, 2005, compared with $201.8 million for
      the
      same period in 2004.  Systems
      and services revenues increased primarily as a result of an increase in revenues
      generated under long term contracts including increases in software, software
      maintenance, outsourcing and remote hosting. These revenues, which are generally
      recognized on a monthly basis, increased to $184.3 million, an increase $38.1
      million, or 26.1%. The increase in revenues was primarily a result of higher
      revenues in connection with contracts entered into the second of half of 2004
      and the first half of 2005. These revenues were also favorably impacted by
      progress made on customer projects resulting in higher monthly revenues,
      including software maintenance and software. Additionally, revenues related
      to
      our remote hosting offering increased as more customers have elected this
      service in lieu of purchasing hardware. Furthermore, 2005 was favorably impacted
      by an increase in our outsourcing revenues related to several significant
      contracts that were entered into during late 2004. In addition, systems and
      services revenues increased as a result of higher revenues related to
      professional services, which includes implementation and consulting services.
      These revenues increased to $59.6 million in the nine months ended September
      30,
      2005 compared to $40.4 million during the same period in 2004, an increase
      of
      $19.2 million, or 47.6%. This increase was related to higher volumes associated
      with customer activations of our advance clinical and financial software
      products. The higher level of professional services is expected to continue
      throughout the remainder of 2005 as we continue to activate numerous customers
      on the newest releases of our software product. Additionally, systems and
      services revenues increased as a result of a higher volume of software license
      fees, which increased to $9.1 million in 2005, compared to $2.4 million in
      2004.
      This increase was primarily related to revenues associated with license fees
      under our clinical practice content marketing arrangement. There were no fees
      from this remarketing arrangement in the 2004 period.  We do not foresee
      significant revenue from the remarketing arrangement in the fourth quarter,
      and
      there is no assurance that we will generate comparable levels of revenue from
      the remarketing arrangement in any future periods.  Revenue increases
      in
      any period are attributable, to a significant degree, to prior-year sales. 
      Because 2005 sales have fallen short of expectations, the percentage revenue
      increases experienced in 2005 may not be repeated in 2006.





-
          19
          -
 
  Hardware
        revenues decreased by $11.4 million, or 56.9% to $8.7 million, for the nine
        months ended September 30, 2005, compared with $20.1 million for the
        same
        period in 2004. As previously mentioned, 2005 hardware revenues are expected
        to
        remain at levels that are lower than 2004 due to the change in sales mix
        related
        to the purchase of remote hosting services in lieu of hardware purchases
        by our
        customers and a lower level of hardware volume associated with the status
        of
        customer implementations and lower sales volumes to date compared to the
        prior
        year.




Costs
      of
      systems and services revenues increased $41.5 million, or 33.5%, to
      $165.6
      million, for the nine months ended September 30, 2005, compared to
      $124.1 million for the same period in 2004. The increase in costs of
      systems and services revenues was largely a result of incremental costs
      associated with higher levels of outsourcing and remote hosting revenues.
      Additionally, costs in the period increased as a result of a higher level of
      third party consulting costs used to supplement our delivery of services in
      connection with customer implementation and consulting projects. The higher
      level of spending associated with the third party consulting costs is expected
      to continue through the remainder of 2005. Furthermore, the amortization of
      capitalized software development costs increased by $3.7 million as a result
      of
      releases of our clinical product suite in 2004 and 2005.




Costs
      of
      hardware revenues decreased by $10.0 million, or 58.1%, to
      $7.2 million for the nine months ended September 30, 2005, compared
      to
      $17.3 million for the same period in 2004. Gross margins on hardware
      revenues were 16.5% in the nine months ended September 30, 2005 and 14.0% in
      the
      same period in 2004. The decrease in the costs of hardware revenues was
      attributable to the decrease in hardware revenues discussed above.




Sales
      and
      marketing expenses increased $780,000, or 1.7%, to $47.1million for the nine
      months ended September 30, 2005, compared to $46.4 million for the same
      period in 2004. The increase in sales and marketing expenses was primarily
      related to increases in payroll related costs including incentive compensation
      related costs, travel, training and costs associated with marketing
      events.




