**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**





**Form
      10-K**


**FOR
      ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934**





þ
            
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934****For
                the fiscal year ended December 31, 2006**
              
              **or****o**
            
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                OF 1934**





**Commission
      File Number: 000-24539**





**ECLIPSYS
      CORPORATION**


*(Exact
      name of registrant as specified in its charter)*


**Delaware**
            
            **65-0632092***(State
                of incorporation)*
            
            *(I.R.S.
                Employer*
              *Identification
                Number)*





**1750
      Clint Moore Road**


**Boca
      Raton, Florida**


**33487**


*(Address
      of principal executive offices)*


**(561)-322-4321**


*(Registrant’s
      telephone number, including area code)*


**Securities
      registered pursuant to Section 12(b) of the Act:**


**Title
      of Each Class**    **Name
      of Each Exchange on Which Registered**


**Common
      Stock,
      $.01 par value, and**


**Preferred
      Stock Purchase
      Rights**  ****  **The NASDAQ Stock Market LLC (NASDAQ Global Select)**





**Securities
      registered pursuant to Section 12(g) of the Act:**


**None**








Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
      [
      ]  No
      [ ü ]


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes [ ]   No
      [ ü ]





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


Yes
      [ ]   No
      [ ü ]





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. []





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


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





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


Yes
      [
      ]   No
      [ ü ]


The
      aggregate market value of the common stock held by non-affiliates of the
      registrant as of June 30, 2006 based upon the closing price of the Common Stock
      on the NASDAQ Global Select Market for such date was $849,043,542.





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


**Class**
            
            **Shares
                Outstanding as of May 16, 2007**Common
                Stock, $0.01 par value
            
            53,055,049








**EXPLANATORY
      NOTE REGARDING RESTATEMENTS**




This
      Annual Report on Form 10-K for our fiscal year ended December 31, 2006
      includes restatements of the following previously filed financial statements
      and
      data (and related disclosures): (i) our consolidated financial statements for
      our fiscal years ended December 31, 2005 and December 31, 2004; (ii) our
      selected consolidated financial data as of and for our fiscal years ended
      December 31, 2005, 2004, 2003 and 2002, and (iii) our unaudited quarterly
      financial data for fiscal year 2005 and the first three quarters in our fiscal
      year ended December 31, 2006. See Note 3, “Review of Stock Option Practices and
      Restatements of Consolidated Financial Statements,” in Notes to the Consolidated
      Financial Statements and Exhibit 99.1 for a detailed discussion of the effect
      of
      the restatements.




As
      previously announced on February 13, 2007, the Company initiated a voluntary
      review of its stock option grants addressing the timing of the grants and their
      related accounting and tax treatment, including whether the Company properly
      applied Accounting Principles Board Opinion (“APB”) 25 “Accounting for Stock
      Issued to Employees” (“APB 25”) in accounting for those grants. This review was
      conducted under the oversight of a special committee, consisting of two
      independent directors of the Company, as appointed by our Board of Directors.
      Outside counsel was engaged to conduct investigative and analytical portions
      of
      the review.




The
      review covered all stock option grants made from the Company’s initial public
      offering in August 1998 until the present, with particular focus upon grants
      made before implementation of the Sarbanes-Oxley Act in July 2002. During the
      course of the review, the Company and its advisors examined over thirty thousand
      paper and electronic documents and conducted interviews with 31 current and
      former employees, directors and advisors.




Through
      the review, the Company identified various stock option grants made during
      the
      period that had exercise prices lower than the fair market value of the
      Company’s common stock on the appropriate accounting measurement dates for those
      grants. Most of these instances occurred from March 1999 until August 2002;
      during that period, there were instances of selecting favorable grant dates
      and
      associated exercise prices with hindsight, repricing of previously issued
      options to lower exercise prices, adding additional stock options after the
      fact
      to a previously approved batch of options, and reallocation of previously issued
      options to different recipients at a later time, as well as administrative
      errors. The affected options were widely distributed to various personnel
      throughout the organization, and were not focused on grants to officers or
      directors.




The
      Company concluded that it did not properly apply APB 25 in accounting for some
      past stock option grants, primarily during the period from 1999 to 2002, and
      that approximately $8.9 million in additional aggregate non-cash stock-based
      compensation expense should have been recognized over the period 1999 through
      2005. Additionally, this results in approximately $0.5 million in related
      incremental payroll withholding taxes over the period 1999 to 2006.
      Consequently, the Company will record additional compensation expense for past
      stock option grants in an aggregate amount of approximately $9.4 million.





The
      individuals responsible for making decisions about stock option grants from
      August 1998 to August 2002 all left the Company in 2006 or earlier for reasons
      unrelated to the stock option review, and are no longer associated with the
      Company. The Company did not conclude that any current officers or employees
      engaged in any knowing or intentional misconduct with regard to the Company’s
      past stock option grant practices.





The
      Company does not consider the additional expense to be material to any of the
      prior years presented in this Annual Report.  Based upon the results of the
      review, the Company is restating its financial statements.  In lieu of
      amending prior SEC filings to restate financial statements, the Company is
      including the restatements in this Annual Report.





In
      addition to restatements to reflect the results of the stock option review,
      the
      annual and quarterly periods presented also include other adjustments that
      were
      not recorded in the originally filed financial statements due to their
      immateriality.





We
      will
      restate our previously filed financial statements for the quarters ended and
      March 31, 2006, June 30, 2006 and September 30, 2006, when included in our
      Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007, June
      30,
      2007 and September 30, 2007, respectively. The Selected Quarterly Condensed
      Consolidated Financial Data for the quarters ended September 30, 2006, June
      30,
      2006, March 31, 2006, December 31, 2005, September 30, 2005, June 30, 2005
      and
      March 31, 2005 and related selected Management’s Discussion and Analysis for the
      quarters ended September 30, 2006 and June 30, 2006 are included in Exhibit
      99.1
      to this Annual Report. We have not amended and do not intend to amend any of
      the
      previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q
      for the periods affected by the restatements.




**Part
      I**




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





Actual
      results might differ materially from the results projected due to a number
      of
      risks and uncertainties. Software development may take longer and cost more
      than
      expected, and incorporation of anticipated features and functionality may be
      delayed, due to various factors including programming and integration challenges
      and resource constraints. We may change our 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 our software,
      outsourcing or consulting services. The success and timeliness of our services
      often depend at least in part upon client involvement, which can be difficult
      to
      control. We are required to meet performance specifications, and contracts
      can
      be terminated or their scope reduced under certain circumstances. Competition
      is
      vigorous, and competitors may develop more compelling offerings or offer more
      aggressive pricing. New business is not assured and existing clients may migrate
      to competing offerings. Financial performance targets might not be




1


achieved
      due to various risks, including slower-than-expected business development or
      new
      account implementation, or higher-than-expected costs to develop software,
      meet
      service commitments or sign new contracts. Our cash consumption may exceed
      expected levels if profitability does not meet expectations or strategic
      opportunities require cash investments. These and other risks and uncertainties
      that could cause our actual results to differ materially from our
      forward-looking statements are described in this report under the headings
“Risk
      Factors” and “Management's Discussion and Analysis of Financial Condition and
      Results in Operations” and in our other filings made from time to time with the
      Securities and Exchange Commission. The cautionary statements made in this
      report should be read as being applicable to all related forward-looking
      statements wherever they appear. These statements are only predictions. We
      cannot guarantee future results, levels of activity, performance or
      achievements. All forward-looking statements attributable to us or any persons
      acting on our behalf are expressly qualified in their entirety by the risk
      factors referenced above. We assume no obligation to publicly update or revise
      these forward-looking statements for any reason, or to update the reasons actual
      results could differ materially from those anticipated in these forward-looking
      statements, even if new information becomes available in the future. We
      nonetheless reserve the right to make such updates from time to time without
      the
      need for specific reference to this report. No such update shall be deemed
      to
      indicate that other statements not addressed by such updates remain correct
      or
      create an obligation to provide any other updates.




**Item
      1.** ****** ***Business***




**Overview**




Eclipsys
      is a healthcare information technology company and a leading provider of
      advanced integrated information software, clinical content and professional
      services that help healthcare organizations improve clinical, financial, and
      operational processes. We develop and license proprietary software and content
      that is designed for use in connection with many of the key clinical,
      administrative and financial functions that healthcare organizations require.
      Among other things, our software enables physicians, nurses and other clinicians
      to order tests, treatment and medications and record, access and share
      information about patients. Our software also facilitates patient admissions,
      scheduling, records maintenance, invoicing, inventory control, cost accounting,
      and assessment of the profitability of specific medical procedures and
      personnel.  Our clinical content, which is integrated with our software,
      provides practice guidelines for use by physicians, nurses and other
      clinicians.




We
      also
      provide services related to our software.  These services include software
      and hardware maintenance, outsourcing, remote hosting of our software as well
      as
      third-party healthcare information technology applications, network services,
      training and consulting.




We
      believe that one of the key differentiators of our software is its open,
      flexible and modular architecture.  This allows our software to be
      installed one application at a time or all at once, and to generally integrate
      easily with software developed by other vendors or our clients. This enables
      our
      clients to install our software without the disruption and expense of replacing
      their existing software systems to gain additional
      functionality.




We
      market
      our software to small, stand-alone hospitals, large multi-entity healthcare
      systems, academic medical centers, community hospitals and other healthcare
      organizations. We have one or more of our software applications installed in,
      or
      licensed to be installed at approximately 1,500 facilities. Most of the
      top-ranked U.S. hospitals named in *U.S.
      News & World Report* ’s
      Honor
      Roll use one or more of our solutions.




**Available
      Information**





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 or SEC. The information
      on
      our Web site is not incorporated into this annual report.





The
      SEC
      also maintains an Internet web site that contains reports, proxy and information
      statements and other information regarding issuers, such as us, that file
      electronically with the SEC. The SEC’s Web site is located at
      www.sec.gov.





Eclipsys
      was incorporated in Delaware as “Integrated Healthcare Solutions, Inc.” in 1995
      and we changed our name to “Eclipsys Corporation” in 1997.





**Segments**





Eclipsys
      operates in one segment, as further described in Note 2, “Summary of Significant
      Accounting Policies” in Notes to the Consolidated Financial
      Statements.





**Recent
      Developments**




*Software*





We
      released Sunrise Clinical Manager 4.5 XA in January 2006.  The Sunrise 4.5
      XA advanced clinical suite builds upon our previous releases and adds
      significant new or expanded capabilities, including the fully integrated
      capabilities of our Sunrise Ambulatory Care TM ,
      Sunrise
      Emergency Care TM and
      Sunrise Medication ManagementTM solutions.  Sunrise 4.5 XA also builds upon
      recent enhancements to our Sunrise Patient Financial ManagerTM and Sunrise
      Decision SupportTM solutions. These solutions help save healthcare enterprises
      significant time and costs by streamlining workflows and optimizing clinical
      practices across the organization. During 2006, we completed implementation
      of
      Sunrise Clinical Manager 4.5 XA at more than 25 client sites and implementations
      at more than 35 additional client sites are underway or scheduled for
      2007.





On
      October 23, 2006, we announced that Eclipsys’ Sunrise Ambulatory CareTM 4.5
      complies with the Certification Commission for Healthcare Information Technology
      (CCHIT) for ambulatory electronic health record criteria for 2006. Ambulatory
      electronic health records are designed for physician offices and clinics where
      most Americans get their healthcare. The CCHIT is an independent, nonprofit
      organization that reviews electronic health record software against its set
      of
      certification criteria designed to evaluate functionality, interoperability
      and
      security.




2


*Acquisitions*




In
      July
      2006, we acquired certain assets of Sysware Healthcare Systems, Inc.
      (“Sysware”), a laboratory information system company. During December 2006, we
      closed a stock acquisition of Mosum Technology (India) Private Limited
      (“Mosum”), Sysware’s related software-development organization in India, once
      applicable Indian regulatory approvals were received. From July 2006 to such
      closing, we operated Mosum under a management agreement. Since 2004, Eclipsys
      and Sysware shared a strong strategic business relationship, with Eclipsys
      marketing Sysware's PowerLAB solution under the Eclipsys Sunrise
      Laboratory TM brand.
      This asset acquisition built upon that partnership and acknowledges the value
      of
      an integrated laboratory information system as a core module of Eclipsys'
      Sunrise Clinical Manager suite of advanced clinical information solutions.
      It
      also provided us with the foundation for our growing development and support
      organization in India. In December 2006, we acquired Van Slyck & Associates,
      Inc., or VSA. VSA is a patient classification, acuity-driven nurse staffing
      service and software company. Since 2004, Eclipsys has offered Sunrise Patient
      AcuityTM, a module that includes VSA’s patient acuity methodology embedded into
      the interdisciplinary clinical documentation capabilities of Eclipsys’ Sunrise
      Clinical ManagerTM. Sunrise Patient Acuity taps the VSA methodology, which
      enables calculation of patient acuity -the patient's severity and complexity
      of
      illness or injury - as an automatic byproduct of nursing documentation, and
      generates nurse staffing models based upon patient acuity to enable nurse
      managers to staff their units appropriately to ensure improved quality of care.
      With this acquisition, Eclipsys will be able to further expand its integrated
      solutions’ staffing and productivity management and reporting capabilities.




*Key
      Hires and Promotions*




In
      January 2006, we named John E. Deady Executive Vice President Client Solutions.
      Mr. Deady oversees
      our sales,
      sales support, corporate marketing and software marketing operations.




In
      August
      2006, we named Jan Smith Senior Vice President Human Resources.




In
      December 2006, we promoted Frank Stearns to Executive Vice President Client
      Operations. In that capacity, Mr. Stearns manages our professional services,
      software support and remote hosting operations.




In
      January 2007, we promoted John McAuley to Senior Vice President Outsourcing.
      He
      now manages our outsourcing operations.




In
      February 2007, we named Bob Elson, MD, MS our new Chief Medical Officer. Dr.
      Elson will work with Eclipsys senior executives to set our long-term clinical
      strategy and short-term priorities for Eclipsys solutions. Additionally, Dr.
      Elson will be responsible for executive-level and physician sales support.
      In
      February 2007, we announced that Nitin Deshpande will join Eclipsys as president
      of India operations, where he will be responsible for managing all day-to-day
      operations of Eclipsys India.




In
      February 2007, we announced that Joe Petro joined Eclipsys as Senior Vice
      President Software Development. He will be responsible for managing our software
      research and development activities.





***Restructuring
      Activities***





In
      January 2006, we effected a restructuring of our operations which included
      a
      reduction in headcount of approximately 100 individuals, and the reorganization
      of our Company. This was undertaken to better align our organization, reduce
      costs, and re-invest some of the cost savings into client-related activities
      including client support and professional services. In December 2006, we
      realigned certain management resources and consolidated some facilities to
      eliminate excess office space.





These
      activities resulted in restructuring charges of $14.7 million in the year ended
      December 31, 2006. Severance charges were $12.2 million, of which $3.6 million
      related to the termination of employment of certain management personnel. Of
      this charge, $1.3 million was for non-cash stock-based compensation. The excess
      office space consolidation resulted in charges of $2.5 million related to the
      closing of three facilities.





Savings
      from these restructuring activities are being reinvested in our business to
      finance a planned increase in our research and development capabilities and
      client services.




**Challenges
      for 2007**




Our
      release of SCM 4.5 XA in January 2006 included new functionality, and we are
      implementing this new software with a number of clients. In addition, our newest
      integrated medication management and ambulatory software is early in its
      lifecycle and is being implemented by many clients for the first time.
      Furthermore, we are currently developing the next major release of our core
      clinical software, SCM 5.0 XA. In the event our new software does not continue
      to achieve market acceptance, we experience any significant delays in
      implementing these new releases, or the software does not function as expected,
      our results of operations could be negatively affected, including a delay or
      loss in closing future new sales transactions.





Our
      software sales in 2006 did not meet our internal targets and the attainment
      of
      the results we expect for 2007 will depend upon future software license fees,
      continued improvement in our professional service revenues and margins, and
      continued successful client activations.





The
      Company’s name recognition in the marketplace continues to be relatively low. In
      2007, we have begun an image-building campaign to increase name
      recognition. In addition, we have placed new leaders in sales, marketing and
      sales support.





3


**Healthcare
      Industry Factors**




Healthcare
      organizations are under increased pressure to reduce medical errors and increase
      operational efficiencies. Our software and services are designed to help clients
      achieve these objectives. Legislation is also requiring changes within the
      healthcare industry. We believe that these changes may increase demand for
      healthcare information technology software and services such as
      ours.




**The
      Decade of Health Information Technology.** On
      April 27, 2004, President George W. Bush issued an executive order that
      established the position of National Health Information Technology Coordinator
      within the Department of Health & Human Services. The post was created
      to provide leadership for the development and nationwide implementation of
      an
      interoperable health information technology infrastructure to improve the
      quality and efficiency of healthcare in the United States. The vision of this
      infrastructure is to:


- ensure
            that appropriate information to guide medical decisions is available
            at the
            time and place of care;
- improve
          healthcare quality, reduce medical errors, and advance the delivery of
          appropriate, evidence-based medical care;
- reduce
          healthcare costs resulting from inefficiency, medical errors, inappropriate
          care, and incomplete information;
- promote
          a more-effective marketplace, greater competition, and increased choice
          through the wider availability of accurate information on healthcare costs,
          quality, and outcomes;
- improve
          the coordination of care and information among hospitals, laboratories,
          physician offices, and other ambulatory care providers through an effective
          infrastructure for the secure and authorized exchange of healthcare
          information; and
- ensure
          that patients’ individually identifiable health information is secure and
          protected.

On
      July 21, 2004, the Secretary of Health & Human Services released the
      first outline of a 10-year plan to build the national electronic health
      information infrastructure. The report entitled, “The Decade of Health
      Information Technology: Delivering Consumer-centric and Information-rich Health
      Care,” concluded that federal leadership can facilitate efforts to be carried
      out by the private sector and laid out the broad steps needed to achieve
      widespread electronic health records for Americans. This report was a response
      to the call by President Bush in 2004 to achieve electronic health records
      for
      most Americans within a decade.




**CCHIT.** The
      Health & Human Services initiatives have, among other things, led to the
      creation of the private-sector Certification Commission for Health
      Information Technology, or CCHIT, which consists of 15 commissioners from across
      the healthcare industry. CCHIT is developing a set of private sector determined
      criteria for electronic health record functionality, interoperability,
      reliability and security, and is inspecting electronic health record software
      to
      determine its performance against these criteria. Eclipsys’ Sunrise Ambulatory
      CareTM 4.5 met CCHIT’s ambulatory electronic health record criteria for
      2006.




**Institute
      of Medicine.** In 1999,
      the Institute of Medicine issued a report titled, “To Err Is Human: Building a
      Safer Health System” calling for the expanded use of information technology to
      reduce avoidable medical errors by 50 percent in the U.S. over the
      ensuing five-year period. According to that report, between 44,000 and 98,000
      people died each year as a result of medical errors. The Institute of Medicine
      concluded that more people were injured from preventable mistakes than from
      many
      other common illnesses or accidents. The Institute of Medicine report identified
      medication and pharmacy errors as significant causes of deaths and adverse
      events. In 2003, the Institute of Medicine released a separate report stating
      that medical errors may be reduced through widespread adoption of information
      technology, such as electronic medical records that can be connected through
      a
      national system linking all healthcare organizations.





**Health
      Insurance Portability and Accountability Act.** The
      federal Health Insurance Portability and Accountability Act of 1996 or HIPAA,
      seeks to impose national health data standards on covered entities. Under HIPAA,
      a covered entity includes (i) healthcare providers that conduct electronic
      health transactions; (ii) healthcare clearinghouses that convert health
      data between HIPAA-compliant and non-compliant formats; and (iii) health
      plans. The HIPAA standards prescribe, among other things, transaction formats
      and code sets for electronic health transactions, in order to protect individual
      privacy by limiting the uses and disclosure of individually identifiable health
      information. HIPAA also requires 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.




Under
      HIPAA, covered entities are required to utilize HIPAA-compliant products,
      software and services. We believe that the need for HIPAA-compliant software
      will continue to create demand for software and services like ours. We are
      not a
      covered entity under HIPAA, but many of our clients are. Accordingly, we have
      developed our software to facilitate HIPAA compliance.




**The
      Joint Commission.** The
      Joint Commission (formerly known as the Joint Commission on Accreditation of
      Healthcare Organizations) is an independent non-profit organization that
      provides voluntary evaluation and accreditation for more than 15,000 healthcare
      organizations in the United States. The Joint Commission periodically introduces
      new process improvement initiatives, standards and performance measurements
      that
      are used to assess hospitals. The Joint Commission has also established patient
      safety standards and each year approves annual National Patient Safety Goals
      that include specific recommendations for improving patient safety. Most of
      our
      clients seek to comply with the Joint Commission standards. We believe that
      clients use our software and services to help them meet the Joint Commission
      standards.




**The
      Internet.** The
      Internet enables consumers to be more involved in their healthcare choices,
      and
      provides increased availability of medical information to physicians, clinicians
      and healthcare workers. As consumers adopt Web-centric lifestyles, we believe
      that software and services like ours will become more appealing to a wider
      client base.




**Our
      Offering**




We
      provide the following software and services:




- Clinical
            and financial software for use by healthcare organizations and clinicians;
- Professional
            services related to implementation and use of our software;
- Consulting
          services to help our clients improve their operations;
- IT
          outsourcing;
- Remote
          hosting of client IT systems, including our software and third-party software;
- Hardware
          and Networks.



4


Additional
      details regarding our software and services offering are provided
      below:




**Software**




Eclipsys
      software provides comprehensive functionality that helps healthcare
      organizations and care providers address many of their key clinical, financial
      and administrative needs.  Among other things, our software is designed
      to:





·
            Provide
                healthcare organizations with tools to improve clinical workflow
                and
                support clinical, financial and operational decision-making throughout
                the
                organization, as well as information they use to negotiate with insurance
                companies, Medicare and Medicaid, to maximize collections and minimize
                payment denials.


·
            Provide
                clinicians with access to patient information, evidence-based clinical
                content and supporting references, such as medical journals, as well
                as
                information regarding costs and effects of patient tests and treatments.


·
            Permit
                simultaneous access to consolidated patient information by multiple
                users
                from access points throughout the clinical environment and from remote
                locations.





We
      have
      been committed to building our software on, and re-engineering and migrating
      existing software to, an architecture based on the Microsoft .NET Framework
      and
      other industry-standard technologies. We believe this approach allows our
      software to be more open and extensible, making it easier to integrate with
      a
      client’s legacy and ancillary systems. We believe this architecture enables
      healthcare organizations to continue to derive value from their existing
      technology investments, and add other software as functional needs and resources
      dictate.




Sunrise
      software built upon our XA architecture shares a common database model known
      as
      a Healthcare Data Repository. The Healthcare Data Repository can be used by
      all
      components within XA-based Eclipsys software, regardless of where in the
      healthcare organization a physician, nurse or employee is located. Our XA-based
      solutions are designed to prevent the isolation of information and duplication
      of functionality that can occur with other information technology systems.
      We
      believe that this approach will enable a faster, more cost-effective
      implementation of our software, simplify software maintenance and provide a
      lower total cost of ownership.