Research
      and
      development expenses decreased $5.0 million, or 11.4%, to
      $39.3 million, for the nine months ended September 30, 2005, compared
      to
      $44.3 million for the same period in 2004. The decrease in research
      and
      development expenses was primarily related to an increase in capitalized
      software development costs and lower overall expenditures. Capitalized software
      development costs increased to $14.6 million in 2005 compared to $10.6 million
      in 2004. The increase in capitalized software development costs was related
      to
      development efforts and activities associated with the completion of Sunrise
      Clinical Manager 4.5 XA which is scheduled for general availability in December
      2005 - January 2006.




General
      and
      administrative expenses increased $3.9 million, or 35.5%, to $14.7 million
      for the nine months ended September 30, 2005, compared to $10.9 million
      for
      the same period in 2004. General and administrative expenses in 2005 included
      $2.2 million of costs associated with the transition of our former Chief
      Executive Officer. Additionally, these expenses further increased as a result
      of
      incremental payroll related costs and professional services.




Depreciation
      and amortization increased $1.2 million or 11.9%, to $10.9 million, for the
      nine
      months ended September 30, 2005, compared to $9.7 million, for the same
      period in 2004. The increase was primarily the result of higher depreciation
      related to fixed assets purchased to expand our corporate
      infrastructure.




Interest
      income increased $1.1 million, or 96.2%, to $2.2 million for the nine months
      ended September 30, 2005, compared to $1.1 million for the same period in 2004.
      The increase was due to an improvement in yields resulting from higher interest
      rates in the period.




As
      a result
      of these factors, we had a net loss of $4.5 million for the nine months
      ended September 30, 2005, compared to a net loss of $29.7 million for the same
      period in 2004.





LIQUIDITY
      AND CAPITAL RESOURCES




During
      the
      quarter-ended September 30, 2005, operating activities generated $8.8 million
      of
      cash, primarily related to the collection of accounts receivable from customers
      and an overall improvement in our results of operations. Investing activities
      used $58.9 million of cash, primarily related to $5.0 million of
      capitalized software development costs, $6.5 million of capital expenditures
      and
      $46.5 million of net purchases of marketable securities. Financing activities
      provided $2.3 million of cash from the exercise of stock options. For
      the
      nine months ended September 30, 2005, operating activities provided $3.4 million
      of cash, primarily related to collection of accounts receivable and an overall
      improvement in operating results. These items were partially offset by some
      up-front costs in connection with a significant outsourcing contract, costs
      associated with the Chief Executive Officer transition and payments made in
      conjunction with prior year employee incentive compensation plans. Investing
      activities used $112.0 million of cash, primarily related to $14.6 million
      of
      capitalized software development costs, $12.8 million of capital expenditures
      and $83.6 million of net purchases of marketable equity securities. Financing
      activities provided $9.9 million of cash from the exercise of stock
      options.




As
      of
      September 30, 2005, our principal source of liquidity was our combined cash
      and
      marketable securities balance of $107.1 million. Our future liquidity
      requirements will depend on a number of factors including, among other things,
      the timing and volume of our new sales, the cost of our development efforts,
      the
      success and market acceptance of our future product releases, and





-
          20
          -





other
      related items. As of September 30, 2005, we did not have any material
      commitments for capital expenditures. We believe that our current cash and
      marketable securities balances, combined with our anticipated cash collections
      from customers will be adequate to meet our liquidity requirements for the
      next
      twelve months.







**Risk
      Factors**




There
      are a
      number of important factors that could affect our business and future operating
      results, including without limitation, the factors set forth below. The
      information contained in this report should be read in light of such factors.
      Any of the following factors could harm our business and future operating
      results.





***We
      face risks relating to our product strategy***




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 the root cause of the
      issue was in the technical design of the software, which did not adequately
      support the throughput required in the highly interactive patient care
      environment. We believe we have corrected the problem, but we still have some
      warranty issues associated with this problem, the announcement adversely affected our 2004 sales and may continue to make sales
      more challenging for the affected applications. These
      issues could harm our relationships with customers generally and our reputation
      in the marketplace.