The
      following summarizes our principal software offerings:




**Sunrise
      Clinical Manager** is
      a computerized patient record system that provides patient information to
      clinicians at the point of decision-making. Sunrise Clinical Manager allows
      a
      physician to enter orders quickly and efficiently, and provides evidence-based
      clinical decision support at the time of order entry.  Sunrise Clinical
      Manager’s core capabilities and related modules are designed for use in the
      acute care, critical care emergency department, ambulatory clinic and physician
      office settings, and include the following features among others:





·
            Order
                entry, communication and management, which enables physicians to
                order
                online prescriptions and laboratory or diagnostic tests or procedures,
                and
                routes the orders to the appropriate department or party within the
                organization for fulfillment.


·
            Knowledge-based
                orders, which is a clinical decision support system that uses a rules
                database to help physicians minimize the risk of possible problems
                with or
                conflicts between newly entered orders and existing patient information.
                A
                set of clinical rules developed by physicians is available with
                knowledge-based orders. Clients can modify these existing rules or
                develop
                their own clinical rules.


·
            Clinical
                decision support, which triggers alerts, including by e-mail or pager,
                upon the occurrence of a specified change in a patient’s condition or
                other physician-designated events, such as the delivery of unfavorable
                laboratory results, while relating the new information to information
                already in the system for that
                patient.


·
            Clinical
                pathways and scheduled activities lists, which provides access to
                standardized patient-care profiles and assists in the scheduling
                of
                clinical treatment procedures.


·
            Clinical
                documentation, which gathers and presents patient information by
                accepting
                and arranging input from caregivers, laboratories or monitoring equipment.
                Features include an automated patient classification, an acuity system
                that facilitates timely adjustment of nursing staffing and other
                resources
                and evidence-based clinical practice
                guidelines.


·
            End-to-end
                medication management, which links physicians as they place orders,
                pharmacists as they verify and dispense those orders, and nurses
                as they
                administer medications.


·
            Laboratory,
                surgery, and critical care modules to facilitate the operation of
                these
                care environments.


·
            Remote
                access services, which provides physicians with Web-based access
                to
                patient information from within the healthcare facility or
                remotely.





**Sunrise
      Access Manager** enables
      healthcare providers to identify a patient at any time within a hospital and
      to
      collect and maintain patient information on an enterprise-wide basis. It
      provides the following features:





·
            Captures
                demographic, insurance, referral and primary-care provider information
                and
                helps automate patient admission, discharge and transfer
                processes.


·
            Patient
                scheduling and resource management facilitates scheduling patient
                appointments throughout an organization based on patient preferences
                and
                resource availability, and provides complex scheduling capabilities
                such
                as multiple and linked conditional
                appointments.


·
            Managed-care
                support features, such as verifying insurance eligibility online
                and
                compliance with managed-care plan rules and
                procedures.




**Sunrise
      Patient Financial Manager** provides
      centralized enterprise-wide business office capabilities:





·
            Patient
                accounting, which facilitates the patient-billing and accounts
                receivable functions, including bill generation, reimbursement management
                to monitor receivables, the collection activities and contract compliance
                analysis, as well as follow-up processing and reporting functions.
                Paperless processing is possible through real-time inquiry, editing,
                sorting, reporting, commenting and updating from other applications,
                including modules in Sunrise Access Manager and Sunrise Clinical
                Manager
                modules.


·
            Contract
                management, which is used in conjunction with other Sunrise software
                to
                ensure that patient care complies with the payment terms, restrictions,
                approval requirements and other rules and regulations of each insurance
                plan and managed care contracts.


·
            Single-statement
                billing and registration across the entire enterprise, and enterprise-wide
                access and outcomes analysis.





5


**Sunrise
      Decision Support** integrates
      data from throughout the enterprise to create a clinical and financial data
      repository that can be used as an analytical tool and provides the following
      features:





·
            Allows
                a hospital to evaluate its cost structure, make changes in clinical
                processes to reduce costs and accurately price reimbursement contracts
                 on a profitable basis.


·
            Analyzes
                and measures clinical process and outcomes data, and helps to determine
                the patient-level costs of care and identify the practice patterns
                that
                most consistently result in the highest quality care at the lowest
                cost.


·
            Helps
                clients measure and document improved clinical outcomes and facilitates
                economic analysis.


·
            Facilitates
                cost and profitability analysis and strategic planning, modeling
                and
                forecasting.





**Sunrise
      Clinical Analytics** TM is an
      online analytic processing database and reporting companion to Sunrise Clinical
      Manager. Sunrise Clinical Analytics automates the development of sophisticated
      reporting objects that are focused on quality management analysis,
      pay-for-performance measures, clinical practice analysis, clinical decision
      support analysis and outcomes analysis. It provides verifiable information
      about
      adherence to guidelines, length of stay, the development of some morbid
      conditions, and other outcomes. Sunrise Clinical Analytics extracts
      information from a replicated copy of Sunrise Clinical Manager, and creates
      and
      updates fact and dimension tables for analysis using business intelligence
      tools.




**Sunrise
      Record Manager** TM provides
      comprehensive clinical data management and enterprise-wide document and
      image-management functions:





·
            Enables
                capture of patient identification and consent forms and other documents
                through document imaging and document scanning and interfaces with
                other
                electronic document systems.


·
            Includes
                tools for managing patient medical records, including tracking record
                locations, chart requests, and secured release of
                information.


·
            Joint
                Commission-compliance deficiency and chart completion management
                functions, including HIPAA-compliant electronic signature
                functions.


·
            Medical
                records abstracting, working with industry-standard encoders.




**Sunrise
      Laboratory** provides
      a comprehensive set of tools that help manage the data surrounding the samples
      that are received in the laboratory. It is designed to streamline, simplify
      and
      support the different workflows within the laboratory which
      include:





·
            Manages
                the different methods in which the results are to be
                reported


·
            Enables
                the user to track specimens at both a patient and specimen level
                throughout the laboratory providing for immediate access to the
                specimen


·
            Includes
                tools for managing the services within and outside the hospital
                confines


·
            Improves
                efficiency through streamlined workflows and the use of business
                logic




**Knowledge-Based
      Charting** TM **** an
      integrated module of Sunrise Clinical Manager, **** provides
      clinicians with immediate access to an interdisciplinary professional practice
      framework and evidence-based clinical practice guidelines. As a result,
      Knowledge-Based Charting integrates best practices from multiple disciplines
      at
      the point of care and other points of decision-making to help individualize
      and
      improve healthcare delivery.




**eLink** provides tools to enable the integration of clinical and financial data from
      disparate existing systems within an integrated health network.




**Eclipsys
      Diagnostic Imaging Solutions** comprise
      a comprehensive radiology information system (Sunrise RadiologyTM) and picture
      archiving and communications system (Sunrise PACSTM), that can be implemented
      together, separately, or part of an image-enabled clinical information system
      to
      deliver imaging data as an integrated part of the overall patient record that
      is
      accessible to clinicians at the point of care on any Sunrise-enabled
      device.




**Other
      Services**





**Professional
      Services.** Implementation
      of some of our software is complex.  We offer our clients professional
      assistance in the implementation of our software, the conversion and integration
      of their historical data into our software and systems, and ongoing training
      and
      support in the use of our software.  We also provide maintenance
      releases and software updates, on a when and if available basis.




**Consulting
      Services.** We
      offer
      consulting services to help clients improve their operations.




**IT
      Outsourcing** .
      Eclipsys provide full, partial or transitional IT outsourcing services to our
      clients. We assume partial to total responsibility for a healthcare
      organization’s IT operations using our employees. These services include
      facilities management, by which we assume responsibility for all aspects
      of client internal IT operations, as well as network outsourcing, which
      relieves our clients of the need to secure and maintain an expensive IT
      infrastructure in a rapidly changing technological environment and transition
      management, which offers our clients a solution for migrating their IT to new
      processes, technologies or platforms without interfering with healthcare
      delivery.




**Remote
      Hosting** .
      We
      provide remote hosting services to our clients. Under this offering we assume
      processing of a number of Eclipsys and non-Eclipsys applications for our clients
      using equipment and personnel at our facilities. This minimizes the capital
      investment, operating expense, and management challenges of maintaining the
      environment, equipment and technical staff required to support an organization’s
      IT operations.




**Hardware
      and Networks** .
      As part
      of our commitment to being a comprehensive software and services provider,
      we
      sell a variety of desktop, network and platform solutions including hardware,
      middleware and related services.  We also offer network services.  Our
      professionals assess changes in network utilization and function, forecast
      necessary upgrades to accommodate a client’s growth, and design the changes
      required to support our clients’ needs for network performance and
      functionality.




6


**Sales
      and Marketing**





Our
      sales
      and marketing teams serve small, stand-alone hospitals, large multi-entity
      healthcare systems, academic medical centers, community hospitals and other
      healthcare organizations.  We sell our software and services primarily in
      North America exclusively through our direct sales force, which is structured
      in
      geographic regions, with sales staff dedicated to either new business or
      existing client sales. Sales teams focusing on certain specialty solution areas,
      such as ancillary (departmental) software, outsourcing and/or remote hosting,
      etc., further support the regionalized sales teams.




Our
      marketing group develops targeted campaigns designed to increase demand for
      our
      software and services, as well as increase corporate awareness and brand
      identity for our company.  In addition to advertising, direct mail, public
      relations and Internet marketing, our marketing group produces a wide range
      of
      collateral and sales support training and materials, and manages our annual
      Eclipsys User Network TM client
      conference and our presence at numerous industry trade shows throughout the
      year.





**International**





In
      2006,
      we acquired Mosum Technology (India) Private Limited, a laboratory
      software-development organization in India. We are now expanding the size and
      scope of our operations in India. We believe that India provides a solid base
      of
      educated professionals to work on research development and support of our
      software, at an economically effective cost.




**Research
      and Development**





We
      seek
      to maintain technological competitiveness and respond to market trends and
      our
      clients’ evolving needs. Our software is based on Microsoft’s .NET Framework and
      other industry standards. We are also creating new functionality for our
      existing software. We have limited our reliance on outside vendors that have
      historically aided our internal personnel in software development. We use
      Microsoft’s Solutions Framework development methodology to gauge the quality and
      performance of our software development efforts. As part of these processes,
      we
      have also involved clients in our software design process, enabling them in
      some
      cases to have direct and regular access to the development staff, including
      its
      senior leadership.





Our
      latest-generation clinical and access solutions utilize the same architecture
      and share the same Health Data Repository and many other components, while
      being
      adapted for the workflows of different environments.  This enables Eclipsys
      clients to tie together their workflows, operations and the entire continuum
      of
      care.   Further, our software is built upon an open architecture that
      supports the secure exchange of data between systems, as well as the ability
      to
      embed evidence-based content.





Our
      spending on research and development (including capitalized software development
      costs) was $72.1 million, $71.9 million and $73.4 million in 2006, 2005 and
      2004, respectively.




In
      November 2004, we announced the general availability of Sunrise ED Manager
      3.6
      XA and Sunrise Ambulatory Care Manager 3.6 XA. In the first quarter of 2005,
      we
      released Sunrise Clinical Manager 4.0XA, which contained new features and
      enhancements in several key areas including incremental functionality related
      to
      ambulatory, emergency department, critical care, medication management and
      nursing.   Additionally, we released Remote Access Services (RAS) 4.0
      XA TM and
      Pocket Sunrise TM 4.0 XA,
      which enhanced users’ ability to access our applications from remote
      locations.  Furthermore, in November 2005 we announced the release of
      Sunrise Radiology Information System (RIS), which automates radiology
      workflow.




In
      January 2006, we released Sunrise Clinical Manager 4.5 XA.  This release
      contained approximately 1,500 incremental functions which continued to enhance
      the capabilities of our offering in all major clinical areas including
      ambulatory, emergency department, critical care and nursing.  Additionally,
      this release included integrated end-to-end medication management capabilities
      and builds upon recent enhancements to our Sunrise Patient Financial
      Manager and Sunrise Decision Support Manager solutions.




**Competition**




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




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




**Employees**




As
      of
      December 31, 2006, we had 2,220 employees. Our success depends significantly
      on
      our continued ability to attract and retain highly skilled and qualified
      personnel. Competition for such personnel is intense in our industry,
      particularly for software developers, implementation and service consultants
      and
      sales and marketing personnel. We cannot be assured that we will continue to
      attract and retain qualified personnel. Our employees are not represented by
      any
      labor unions. We consider our relations with our employees to be
      good.





7


**Financial
      Information about Geographic Areas**




Revenues
      from U.S. operations totaled $394.5 million, $359.3 million, and $293.1 million
      in 2006, 2005, and 2004, respectively. Revenues from outside the United States
      totaled $33.1 million, $24.0 million, and $16.0 million in 2006, 2005 and 2004,
      respectively. Long-lived assets in the United States totaled $109.8 million
      and $108.4 million in 2006 and 2005, respectively. Long-lived assets in
      other countries totaled $3.8 million and $2.9 million in 2006 and 2005,
      respectively. See Note 14 to the consolidated financial statements.




ITEM
      1A.
      RISK FACTORS





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




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





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




Software
      development is time consuming, expensive and complex.  Unforeseen
      difficulties can arise. We may encounter technical obstacles, and it is possible
      that we could discover additional problems that prevent our software from
      operating properly. If our software contains errors or does not function
      consistent with software specifications or client expectations, clients could
      assert liability claims against us and/or attempt to cancel their contracts
      with
      us.  These risks are generally more significant for newer software, until
      it has been used for enough time in enough client locations for us to have
      addressed issues that are discovered through use in disparate circumstances
      and
      environments.  Due to our development efforts, we generally have
      significant software that could be considered relatively new and therefore
      more
      vulnerable to these risks, including at present our medication management and
      ambulatory software, among other things.  It is also possible that future
      releases of our software, which would typically include additional features,
      may
      be delayed or may require additional work to address issues that may be
      discovered as the software comes into use in our client base. If we fail to
      deliver software with the features and functionality as described in our
      software specifications, we could be subject to significant contractual
      damages.




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




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




8


***Market
      changes or mistaken development decisions could decrease the demand for our
      software, which could harm our business and decrease our
      revenues.***





The
      healthcare information technology market is characterized by rapidly changing
      technologies, evolving industry standards and new software introductions and
      enhancements that may render existing software obsolete or less competitive.
      Our
      position in the market could erode rapidly due to the development of regulatory
      or industry standards that our software may not fully meet, or due to changes
      in
      the features and functions of competing software, as well as the pricing models
      for such software.  Our future success will depend in part upon our ability
      to enhance our existing software and services, and to develop and introduce
      competing new software and services that are appropriately priced to meet
      changing client and market requirements. The process of developing software
      and
      services such as those we offer is extremely complex and is expected to become
      more complex and expensive in the future as new technologies are
      introduced.  As we evolve our offering in an attempt to anticipate and meet
      market demand, clients and potential clients may find our software and services
      less appealing.  If software development for the healthcare information
      technology market becomes significantly more expensive due to changes in
      regulatory requirements or healthcare industry practices, or other factors,
      we
      may find ourselves at a disadvantage to larger competitors with more financial
      resources to devote to development.  If we are unable to enhance our
      existing software or develop new software to meet changing client requirements,
      demand for our software could suffer.




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




Our
      software strategy is substantially dependent upon Microsoft's .NET Framework
      and
      other Microsoft technologies. The .NET Framework, in particular, is a relatively
      new and evolving technology. If Microsoft were to cease actively supporting
      .NET
      or other technologies, fail to update and enhance them to keep pace with
      changing industry standards, encounter technical difficulties in the continuing
      development of these technologies or make them unavailable to us, we could
      be
      required to invest significant resources in re-engineering our software. This
      could lead to lost or delayed sales, client costs associated with platform
      changes, unanticipated development expenses and harm to our reputation, and
      would cause our financial results and business to suffer.




***Any
      failure by us to protect our intellectual property, or any misappropriation
      of
      it, could enable our competitors to market software with similar features,
      which
      could reduce demand for our software.***




We
      are
      dependent upon our proprietary information and technology. Our means of
      protecting our proprietary rights may not be adequate to prevent
      misappropriation. The laws of some foreign countries may not protect our
      proprietary rights as fully as do the laws of the United States. Also, despite
      the steps we have taken to protect our proprietary rights, it may be possible
      for unauthorized third parties to copy aspects of our software, reverse engineer
      our software or otherwise obtain and use information that we regard as
      proprietary. In some limited instances, clients can access source-code versions
      of our software, subject to contractual limitations on the permitted use of
      the
      source code. Furthermore, it may be possible for our competitors to copy or
      gain
      access to our content. Although our license agreements with clients attempt
      to
      prevent misuse of the source code or trade secrets, the possession of our source
      code or trade secrets by third parties increases the ease and likelihood of
      potential misappropriation of our software. Furthermore, others could
      independently develop technologies similar or superior to our technology or
      design around our proprietary rights.





***Failure
      of security features of our software could expose us to significant expense
      and
      harm our reputation.***




Clients
      use our systems to store and transmit highly confidential patient health
      information.  Because of the sensitivity of this information, security
      features of our software are very important.  If, notwithstanding our
      efforts, our software security features do not function properly, or client
      systems using our software are compromised, we could face claims for contract
      breach, penalties for violation of applicable laws or regulations, significant
      costs for remediation and re-engineering to prevent future occurrences, and
      serious harm to our reputation.




**Risks
      related to sales and implementation of our software**




***The
      length of our sales and implementation cycles may adversely affect our future
      operating results.***




We
      have
      experienced long sales and implementation cycles. How and when to implement,
      replace, expand or substantially modify an information system, or modify or
      add
      business processes, are major decisions for healthcare organizations, our target
      client market. Furthermore, our software generally requires significant capital
      expenditures by our clients. The sales cycle for our software ranges from 6
      to
      18 months or more from initial contact to contract execution.  Our
      implementation cycle has generally ranged from 6 to 36 months from contract
      execution to completion of implementation. During the sales and implementation
      cycles, we will expend substantial time, effort and resources preparing contract
      proposals, negotiating the contract and implementing the software. We may not
      realize any revenues to offset these expenditures and, if we do, accounting
      principles may not allow us to recognize the revenues during corresponding
      periods. Additionally, any decision by our clients to delay purchasing or
      implementing our software may adversely affect our revenues.




9


***We
      may experience implementation delays that could harm our reputation and violate
      contractual commitments.***




Some
      of
      our software is complex and requires a lengthy and expensive implementation
      process.  Each client's situation is different, and unanticipated
      difficulties and delays may arise as a result of failures by us or the client
      to
      meet our respective implementation responsibilities.  Because of the
      complexity of the implementation process, delays are sometimes difficult to
      attribute solely to us or the client.  Implementation delays could motivate
      clients to delay payments or attempt to cancel their contracts with us or seek
      other remedies from us. Any inability or perceived inability to implement
      consistent with a client's schedule may be a competitive disadvantage for us
      as
      we pursue new business.  Implementation also requires our clients to make a
      substantial commitment of their own time and resources and to make significant
      organizational and process changes, and if our clients are unable to fulfill
      their implementation responsibilities in a timely fashion our projects may
      be
      delayed or become less profitable.




***Implementation
      costs may exceed expectations, which can negatively affect our operating
      results*** **.**




Each
      client's circumstances may include unforeseen issues that make it more difficult
      or costly than anticipated to implement our software. We may fail to project,
      price or manage our implementation services correctly.  If we do not have
      sufficient qualified personnel to fulfill our implementation commitments in
      a
      timely fashion, related revenue may be delayed, and if we must supplement our
      capabilities with expensive third-party consultants, our costs will
      increase.




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




We
      must
      achieve higher levels of software sales, consistent with our projections, in
      order to achieve our expectations for annual revenue and earnings and to provide
      a solid foundation for future growth. Our ability to improve sales depends
      upon
      many factors, including completion of implementation and successful use of
      our
      new software releases, particularly our pharmacy and ambulatory solutions,
      in
      live environments for clients who achieve success and are willing to become
      reference sites for us.




**Risks
      related to our IT or technology services**




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




We
      provide remote hosting services that involve running our software and third-
      party vendor's software for clients in our Technology Solutions Center. 
The ability to access the systems and the data the Technology Solution Center
      hosts and supports on demand is critical to our clients.  Our operations
      and facilities are vulnerable to interruption and/or damage from a number of
      sources, many of which are beyond our control, including, without limitation:
      (i) power loss and telecommunications failures; (ii) fire, flood, hurricane
      and
      other natural disasters; (iii) software and hardware errors, failures or
      crashes; and (iv) computer viruses, hacking and similar disruptive
      problems.  We attempt to mitigate these risks through various means
      including redundant infrastructure, disaster recovery plans, separate test
      systems and change control and system security measures, but our
      precautions  may not protect against all problems.  If clients' access
      is interrupted because of problems in the operation of our facilities, we could
      be exposed to significant claims by clients or their patients, particularly
      if
      the access interruption is associated with problems in the timely delivery
      of
      medical care.  We must maintain disaster recovery and business continuity
      plans that rely upon third-party providers of related services, and if those
      vendors fail us at a time that our center is not operating correctly, we could
      incur a loss of revenue and liability for failure to fulfill our contractual
      service commitments.  Any significant instances of system downtime could
      negatively affect our reputation and ability to sell our remote hosting
      services.




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




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




***Recruiting
      challenges and higher than anticipated costs in outsourcing our clients' IT
      operations may adversely affect our profitability.***




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




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




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




10


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




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




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




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




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




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





***The
      healthcare industry faces financial constraints that could adversely affect
      the
      demand for our software and services.***




The
      healthcare industry faces significant financial constraints. For example, the
      shift to managed healthcare in the 1990's put pressure on healthcare
      organizations to reduce costs, and the Balanced Budget Act of 1997 dramatically
      reduced Medicare reimbursement to healthcare organizations. Our software often
      involves a significant financial commitment by our clients. Our ability to
      grow
      our business is largely dependent on our clients' information technology
      budgets.  If healthcare information technology spending declines or
      increases more slowly than we anticipate, demand for our software could be
      adversely affected.




***Healthcare
      industry consolidation could impose pressure on our software prices, reduce
      our
      potential client base and reduce demand for our
      software.***




Many
      healthcare organizations have consolidated to create larger healthcare
      enterprises with greater market power. If this consolidation trend continues,
      it
      could reduce the size of our target market and give the resulting enterprises
      greater bargaining power, which may lead to erosion of the prices for our
      software. In addition, when healthcare organizations combine they often
      consolidate infrastructure including IT systems, and acquisition of our clients
      could erode our revenue base.