Our
      subsequent releases of Sunrise Clinical Manager 3.5 XA in June 2004
      and
      Sunrise Clinical Manager 4.0 XA in March 2005 were significant milestones
      in the implementation of our product strategy and to date have not manifested
      the throughput issues described above. However, we continue to face a variety
      of
      risks and uncertainties associated with our software development and
      implementation that could
      harm our relationships with customers generally and our reputation in the
      marketplace ,
      including among others, the following:





·  We
      may
      encounter technical obstacles and delays in implementing our software
      development plans, and it is possible that we could discover additional problems
      with our software. If our software does not function as promised or if we are
      not able to continue to add features and functionality to address market demand
      and remain competitive, our business will suffer.





·  It
      is
      possible that future releases of our software, with anticipated additional
      features for our products, may be delayed. This could result in delayed or
      lost
      sales and potential breach of commitments to certain clients regarding
      availability of new functionality.





·  Customers
      who are currently implementing SunriseXA have faced delays in their
      implementations. As a result, existing SunriseXA customers could attempt to
      cancel their contracts with us or seek financial or other concessions from
      us.





·  As
      a
      result of the changes we will make to our SunriseXA product offerings, potential
      customers may find such products less appealing, which could decrease demand
      for
      our products.





·  2003
      operating results reflect a $1.2 million write-down of capitalized software
      development costs for some of our software components. Additionally, to date
      we
      have recorded warranty related costs of $4.6 million related to the anticipated
      costs associated with the 2003 response time issue.





***Recent
      changes in our executive team could distract management and cause uncertainty
      that could result in delayed or lost sales***




On
      April 29, 2005, we announced that our Chairman, Eugene V. Fife, had
      been
      named President and Chief Executive Officer on an interim basis, pending a
      search for a new, long-term Chief Executive Officer. On
      October 20, 2005, we announced that the Board of Directors had appointed R.
      Andrew Eckert to replace Mr. Fife as CEO and President, effective as of November
      14, 2005, with Mr. Fife continuing as Chairman of the Board. The
      CEO
      transition could 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 customers and potential customers that could lead
      to
      delays in closing new business or ultimately in lost sales.





***Our
      product strategy is dependent on the continued development and support by
      Microsoft of its .Net Framework and other
      technologies***




Our
      product
      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 products. This
      could lead to lost or delayed sales, unanticipated development expenses and
      harm
      to our reputation, and would cause our financial results and business to
      suffer.


-
          21
          -





***Our
      software development efforts may not meet the demands of the market or
      commitments to our clients, which could adversely affect our results of
      operations***




We
      continuously strive to develop new software products, and improve our existing
      software products 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 clients’ needs, and fail to meet
      commitments to clients regarding delivery of new or enhanced features and
      functionality. We have experienced such failures in the past and previous or
      potential failures of this kind could impair existing customer relationships
      and
      new sales.





***Given
      the length of our sales and implementation cycles, if a significant number
      of
      our customers delay implementation, our future operating results may
      suffer***




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 customer
      market. Furthermore, our software generally requires significant capital
      expenditures by our customers. The sales cycle for our software ranges from
      6 to
      18 months or more from initial contact to contract execution. Historically,
      our implementation cycle has 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 financial 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 customers to delay
      purchasing or implementing our products may adversely affect our
      revenues.





***Implementation
      costs may exceed expectations, which can negatively affect our
      margins***




Some
      of our
      software is complex and our implementations may require substantial investments
      of time and resources by us and our customers. Each customer’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, resulting in losses of margin, inefficient
      use of our implementation staff, and significant use of expensive third-party
      consultants to help us fulfill our implementation commitments.





***The
      healthcare industry faces financial constraints that could adversely affect
      the
      demand for our products 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 customers. Our ability to
      grow our business is largely dependent on our customers’ information technology
      budgets. To the extent healthcare information technology spending declines
      or
      increases more slowly than we anticipate, demand for our products would be
      adversely affected.





***We
      have a history of operating losses and we cannot predict future
      profitability***




For
      the nine
      months of 2005, we had a net loss of $4.5 million. We had a net loss
      of
      $32.6 million for the year ended December 31, 2004. We also had net
      losses
      of $56.0 million in 2003, $29.8 million in 2002, $34.0 million
      in
      2000, $9.4 million in 1999, and $35.3 million in 1998. In 2001,
      we had
      net income of $4.4 million, although we had a loss from operations of
      $1.6 million. We may continue to incur net losses and cannot predict
      when,
      or if, we will be profitable in the future.