***Potential
      changes in standards applicable to our software could require us to incur
      substantial additional development costs*** *.*




Integration
      and interoperability of the software and systems provided by various vendors
      are
      important issues in the healthcare industry.  Market forces or regulatory
      authorities could cause emergence of software standards applicable to us, and
      if
      our software is not consistent with those standards we could be forced to incur
      substantial additional development costs to conform. For example, the CCHIT
      is
      developing comprehensive sets of criteria for the functionality,
      interoperability, and security of various software modules in our industry.
      Achieving CCHIT certification is evolving as a *de
      facto* competitive requirement, resulting in increased research and development and
      administrative expense to conform to these requirements.  If our software
      is not consistent with emerging standards, our market position and sales could
      be impaired and we may have to change our software.




**Risks
      related to our operating results, accounting controls and
      finances**




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




During
      each of the four preceding years, we had a net loss or operating loss. We may
      incur losses in the future, and it is not certain that we will achieve sustained
      or increasing profitability.





11


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




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





·
            the
                performance of our software and our ability to promptly and efficiently
                address software performance shortcomings or warranty
                issues;


·
            the
                cost, timeliness and outcomes of our software development and
                implementation efforts, including expansion of our presence in
                India;


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


·
            overall
                demand for healthcare information
                technology;


·
            the
                financial condition of our clients and potential
                clients;


·
            market
                acceptance or our new services, software and software enhancements
                by us
                or our competitors;


·
            client
                decisions regarding renewal or termination of their
                contracts;


·
            software
                and price competition;


·
            personnel
                changes and other organizational changes and related
                expenses;


·
            significant
                judgments and estimates made by management in the application of
                generally
                accepted accounting principles;


·
            healthcare
                reform measures and healthcare regulation in general;
                and


·
            fluctuations
                in general economic and financial market conditions; including interest
                rates.





It
      is
      difficult to predict the timing of revenues that we receive from software sales,
      because the sales cycle can vary depending upon several factors. These include
      the size and terms of the transaction, the changing business plans of the
      client, the effectiveness of the client's management, general economic
      conditions and the regulatory environment. In addition, the timing of our
      revenue recognition could vary considerably depending upon whether our clients
      license our software under our subscription model or our traditional licensing
      arrangements. Because a significant percentage of our expenses are relatively
      fixed, a variation in the timing of sales and implementations could cause
      significant variations in operating results from quarter to quarter. We believe
      that period-to-period comparisons of our historical results of operations are
      not necessarily meaningful. Investors should not rely on these comparisons
      as
      indicators of future performance.




***Our
      past stock option practices and related accounting issues may result in
      litigation, regulatory proceedings and governmental enforcement
      actions.***





As
      a
      result of our voluntary review of historical stock option practices, we
      concluded that incorrect measurement dates were used for accounting for certain
      prior stock option grants. As a result, we recorded additional non-cash
      stock-based compensation expense, and related tax effects, with regard to
      certain past stock option grants, and we restated certain previously filed
      financial statements included in this Form 10-K. See Note 3 to the Consolidated
      Financial Statements.




The
      review and related activities have required us to incur substantial expenses
      for
      legal, accounting, tax and other professional services, which will affect our
      financial results for 2007.




While
      we
      believe appropriate judgments have been made in determining the correct
      measurement dates for our stock option grants, the SEC may disagree with the
      manner in which we have accounted for and reported, or not reported, the
      financial impact. Accordingly, there is a risk we may have to further restate
      our prior financial statements, amend prior filings with the SEC, or take other
      actions not currently contemplated.  Additionally, if the SEC disagrees
      with the manner in which we have accounted for and reported, or not reported,
      the financial impact of past stock option grants, there could be delays in
      filing subsequent SEC reports that could subject our common stock to potential
      delisting from the NASDAQ Global Select Market.




Our
      past
      stock option granting practices and the restatement of prior financial
      statements have exposed us to risks associated with claims by stockholders
      or
      employees, regulatory proceedings, government enforcement actions and related
      investigations and litigation. These risks include significant expenses,
      management distraction and potential damages, penalties, other remedies, or
      adverse findings, which could harm our business, financial condition, results
      of
      operations and cash flows.




***Early
      termination of client contracts or contract penalties could adversely affect
      results of operations.***




Client
      contracts can change or terminate early for a variety of reasons.  Change
      of control, financial issues, or other changes in client circumstances may
      cause
      us or the client to seek to modify or terminate a contract.  Further,
      either we or the client may generally terminate a contract for material uncured
      breach by the other.  If we breach a contract or fail to perform in
      accordance with contractual service levels, we may be required to refund money
      previously paid to us by the client, or to pay penalties or other damages. 
Even if we have not breached, we may deal with various situations from time
      to
      time for the reasons described above which may result in the amendment of a
      contract.  These steps can result in significant current period charges
      and/or reductions in current or future revenue.




***Because
      in many cases we recognize revenues for our software monthly over the term
      of a
      client contract, downturns or upturns in sales will not be fully reflected
      in
      our operating results until future periods.***




We
      recognize a significant portion of our revenues from clients monthly over the
      terms of their agreements, which are typically 5-7 years and can be up to
      10 years. As a result, much of the revenue that we report each quarter is
      attributable to agreements executed during prior quarters. Consequently, a
      decline in sales, client renewals, or market acceptance of our software in
      one
      quarter will not necessarily be reflected in lower revenues in that quarter,
      and
      may negatively affect our revenues and profitability in future quarters. In
      addition, we may be unable to adjust our cost structure to compensate for these
      reduced revenues. This monthly revenue recognition also makes it difficult
      for
      us to rapidly increase our revenues through additional sales in any period,
      as a
      significant portion of revenues from new clients must generally be recognized
      over the applicable agreement term.




12


***Loss
      of revenue from large clients could have significant negative impact on our
      results of operations and overall financial
      condition.***




During
      the fiscal year ended December 31, 2006, approximately 40% of our revenues
      were
      attributable to our 20 largest clients.  In addition, approximately 36% of
      our accounts receivable as of December 31, 2006 were attributable to 20 clients.
      Loss of revenue from significant clients or failure to collect accounts
      receivable, whether as a result of client payment default, contract termination,
      or other factors could have a significant negative impact on our results of
      operation and overall financial condition.





***Impairment
      of intangible assets could increase our expenses.***




A
      significant portion of our assets consists of intangible assets, including
      capitalized development costs, goodwill and other intangibles acquired in
      connection with acquisitions.  Current accounting standards require us to
      evaluate goodwill on an annual basis and other intangibles if certain triggering
      events occur, and adjust the carrying value of these assets to net realizable
      value when such testing reveals impairment of the assets.  Various factors,
      including regulatory or competitive changes, could affect the value of our
      intangible assets.  If we are required to write-down the value of our
      intangible assets due to impairment, our reported expenses will increase,
      resulting in a corresponding decrease in our reported profit.





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




Section
      404 of the Sarbanes-Oxley Act of 2002 requires that we maintain internal control
      over financial reporting that meets applicable standards. We have a material
      weakness in maintaining effective internal control over financial reporting
      in
      accordance with the requirements of Section 404 (see Item 9A. “Controls and
      Procedures”), and it is possible that we might in the future have another
      material weakness in maintaining such effective internal control over financial
      reporting.  If we are unable, or are perceived as unable, to produce
      reliable financial reports due to internal control deficiencies, investors
      could
      lose confidence in our reported financial information and our operating
      results which could result in a negative market reaction.




***Inability
      to obtain additional financing could limit our ability to conduct necessary
      development activities and make strategic investments*** **.**




While
      our
      available cash and cash equivalents and the cash we anticipate generating from
      operations appear at this time to be adequate to meet our foreseeable needs,
      we
      could incur significant expenses as a result of unanticipated events in our
      business or competitive, regulatory, or other changes in our market.  As a
      result, we may in the future need to obtain additional financing.  If
      additional financing is not available on acceptable terms, we may not be able
      to
      respond adequately to these changes, which could adversely affect our operating
      results and the market price of our common stock.





**Risk
      of liability to third parties**




***Our
      software and content are used to assist clinical decision-making and provide
      information about patient medical histories and treatment plans. If our software
      fails to provide accurate and timely information or is associated with faulty
      clinical decisions or treatment, clients, clinicians or their patients could
      assert claims against us that could result in substantial cost to us, harm
      our
      reputation in the industry and cause demand for our software to
      decline.***




We
      provide software and content that provides practice guidelines and potential
      treatment methodologies, and other information and tools for use in clinical
      decision-making, provides access to patient medical histories and assists
      in creating patient treatment plans. If our software fails to provide accurate
      and timely information, or if our content or any other element of our software
      is associated with faulty clinical decisions or treatment, we could have
      liability to clients, clinicians or patients. The assertion of such claims,
      whether or not valid, and ensuing litigation, regardless of its outcome, could
      result in substantial cost to us, divert management's attention from operations
      and decrease market acceptance of our software. We attempt to limit by contract
      our liability for damages and to require that our clients assume responsibility
      for medical care and approve all system rules and protocols. Despite these
      precautions, the allocations of responsibility and limitations of liability
      set
      forth in our contracts may not be enforceable, may not be binding upon patients,
      or may not otherwise protect us from liability for damages. We maintain general
      liability and errors and omissions insurance coverage, but this coverage may
      not
      continue to be available on acceptable terms or may not be available in
      sufficient amounts to cover one or more large claims against us. In addition,
      the insurer might disclaim coverage as to any future claim. One or more large
      claims could exceed our available insurance coverage.




Complex
      software such as ours may contain errors or failures that are not detected
      until
      after the software is introduced or updates and new versions are released.
      It is
      challenging for us to envision and test our software for all potential problems
      because it is difficult to simulate the wide variety of computing environments
      or treatment methodologies that our clients may deploy or rely upon. Despite
      extensive testing by us and clients, from time to time we have discovered
      defects or errors in our software, and such defects or errors can be expected
      to
      appear in the future.  Defects and errors that are not timely detected and
      remedied could expose us to risk of liability to clients, clinicians and
      patients and cause delays in software introductions and shipments, result in
      increased costs and diversion of development resources, require design
      modifications or decrease market acceptance or client satisfaction with our
      software.




***Our
      software and our vendors' software that we include in our offering could
      infringe third-party intellectual property rights, exposing us to costs that
      could be significant.***




Infringement
      or invalidity claims or claims for indemnification resulting from infringement
      claims could be asserted or prosecuted against us based upon design or use
      of
      software we provide to clients, including software we develop as well as
      software provided to us by vendors. Regardless of the validity of any claims,
      defending against these claims could result in significant costs and diversion
      of our resources, and vendor indemnity might not be available. The assertion
      of
      infringement claims could result in injunctions preventing us from distributing
      our software, or require us to obtain a license to the disputed intellectual
      property rights, which might not be available on reasonable terms or at
      all.  We might also be required to indemnify our clients at significant
      expense.





13


**Risks
      related to our strategic relationships and initiatives**




***We
      depend on licenses from third parties for rights to some of the technology
      we
      use, and if we are unable to continue these relationships and maintain our
      rights to this technology, our business could suffer.***




We
      depend
      upon licenses for some of the technology used in our software from a number
      of
      third-party vendors. Most of these licenses expire within one to five years,
      can
      be renewed only by mutual consent and may be terminated if we breach the terms
      of the license and fail to cure the breach within a specified period of time.
      We
      may not be able to continue using the technology made available to us under
      these licenses on commercially reasonable terms or at all. As a result, we
      may
      have to discontinue, delay or reduce software shipments until we obtain
      equivalent technology, which could hurt our business. Most of our third-party
      licenses are non-exclusive. Our competitors may obtain the right to use any
      of
      the technology covered by these licenses and use the technology to compete
      directly with us. In addition, if our vendors choose to discontinue support
      of
      the licensed technology in the future or are unsuccessful in their continued
      research and development efforts, particularly with regard to Microsoft, we
      may
      not be able to modify or adapt our own software.




***Our
      offering often includes software modules provided by third parties, and if
      these
      third parties do not meet their commitments, our relationships with our clients
      could be impaired.***




Some
      of
      the software modules we offer to clients are provided by third parties.  We
      often rely upon these third parties to produce software that meets clients'
      needs and to implement and maintain that software.  If these third parties
      fail to fulfill their responsibilities, our relationships with affected clients
      could be impaired, and we could be responsible to clients for the
      failures.  We might not be able to recover from these third parties for all
      of the costs we incur as a result of their failures.




***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 and while there is no assurance that we will complete any future
      acquisitions, any future acquisitions would involve a number of risks, including
      the following:





·
            The
                anticipated benefits from any acquisition may not be achieved. The
                integration of acquired businesses requires substantial attention
                from
                management. The diversion of management’s attention and any difficulties
                encountered in the transition process could hurt our
                business.





·
            In
                future acquisitions, we could issue additional shares of our common
                stock,
                incur additional indebtedness or pay consideration in excess of book
                value, which could have dilutive effect on future net income, if
                any, per
                share.





·
            New
                business acquisitions must be accounted for under the purchase method
                of
                accounting. These acquisitions may generate significant intangible
                assets
                and result in substantial related amortization charges to
                us.





***Additional
      investment will be required to realize the potential of our Sysware and Mosum
      acquisition.***




We
      must
      make significant investments of money and management time in software
      development and infrastructure in order to realize the potential of our
      acquisition of the business of Sysware and Mosum to (i) have a fully integrated
      and leverageable laboratory information system to sell to our diversified client
      base, and (ii) build Mosum's India operations into an integrated development
      and
      support organization that can cost-effectively augment our onshore resources.
      If
      the additional investment turns out to be more than what we anticipated, this
      may negatively affect our results of operations.





**Risks
      related to industry regulation**




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




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





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


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


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





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




14


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




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




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





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




**Risks
      related to our personnel and organization**





***Our
      growing operations in India expose us to risks specific to international
      operations that could have an adverse effect on our results of
      operations.***




As
      a
      result of our 2006 acquisition of Mosum, we have a significant workforce
      employed in India. To date our operations in India have focused primarily upon
      our laboratory software, but we intend to increase the size and scope of our
      operations in India to include additional research and development and
      administrative functions, with the expectation that our India operations will
      be
      integral to the Company. This involves significant challenges that are increased
      by our lack of prior experience managing operations in India. Further, while
      there are certain cost advantages to operating in India, significant increases
      in the numbers of foreign businesses that have established operations in India
      and commensurate competition to attract and retain skilled employees has
      increased, and will likely continue to increase, compensation costs. As a result
      of these and other factors there can be no assurance that we will successfully
      integrate our India operations, or that our India operations will advance our
      business strategy and provide a satisfactory return on this investment.




In
      addition, our reliance on a workforce in India exposes us to disruptions in
      the
      business, political and economic environment in that region. Maintenance of
      a
      stable political environment is important to our operations, and terrorist
      attacks and acts of violence or war may directly affect our physical facilities
      and workforce or contribute to general instability. Our operations in India
      may
      also be affected by trade restrictions, such as tariffs or other trade controls,
      as well as other factors that may adversely affect our business and operating
      results.




More
      generally, foreign operations subject us to additional risks including
      fluctuations in foreign currency exchange rates, varying legislative or
      regulatory requirements and protections, particularly for intellectual property
      rights, and cultural differences. Furthermore, remote operations require
      significant management attention and financial resources.





***If
      we fail to attract, motivate and retain highly qualified technical, marketing,
      sales and management personnel, our ability to execute our business strategy
      could be impaired.***




Our
      success depends, in significant part, upon the continued services of our key
      technical, marketing, sales and management personnel, and on our ability to
      continue to attract, motivate and retain highly qualified employees. Competition
      for these employees is intense and we maintain at-will employment terms with
      our
      employees, meaning that they are free to leave at any time.  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.




**Risks
      related to our equity structure**




***Provisions
      of our charter documents and Delaware law may inhibit potential acquisition
      bids
      that a stockholder may believe is desirable, and the market price of our common
      stock may be lower as a result.***




Our
      board
      of directors has the authority to issue up to 4,900,000 shares of preferred
      stock. The board of directors can fix the price, rights, preferences, privileges
      and restrictions of the preferred stock without any further vote or action
      by
      our stockholders. The issuance of shares of preferred stock may discourage,
      delay or prevent a merger or acquisition of our company. The issuance of
      preferred stock may result in the loss of voting control to other stockholders.
      We have no current plans to issue any shares of preferred stock. In
      August 2000, our board of directors adopted a shareholder rights plan under
      which we issued preferred stock purchase rights that would adversely affect
      the
      economic and voting interests of a person or group that seeks to acquire us
      or a
      15% or more interest in our common stock without negotiations with our board
      of
      directors.




Our
      charter documents contain additional anti-takeover devices
      including:





·
            only
                one of the three classes of directors is elected each
                year;


·
            the
                ability of our stockholders to remove directors without cause is
                limited;


·
            the
                right of stockholders to act by written consent has been
                eliminated;


·
            the
                right of stockholders to call a special meeting of stockholders has
                been
                eliminated; and


·
            advance
                notice must be given to nominate directors or submit proposals for
                consideration at stockholders
                meetings.








15


**Item
      1B.***********Unresolved
      Staff Comments***




Not
      applicable.




**Item
      2.** **** **** ***Properties***




Our
      corporate offices are located in Boca Raton, Florida under a lease that expires
      in July 2007. In addition, we maintain leased office space in Phoenix, Arizona;
      Irvine, California; San Jose, California; Atlanta, Georgia; Sawanee, Georgia;
      Boston, Massachusetts; Grand Rapids, Michigan; Mountain Lakes, New Jersey; 
Malvern, Pennsylvania; Irving, Texas; Montreal, Canada; Richmond, Canada;
      Baroda, India; Pune, India; and certain small offices for remote employees.
      These leases expire at various times through September 2013.





**Item
      3.** ****** ***Legal
      Proceedings***




We
      and
      our subsidiaries are from time to time parties to legal proceedings, lawsuits
      and other claims incident to our 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 has been terminated. Such matters are
      subject to many uncertainties and outcomes are not predictable with assurance.
      Consequently, we are 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
      4.** **** **** ***Submission
      of Matters to a Vote of Security Holders***




No
      matters were submitted to a vote of our stockholders during the fourth quarter
      of 2006.





**Part
      II**




**Item
      5.**  ***Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities***





***Equity
      Securities***




**Price
      Range of Common Stock**




Our
      common stock has been publicly traded on the NASDAQ Global Select Market under
      the symbol “ECLP” since our initial public offering on August 6, 1998. The
      following table sets forth, for the quarters indicated, the high and low sales
      prices of our common stock as reported by the NASDAQ Global Select
      Market.


**High**
              
              **Low**2005First
                  quarter
              
              $
              20.52
              
              $
              14.44Second
                  quarter
              
              $
              15.67
              
              $
              11.21Third
                  quarter
              
              $
              18.83
              
              $
              12.82Fourth
                  quarter
              
              $
              20.20
              
              $
              15.382006First
                  quarter
              
              $
              26.27
              
              $
              18.36Second
                  quarter
              
              $
              24.17
              
              $
              16.70Third
                  quarter
              
              $
              19.73
              
              $
              13.71Fourth
                  quarter
              
              $
              22.46
              
              $
              17.35


**Holders
      of Record**




On
      May
      16, 2007, the last reported sale price of our common stock on the NASDAQ Global
      Select Market was $18.82 per share. Also as of May 16, 2007, we had 191
      stockholders of record.




16


**Dividends**





We
      have
      never paid or declared any cash dividends on our common stock or other
      securities and do not anticipate paying cash dividends in the foreseeable
      future. We currently intend to retain all future earnings, if any, for use
      in
      the operation of our business.




**Shares
      Available Under Equity Compensation Plans**




Information
      regarding securities authorized for issuance under equity compensation plans
      is
      provided under Item 12 — Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters elsewhere in this
      document.





**Comparative
      Stock Performance**





The
      following graph compares the cumulative total stockholder return on our Voting
      Common Stock from December 31, 2001 to December 31, 2006 with the
      cumulative total return of (i) the companies traded on the NASDAQ Global
      Select Market (the “NASDAQ Composite Index”) and (ii) the NASDAQ Computer &
Data Processing Index. The graph assumes the investment of $100.00 on
      December 31, 2001 in (i) our Voting Common Stock, (ii) the NASDAQ Composite
      Index and (iii) the NASDAQ Computer & Data Processing Index, and assumes
      that any dividends are reinvested.









Cumulative
                  Total Return12/01
              
              12/02
              
              12/03
              
              12/04
              
              12/05
              
              12/06ECLIPSYS
                  CORPORATION
              
              
              100.00
              
              
              31.94
              
              
              69.49
              
              
              121.97
              
              
              113.01
              
              
              122.75NASDAQ
                  STOCK MARKET
              
              
              100.00
              
              
              71.97
              
              
              107.18
              
              
              117.07
              
              
              120.50
              
              
              137.02NASDAQ
                  COMPUTER & DATA PROCESSING
              
              
              100.00
              
              
              72.13
              
              
              91.67
              
              
              104.54
              
              
              107.98
              
              
              122.16





The
      Eclipsys Corporation index is based upon the closing prices of Eclipsys
      Corporation Common Stock on the last trading day of 2001, 2002, 2003, 2004,
      2005
      and 2006 of $16.75, $5.35, $11.64, $20.43, $18.93 and $20.56,
      respectively.





*Note:
      The stock price performance shown on the graph above is not necessarily
      indicative of future price performance. This graph is not "soliciting material,"
      is not deemed “filed” with the Securities Exchange Commission and is not to be
      incorporated by reference in any of our filings under the Securities Act of
      1933
      or the Securities and Exchange Act of 1934, regardless of any general
      incorporation language in such filing.*





17
 **Item
        6.** ****** ****** ***Selected
        Financial Data***




The
      consolidated statements of operations for the years ended December 31,
      2006, 2005 and 2004, and the consolidated balance sheet data as of
      December 31, 2006 and 2005, are derived from our audited consolidated
      financial statements appearing elsewhere in this Annual Report on Form 10-K.
      The
      consolidated statements of operations for the years ended December 31, 2003
      and 2002, and the consolidated balance sheet data as of December 31, 2004,
      2003, and 2002, are derived from our books and records. The financial data
      as of
      and for the fiscal years 2005, 2004, 2003 and 2002 have been restated to correct
      the accounting for certain stock option grants and practices, as further
      described in Note 3, “Review of Stock Option Practices and Restatements of
      Consolidated Financial Statements” in Notes to Consolidated Financial Statements
      included herein. In addition, the Company recorded other adjustments not
      previously recorded in the originally filed financial statements due to their
      immateriality.




The
      information set forth below is not necessarily indicative of results of future
      operations, and should be read in conjunction with Item 7, “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
      the consolidated financial statements and related notes thereto included in
      Item
      8 of this Form 10-K to fully understand factors that may affect the
      comparability of the information presented below. The information presented
      in
      the following tables has been adjusted to reflect the restatement of the
      Company’s financial results, which is more fully described in the “Explanatory
      Note Regarding Restatements” immediately preceding Part I, Item 1 and in
      Note 3, “Review of Stock Option Practices and Restatements of Consolidated
      Financial Statements” in Notes to Consolidated Financial Statements of this
      Form 10-K.