***Our
      operating results may fluctuate significantly and may cause our stock price
      to
      decline***




We
      have
      experienced significant variations in revenues and operating results from
      quarter to quarter. Our operating results may continue to fluctuate due to
      a
      number of factors, including:





·  the
      performance of our products and our ability to promptly and efficiently address
      product performance shortcomings or warranty issue;





·  the
      cost,
      timeliness and outcomes of our software development and implementation
      efforts;


-
          22
          -





·  the
      timing, size and complexity of our product sales and
      implementations;





·  overall
      demand for healthcare information technology;





·  the
      financial condition of our customers and potential customers;





·  market
      acceptance of new services, products and product enhancements by us an our
      competitors;





·  customer
      decisions regarding renewal of their respective contracts;





·  product
      and price competition;





·  the
      relative proportions of revenues we derive from software, services and
      hardware;





·  changes
      in our operating expenses;





·  the
      timing and size of future acquisitions;





·  personnel
      changes;





·  significant
      judgments and estimates made by management in the application of generally
      accepted accounting principles; 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 product 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
      customer, the effectiveness of the customer’s management, general economic
      conditions and the regulatory environment. In addition, the timing of our
      revenue recognition could vary considerably depending upon the extent to which
      our customers elect to license our products under our subscription model or
      our
      traditional licensing arrangements. We also continue to offer contracts using
      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.





***Because
      in many cases we recognize revenues for our software monthly over the term
      of a
      customer 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 customers monthly over the terms
      of
      their agreements, which are typically 7 years and can be up to
      10 years. As a result, much of the revenues that we report each quarter
      are
      attributable to agreements executed during prior quarters. Consequently, a
      decline in sales, client renewals, or market acceptance of our products 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 customers must generally be recognized
      over the applicable agreement term.





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




We
      operate in
      a market that is intensely competitive. Our principal competitors include Cerner
      Corporation, Epic Systems Corporation, GE Medical Systems, IDX Systems
      Corporation, McKesson Corporation, QuadraMed and Siemens AG. We also face
      competition from providers of practice management systems, general decision
      support, database systems and other segment-specific applications, as well
      as
      from healthcare IT consultants. A number of existing and potential competitors
      are more established than we are, and have greater name recognition and
      financial, technical and marketing resources than we do. In addition, some
      of
      our competitors could consolidate with each other or with other large,
      well-financed companies, which could further intensify competition in our
      industry. For example, GE Medical Systems recently announced their plans to
      acquire IDX Systems Corporation. 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.


-
          23
          -





***If
      the healthcare industry continues to undergo consolidation, this could impose
      pressure on our products’ prices, reduce our potential customer base and reduce
      demand for our products***




Many
      hospitals have consolidated to create larger healthcare enterprises with greater
      market power. If this consolidation continues, it could erode our customer
      base
      and reduce the size of our target market. In addition, the resulting enterprises
      could have greater bargaining power, which may lead to erosion of the prices
      for
      our products.





***Potential
      regulation by the U.S. Food and Drug Administration of our products and content
      as medical devices could impose increased costs, delay the introduction of
      new
      products 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 products
      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
      products, or third party products that we resell, as medical devices, it could
      impose extensive requirements upon us, including the following:





·  requiring
      us to seek FDA clearance of a pre-market notification submission demonstrating
      that a product is substantially equivalent to a device already legally marketed,
      or to obtain FDA approval of a pre-market approval application establishing
      the
      safety and effectiveness of the product;





·  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 product corrections,
      suspending production, refusing to grant pre-market clearance or approval of
      products, 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 products or may prevent us from
      marketing our products.





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




The
      demand
      for health care information systems is affected by state and federal laws and
      regulations that govern the collection, use, transmission and other disclosures
      of electronic 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 customers are and require that our software and services
      adhere to HIPAA standards. Any failure or perception of failure of our products
      or services to meet HIPAA standards could adversely affect demand for our
      products and services and force us to expend significant capital, research
      and
      development and other resources to modify our products or services to address
      the privacy and security requirements of our customers.