**Consolidated
                  Statements of Operations****(in
                  thousands, except per share data)****Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****As
                  previously reported**
              
              **As
                  previously reported**
              
              **As
                  previously reported**
              
              **As
                  previously reported**Revenues:Systems
                  and services
              
              $
              409,450
              
              $
              370,309
              
              $
              282,124
              
              $
              233,971
              
              $
              203,218Hardware
              
              
              18,092
              
              
              12,962
              
              
              26,951
              
              
              20,708
              
              
              14,850Total
                  revenues
              
              
              427,542
              
              
              383,271
              
              
              309,075
              
              
              254,679
              
              
              218,068Costs
                  and expenses:Cost
                  of systems and services
              
              
              237,914
              
              
              225,080
              
              
              168,393
              
              
              143,276
              
              
              119,044Cost
                  of hardware
              
              
              14,592
              
              
              11,055
              
              
              22,949
              
              
              17,252
              
              
              12,270Sales
                  and marketing
              
              
              63,516
              
              
              64,140
              
              
              65,024
              
              
              70,381
              
              
              53,175Research
                  and development
              
              
              57,973
              
              
              51,789
              
              
              58,095
              
              
              58,144
              
              
              46,228General
                  and administrative
              
              
              24,345
              
              
              19,191
              
              
              15,524
              
              
              13,528
              
              
              12,434Depreciation
                  and amortization
              
              
              15,736
              
              
              14,659
              
              
              13,284
              
              
              10,492
              
              
              8,531Restructuring
                  charge
              
              
              14,670
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  costs and expenses
              
              
              428,746
              
              
              385,914
              
              
              343,269
              
              
              313,073
              
              
              251,682Loss
                  from operations
              
              
              (1,204
              )
              
              (2,643
              )
              
              (34,194
              )
              
              (58,394
              )
              
              (33,614
              )Interest
                  income, net
              
              
              5,335
              
              
              3,128
              
              
              1,629
              
              
              2,430
              
              
              4,016Income
                  (loss) before income taxes
              
              
              4,131
              
              
              485
              
              
              (32,565
              )
              
              (55,964
              )
              
              (29,598
              )Provision
                  for income taxes
              
              
              38
              
              
              -
              
              
              -
              
              
              -
              
              
              165Net
                  income (loss)
              
              $
              4,093
              
              $
              485
              
              $
              (32,565
              )
              $
              (55,964
              )
              $
              (29,763
              )Net
                  income (loss) per common share:Basic
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )
              $
              (0.67
              )Diluted
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )
              $
              (0.67
              )Basic
                  weighted average common shares outstanding
              
              
              51,472
              
              
              47,947
              
              
              46,587
              
              
              45,405
              
              
              44,711Diluted
                  weighted average common shares outstanding
              
              
              52,948
              
              
              50,644
              
              
              46,587
              
              
              45,405
              
              
              44,711**2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****Adjustments**
              
              
              **Adjustments**
              
              
              **Adjustments**
              
              
              **Adjustments**Revenues:Systems
                  and services
              
              
              N/A
              
              $
              71
              
              $
              -
              
              $
              -
              
              $
              -Hardware
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  revenues
              
              
              N/A
              
              
              71
              
              
              -
              
              
              -
              
              
              -Costs
                  and expenses:Cost
                  of systems and services
              
              
              N/A
              
              
              51
              
              
              355
              
              
              354
              
              
              238Cost
                  of hardware
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -
              
              
              -Sales
                  and marketing
              
              
              N/A
              
              
              (60
              )
              
              575
              
              
              770
              
              
              597Research
                  and development
              
              
              N/A
              
              
              (18
              )
              
              92
              
              
              142
              
              
              53General
                  and administrative
              
              
              N/A
              
              
              288
              
              
              427
              
              
              543
              
              
              488Depreciation
                  and amortization
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -
              
              
              -Restructuring
                  charge
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  costs and expenses
              
              
              N/A
              
              
              261
              
              
              1,449
              
              
              1,809
              
              
              1,376Loss
                  from operations
              
              
              N/A
              
              
              (190
              )
              
              (1,449
              )
              
              (1,809
              )
              
              (1,376
              )Interest
                  income, net
              
              
              N/A
              
              
              (26
              )
              
              (15
              )
              
              (12
              )
              
              (10
              )Loss
                  before income taxes
              
              
              N/A
              
              
              (216
              )
              
              (1,464
              )
              
              (1,821
              )
              
              (1,386
              )Provision
                  for income taxes
              
              
              N/A
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss
              
              
              N/A
              
              $
              (216
              )
              $
              (1,464
              )
              $
              (1,821
              )
              $
              (1,386
              )


18





**Consolidated
                  Statements of Operations****(in
                  thousands, except per share data)****Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****As
                  restated**
              
              **As
                  restated**
              
              **As
                  restated**
              
              **As
                  restated**Revenues:Systems
                  and services
              
              $
              409,450
              
              $
              370,380
              
              $
              282,124
              
              $
              233,971
              
              $
              203,218Hardware
              
              
              18,092
              
              
              12,962
              
              
              26,951
              
              
              20,708
              
              
              14,850Total
                  revenues
              
              
              427,542
              
              
              383,342
              
              
              309,075
              
              
              254,679
              
              
              218,068Costs
                  and expenses:Cost
                  of systems and services
              
              
              237,914
              
              
              225,131
              
              
              168,748
              
              
              143,630
              
              
              119,282Cost
                  of hardware
              
              
              14,592
              
              
              11,055
              
              
              22,949
              
              
              17,252
              
              
              12,270Sales
                  and marketing
              
              
              63,516
              
              
              64,080
              
              
              65,599
              
              
              71,151
              
              
              53,772Research
                  and development
              
              
              57,973
              
              
              51,771
              
              
              58,187
              
              
              58,286
              
              
              46,281General
                  and administrative
              
              
              24,345
              
              
              19,479
              
              
              15,951
              
              
              14,071
              
              
              12,922Depreciation
                  and amortization
              
              
              15,736
              
              
              14,659
              
              
              13,284
              
              
              10,492
              
              
              8,531Restructuring
                  charge
              
              
              14,670
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  costs and expenses
              
              
              428,746
              
              
              386,175
              
              
              344,718
              
              
              314,882
              
              
              253,058Loss
                  from operations
              
              
              (1,204
              )
              
              (2,833
              )
              
              (35,643
              )
              
              (60,203
              )
              
              (34,990
              )Interest
                  income, net
              
              
              5,335
              
              
              3,102
              
              
              1,614
              
              
              2,418
              
              
              4,006Income
                  (loss) before income taxes
              
              
              4,131
              
              
              269
              
              
              (34,029
              )
              
              (57,785
              )
              
              (30,984
              )Provision
                  for income taxes
              
              
              38
              
              
              -
              
              
              -
              
              
              -
              
              
              165Net
                  income (loss)
              
              $
              4,093
              
              $
              269
              
              $
              (34,029
              )
              $
              (57,785
              )
              $
              (31,149
              )Net
                  income (loss) per common share:Basic
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )
              $
              (1.27
              )
              $
              (0.70
              )Diluted
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )
              $
              (1.27
              )
              $
              (0.70
              )Basic
                  weighted average common shares outstanding
              
              
              51,472
              
              
              47,947
              
              
              46,587
              
              
              45,405
              
              
              44,711Diluted
                  weighted average common shares outstanding
              
              
              52,948
              
              
              50,638
              
              
              46,587
              
              
              45,405
              
              
              44,711




19





For
      the
      fiscal periods prior to 2002, the impact from recognizing stock-based
      compensation expense resulting from the investigation of past stock option
      grants and other


adjustments
      is as follows (in thousands):





**Stock-Based****Compensation**
              
              **Other**
              
              **Total****Expense**
              
              **Adjustments**
              
              **Adjustments****Years
                  ended December 31,**1999
              
              $
              (233
              )
              
              -
              
              $
              (233
              )2000
              
              
              (2,360
              )
              
              (20
              )
              
              (2,380
              )2001
              
              
              (1,955
              )
              
              (142
              )
              
              (2,097
              )Cumulatived
                  effect as of the beginning of fiscal 2002
              
              $
              (4,548
              )
              $
              (162
              )
              $
              (4,710
              )




**Balance
                    Sheet Data****(in
                    thousands)****December
                    31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****As
                    previously reported**
                
                **As
                    previously reported**
                
                **As
                    previously reported**
                
                **As
                    previously reported**Cash
                
                $
                41,264
                
                $
                76,693
                
                $
                122,031
                
                $
                151,683
                
                $
                183,500Marketable
                    securities
                
                
                89,549
                
                
                37,455
                
                
                -
                
                
                -
                
                
                -Working
                    capital
                
                
                89,597
                
                
                52,789
                
                
                47,371
                
                
                79,553
                
                
                140,368Total
                    assets
                
                
                363,278
                
                
                328,789
                
                
                296,043
                
                
                295,783
                
                
                301,197Stockholder's
                    equity
                
                
                190,656
                
                
                146,191
                
                
                123,277
                
                
                143,153
                
                
                192,597**December
                    31,****2006**
                
                
                **2005**
                
                
                **2004**
                
                
                **2003**
                
                
                **2002****Adjustments**
                
                
                **Adjustments**
                
                
                **Adjustments**
                
                
                **Adjustments**Cash
                
                
                N/A
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Marketable
                    securities
                
                
                N/A
                
                
                -
                
                
                -
                
                
                -
                
                
                -Working
                    capital
                
                
                N/A
                
                
                (544
                )
                
                (480
                )
                
                (562
                )
                
                (432
                )Total
                    assets
                
                
                N/A
                
                
                (118
                )
                
                (39
                )
                
                215
                
                
                189Stockholder's
                    equity
                
                
                N/A
                
                
                (662
                )
                
                (519
                )
                
                (347
                )
                
                (243
                )**December
                    31,****2006**
                
                
                **2005**
                
                
                **2004**
                
                
                **2003**
                
                
                **2002****As restated**
                
                
                **As
                    restated**
                
                
                **As
                    restated**
                
                
                **As
                    restated**Cash
                
                $
                41,264
                
                $
                76,693
                
                $
                122,031
                
                $
                151,683
                
                $
                183,500Marketable
                    securities
                
                
                89,549
                
                
                37,455
                
                
                -
                
                
                -
                
                
                -Working
                    capital
                
                
                89,597
                
                
                52,245
                
                
                46,891
                
                
                78,991
                
                
                139,936Total
                    assets
                
                
                363,278
                
                
                328,671
                
                
                296,004
                
                
                295,998
                
                
                301,386Stockholder's
                    equity
                
                
                190,656
                
                
                145,529
                
                
                122,758
                
                
                142,806
                
                
                192,354





20


**Item
      7.** **** **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**




*The
      following should be read in conjunction with our consolidated financial
      statements, including the notes thereto, which are included elsewhere in this
      document.*





As
      provided in the explanatory note at the beginning of this Form 10-K and in
      Note
      3 to the Consolidated Financial Statements, the Company has restated its
      financial results as a result of the completed review of Eclipsys’ stock option
      grant practices and related accounting adjustments.




**Overview**




Eclipsys
      is a healthcare information technology company and a leading provider of
      advanced integrated information software, clinical content and professional
      services that help healthcare organizations improve clinical, financial, and
      operational process. We develop and license proprietary software and content
      that is designed for use in connection with many of the key clinical,
      administrative and financial functions that healthcare organizations require.
      Among other things, our software enables physicians, nurses and other clinicians
      to order tests, treatment and medications and record, access and share
      information about patients. Our software also facilitates patient admissions,
      scheduling, records maintenance, invoicing, inventory control, cost accounting,
      and assessment of the profitability of specific medical procedures and
      personnel. Our clinical content, which is integrated with our software,
      provides practice guidelines for use by physicians, nurses and other
      clinicians.