States
      and
      foreign jurisdictions in which we or our customers 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 customers 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 products and services may decrease if we are not able to
      develop and offer products and services that can address the regulatory
      challenges and compliance obligations facing our customers.


-
          24
          -





***Our
      products and content are used to assist clinical decision-making and provide
      information about patient medical histories and treatment plans If our products
      fail to provide accurate and timely information or the treatment methodologies
      suggested by our content are faulty, our customers could assert claims against
      us that could result in substantial cost to us, harm our reputation in the
      industry and cause demand for our products to decline***




We
      provide
      products and embedded content that assist in clinical decision-making, suggest
      treatment methodologies, provide access to patient medical histories and assist
      in creating patient treatment plans. If our software fails to provide accurate
      and timely information, or if treatment methodologies utilizing our content
      or
      practice guidelines are determined to be faulty, we could have liability to
      customers 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 products. We attempt to limit by contract our liability for
      damages arising from negligence, errors or mistakes. In addition, we require
      that our customers approve all system rules and protocols. Despite these
      precautions, the limitations of liability set forth in our contracts may not
      be
      enforceable or may not otherwise protect us from liability for damages. We
      maintain general liability insurance coverage, including coverage for errors
      or
      omissions. However, 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.




Highly
      complex software products such as ours often contain undetected errors or
      failures when first introduced or as updates and new versions are released.
      It
      is particularly challenging for us to test our products because it is difficult
      to simulate the wide variety of computing environments or treatment
      methodologies that our customers may deploy or rely upon. Despite testing,
      from
      time to time we have discovered defects or errors in our products. Defects,
      errors or difficulties could cause delays in product introductions and
      shipments, result in increased costs and diversion of development resources,
      require design modifications or decrease market acceptance or customer
      satisfaction with our products. In addition, despite testing by us and by
      current and potential customers, errors may be found after commencement of
      commercial shipments, resulting in loss of or delay in market
      acceptance.





***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.




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 a 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.





***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. 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.





***Changing
      customer requirements could decrease the demand for our products, which could
      harm our business and decrease our revenues***




The
      market
      for our products and services is characterized by rapidly changing technologies,
      evolving industry standards and new product introductions and enhancements
      that
      may render existing products obsolete or less competitive. As a result, our
      position in the healthcare information technology market could erode rapidly
      due
      to unforeseen changes in the features and functions of competing products,
      as
      well as the pricing models for such products. A significant part of our revenue
      comes from relatively high-margin legacy products that were installed by our
      customers many years ago. We attempt to convert these customers to our newer
      generation products, but such conversions require significant investments of
      time and resources by customers. This reduces our advantage as the


-
          25
          -


incumbent
      vendor and has allowed our competitors to target these customers, with some
      success. Our future success will depend in part upon our ability to enhance
      our
      existing products and services, particularly our ability to continue to release
      our products onto the .NET Framework under the SunriseXA initiative, and to
      develop and introduce new products and services to meet changing customer
      requirements. The process of developing products and services such as those
      we
      offer is extremely complex and is expected to become increasingly complex and
      expensive in the future as new technologies are introduced. If we are unable
      to
      enhance our existing products or develop new products to meet changing customer
      requirements, demand for our products could suffer.





***We
      depend on licenses from third parties for rights to the technology used in
      several of our products, 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 products from a number
      of
      third-party vendors, including Computer Corporation of America, Computer
      Associates, Oracle Corporation and Microsoft. 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
      product 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
      products.





***Our
      products rely on our intellectual property, and any failure by us to protect
      our
      intellectual property, or any misappropriation of it, could enable our
      competitors to market products with similar features, which could reduce demand
      for our products***




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 products, reverse engineer
      our products or otherwise obtain and use information that we regard as
      proprietary. In some limited instances, customers 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
      customers 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 products. Furthermore,
      others could independently develop technologies similar or superior to our
      technology or design around our proprietary rights. In addition, infringement
      or
      invalidity claims or claims for indemnification resulting from infringement
      claims could be asserted or prosecuted against us. Regardless of the validity
      of
      any claims, defending against these claims could result in significant costs
      and
      diversion of our resources. The assertion of infringement claims could also
      result in injunctions preventing us from


distributing
      products. If any claims or actions are asserted against us, we might be required
      to obtain a license to the disputed intellectual property rights, which might
      not be available on reasonable terms or at all.





***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.


-
          26
          -


ITEM
      3.
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We
      do not
      currently use derivative financial instruments. We generally buy investments
      that are highly liquid. Based upon the nature of our investments, we do not
      expect any material loss from our investments.




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 and cash and marketable securities account
      balances.




Annualized
      interest income based upon hypothetical values for cash and marketable
      securities combined balances and interest rates:*




Combined
                  cash and cash equivalents andHypothetical
                  Interest Rate
              
              marketable
                  securities balances (in thousands)$
                  100,000
              
              $
                  110,000
              
              $
                  120,0001.5%
              
              
              1,500
              
              
              1,650
              
              
              1,8002.0%
              
              
              2,000
              
              
              2,200
              
              
              2,4002.5%
              
              
              2,500
              
              
              2,750
              
              
              3,0003.0%
              
              
              3,000
              
              
              3,300
              
              
              3,6003.5%
              
              
              3,500
              
              
              3,850
              
              
              4,2004.0%
              
              
              4,000
              
              
              4,400
              
              
              4,800*
                  (This sensitivity analysis is not a forecast of future interest
                  income.)




ITEM
      4.
      CONTROLS AND PROCEDURES





***Evaluation
      of Disclosure and Controls and Procedures in Internal Control Over Financial
      Reporting***




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 Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934 (the “Exchange Act”) as of September 30, 2005. Our
      disclosure controls and procedures are designed to provide reasonable assurance
      of achieving their objectives of ensuring that information we are required
      to
      disclose in the reports we file or submit under the Exchange Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      SEC’s rules and forms. There is no assurance that our disclosure controls and
      procedures will operate effectively under all circumstances. Based upon the
      evaluation described above our chief executive officer and chief financial
      officer concluded that, as of September 30, 2005, our disclosure controls and
      procedures were effective at the reasonable assurance level.




No
      change in
      our internal control over financial reporting (as defined in Rules 13a-15(f)
      and
      15d-15(f) under the Exchange Act) occurred during the fiscal quarter-ended
      September 30, 2005 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial
      reporting.








PART
      II.





ITEM
      1.
      LEGAL PROCEEDINGS




We
      and our
      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 thins assertions of contract breach or intellectual property
      infringement, claims for indemnity arising in the course of our business
      and claims by persons whose employment 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
      2.
      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




In
      March
      2004, we acquired CPM Resource Center, Ltd., or CPMRC. The transaction provided
      for earn-out payments to the prior owner of CPMRC through 2008 based on fute
      operating results. The earn-out consideration is payable half in cash and half
      in shares of our common stock, based upon the average of the last reported
      sale
      prices of our common stock on the NASDAQ National Market for the five
      consecutive trading days ending on the trading day that is one day prior to
      the
      date on which the earn-out consideration is paid. During the quarter ended
      September 30 we made the first earn-out payment, including issuance of 25,311
      shares of common stock on August 18, 2005. The transaction was exempt from
      registration under the Securities Act of 1933 under Section 4(2) of that act,
      because it did not involve any public offering.





In
        December
        of 2004, we acquired eSys Medical Inc. (eSys).  The transaction provided
        for two additional payments to the prior owners of eSys related to certain
        milestones in connection with future development efforts of the acquired
        technology following the closing, as well as earn-out payments payable through
        2008.  The first development milestone payment, totaling $750,000
        and
        payable 25% in cash and 75% in our common stock, was earned during the
        quarter-ended September 30, 2005, and the cash portion was paid. The 40,612
        shares that were earned are still in the process of being issued as of the
        date
        of this report.  The transaction was exempt from registration under
        the
        Securities Act of 1933 under Section 4(2) of that act, because it did not
        involve any public offering.























**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 Eugene V. Fife31.2
            Rule
                13a-14(a) Certification of Robert J. Colletti32.1
            Rule
                13a-14(b) Certification of Eugene V. Fife32.2
            Rule
                13a-14(b) Certification of Robert J. Colletti





(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.