We
      also
      provide services related to our software.  These services include software
      and hardware maintenance, outsourcing, remote hosting of our software as well
      as
      third-party healthcare information technology applications, network services,
      and training and consulting.




We
      believe that one of the key differentiators of our software is its open,
      flexible and modular architecture.  This allows our software to be
      installed one application at a time or all at once, and to integrate easily
      with
      software developed by other vendors or our client. This enables our clients
      to
      install our software without the disruption and expense of replacing
      their existing software systems to gain additional
      functionality.




We
      market
      our software to small, stand-alone hospitals, large multi-entity healthcare
      systems, academic medical centers, community hospitals and other healthcare
      organizations. We have one or more of our software applications installed in,
      or
      licensed to be installed at approximately 1,500 facilities. Most of the
      top-ranked U.S. hospitals named in *U.S.
      News & World Report* ’s
      Honor
      Roll use one or more of our solutions.




In
      July
      2006, we acquired certain assets of Sysware, a laboratory information system
      company. During December 2006, we closed a stock acquisition of Mosum, Sysware’s
      related software-development organization in India, once applicable Indian
      regulatory approvals were received. From July 2006 to such closing, we operated
      Mosum under a management agreement. Since 2004, Eclipsys and Sysware shared
      a
      strong strategic business relationship, with Eclipsys marketing Sysware's
      PowerLAB solution under the Eclipsys Sunrise Laboratory TM brand.
      This asset acquisition built upon that partnership and acknowledges the value
      of
      an integrated laboratory information system as a core module of Eclipsys'
      Sunrise Clinical Manager suite of advanced clinical information solutions.
      It
      also provided us with the foundation for our growing development and support
      organization in India.




In
      December 2006, we acquired Van Slyck & Associates, Inc., or VSA. VSA is a
      patient classification, acuity-driven nurse staffing service and software
      company. Since 2004, Eclipsys has offered Sunrise Patient AcuityTM, a module that
      includes VSA’s patient acuity methodology embedded into the interdisciplinary
      clinical documentation capabilities of Eclipsys’ Sunrise Clinical ManagerTM.
      Sunrise Patient Acuity taps the VSA methodology, which enables calculation
      of
      patient acuity - the patient's severity and complexity of illness or injury
      - as
      an automatic byproduct of nursing documentation, and generates nurse staffing
      models based upon patient acuity to enable nurse managers to staff their units
      appropriately to ensure improved quality of care. With this acquisition,
      Eclipsys will be able to further expand its integrated solutions’ staffing and
      productivity management and reporting capabilities.





In
      January 2006, we effected a restructuring of our operations which included
      a
      reduction in headcount of approximately 100 individuals, and the reorganization
      of our Company. This was undertaken to better align our organization, reduce
      costs, and re-invest some of the cost savings into client-related activities
      including client support and professional services.





In
      December 2006 we realigned certain management resources and consolidated some
      facilities to eliminate excess office space. These activities resulted in
      restructuring charges of $14.7 million in the year ended December 31, 2006.
      Severance charges were $12.2 million, of which $3.6 million related to the
      termination of employment of certain management personnel. Of this charge,
      $1.3
      million was for non-cash stock-based compensation. The excess office space
      consolidation resulted in charges of $2.5 million related to the closing of
      three facilities.





**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 revenues and expenses and other significant areas involving
      management's judgments and estimates. On an ongoing basis, management evaluates
      and adjusts its estimates and judgments, if necessary. The preparation of
      financial statements in conformity with accounting principles generally accepted
      in the United States of America requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities, revenues
      and expenses and the disclosure of contingencies. Due to the inherent
      uncertainty involved in making estimates, actual results reported in future
      periods may be materially different from those estimates. These critical
      accounting policies relate to revenue recognition, allowance for doubtful
      accounts, capitalized software development costs, stock based compensation
      and
      our warranty reserve. Please refer to Note 2 of the audited consolidated
      financial statements for further discussion of our significant accounting
      policies.




*Revenue
      Recognition*





Revenues
      are derived from licensing of computer software; software and hardware
      maintenance; professional services (including implementation, integration,
      training and consulting); remote hosting; outsourcing; network services; and
      the
      sale of computer hardware.





21


We
      generally contract under multiple element arrangements, which include software
      license fees, hardware and services, including implementation, integration,
      training and software maintenance, for periods of 3 to 7 years. We evaluate
      revenue recognition on a contract-by-contract basis as the terms of each
      arrangement vary. The evaluation of our contractual arrangements often requires
      judgments and estimates that affect the timing of revenue recognized in our
      statements of operations. Specifically, we may be required to make judgments
      about:


- whether
          the fees associated with our software and services are fixed or
          determinable;
- whether
          collection of our fees is considered probable;
- whether
          professional services are essential to the functionality of the related
          software;
- whether
          we have the ability to make a reasonably dependable estimates in the
          application of the percentage-of-completion method; and
- whether
          we have verifiable objective evidence of fair value for our software and
          services.

We
      recognize revenues in accordance with the provisions of Statement of Position,
      (“SOP”) 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP
      98-9, Staff Accounting Bulletin, or SAB 104, “Revenue Recognition” (“SAB 104”)
      and Emerging Issues Task Force (“EITF”) 00-21 “Revenue Arrangements with
      Multiple Deliverables.” SOP 97-2 and SAB 104, as amended, require among other
      matters, that there be a signed contract evidencing an arrangement exists,
      delivery has occurred, the fee is fixed or determinable, and collectibility
      is
      probable.




Many
      of
      our contracts with our clients are multiple element arrangements which may
      provide for multiple software modules including the rights to unspecified future
      versions and releases we may offer within the software suites the client
      purchases or rights to unspecified 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 unspecified future software or platform protection
      rights.  We refer to these arrangements as traditional software
      contracts.  Finally, we offer much of our software and services on a
      stand-alone basis. Revenue under each of these arrangements is recognized as
      set
      forth below:




*Subscription
      Contracts*




Our
      subscription contracts typically include the following
      deliverables:




·  Software
      license fees;


·  Maintenance;


·  Professional
      services; and


·  Third
      party hardware or remote hosting services.




Software
      license fees are recognized ratably over the term of the contract, commencing
      upon the delivery of the software provided that (1) there is evidence of an
      arrangement, (2) the fee is fixed or determinable and (3) collection
      of our fee is considered probable. The value of the software is determined
      using
      the residual method pursuant to Statement of Position or SOP 98-9,
“Modification of SOP 97-2, With Respect to Certain Transactions” or
      SOP 98-9. These contracts contain the rights to unspecified future software
      within the suite purchased and/or unspecified platform transfer rights that
      do
      not qualify for exchange accounting. Accordingly, these arrangements are
      accounted for pursuant to paragraphs 48 and 49 of SOP 97-2 “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.




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




We
      consider the applicability of EITF 00-3, “Application of AICPA 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 client has the contractual
      right to take possession of our software at any time during the hosting period
      without significant penalty, and can feasibly run the software on its own
      hardware or enter into another arrangement with a third party to host the
      software, a software element covered by SOP 97-2 exists. When a software
      element exists in a remote hosting services arrangement, we recognize the
      license, professional services and remote hosting services revenues pursuant
      to
      SOP 97-2, whereby the fair value of the remote hosting service is
      recognized as revenue ratably over the term of the remote hosting contract.
      If
      we determine that a software element covered by SOP 97-2 is not present in
      a remote hosting services arrangement; we recognize revenue for the remote
      hosting services arrangement, ratably over the term of the remote hosting
      contract pursuant to SAB 104.




*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.




22


Revenue
      for each of the elements is recognized as follows:




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




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




*Software
      Contracts Requiring Contract Accounting*




We
      enter
      into certain multiple element arrangements containing milestone provisions
      in
      which the professional services are considered essential to the functionality
      of
      the software. Under these arrangements, software license fees and professional
      service revenues are recognized using the percentage-of-completion method over
      the implementation period which generally ranges from 12 to 24 months.
      Under the percentage-of-completion method, revenue and profit are recognized
      throughout the term of the implementation based upon estimates of total labor
      hours incurred and revenues to be generated over the term of the implementation.
      Changes in estimates of total labor hours and the related effect on the timing
      of revenues and profits are recognized in the period in which they are
      determinable. Accordingly, changes in these estimates could occur and have
      a
      material effect on our operating results in the period of change.




*Stand-Alone
      Software and Service*




We
      also
      market certain software and services on a stand-alone basis, including the
      following:




·  Software
      license;


·  Maintenance;


·  Professional
      services;


·  Hardware;


·  Network
      services;


·  Outsourcing;
      and


·  Remote
      Hosting services.




Revenues
      related to such software and services are recognized as follows:




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




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




Hardware
      is recognized upon delivery pursuant to SAB 104.




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




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




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




We
      record
      reimbursable out-of-pocket expenses in both systems and services revenues and
      as
      a direct cost of systems and services in accordance with EITF 01-14, “Income
      Statement Characterization of Reimbursements Received for “Out-of-Pocket”
Expenses Incurred” ** (“EITF
      01-14”) *.* For
      2006, 2005, and 2004 reimbursable out-of-pocket expenses were $9.0 million,
      $9.2
      million, and $5.7 million, respectively.




In
      accordance with EITF 00-10 *,* ” ** Accounting
      for Shipping and Handling Fees,” ** we
      have
      classified the re-imbursement by clients of shipping and handling costs as
      revenue and the associated cost as cost of revenue.




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




23


*Allowance
      for Doubtful Accounts*




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




*Capitalized
      Software Development Costs*




We
      capitalize a portion of our computer software development costs incurred
      subsequent to establishing technological feasibility. These costs include
      salaries, benefits, consulting and other directly related costs incurred in
      connection with programming and testing software. Capitalization ceases when
      the
      software is generally released for sale to clients. Management monitors the
      net
      realizable value of development costs to ensure that the investment will be
      recovered through future revenues. Capitalized software development costs were
      $14.1 million, $20.1 million, and $15.2 million for the years ended
      December 31, 2006, 2005, and 2004, respectively. These costs are amortized
      over the greater of the ratio that current revenues are to total and anticipated
      future revenues for the applicable software or the straight-line method over
      three years. Amortization of capitalized software development costs, which
      is
      included in cost of systems and services, was $17.5 million, $14.3 million,
      and
      $10.6 million for the years ended December 31, 2006, 2005, and 2004,
      respectively. Accumulated amortization of capitalized software development
      costs
      was $27.6 million and $19.5 million as of December 31, 2006 and 2005,
      respectively.





*Warranty
      Reserve*




The
      agreements that we use to license our software include a limited warranty
      providing that our software, in its unaltered form, will perform substantially
      in accordance with the related documentation. Through September 30, 2003,
      we did not incur any material warranty costs related to our software. Due to
      the
      response time issues that we identified in October 2003, we recorded provisions
      related to warranty costs of $4.6 million through December 31, 2004. This
      provision was reduced by $290,000 during the year ended December 31, 2006,
      as a
      result of a decrease in the estimation of expected warranty costs. To date
      $3.9
      million has been expended against the provision. Warranty costs are charged
      to
      cost of systems and services when they are probable and reasonably estimable.
      In
      determining this warranty reserve, we used significant judgments and estimates
      for the additional professional service hours and third party costs that will
      be
      necessary to remedy this issue on a client-by-client basis. The timing and
      amount of our warranty reserve could have been different if we had used other
      judgments or assumptions in our evaluation. At December 31, 2006, the remaining
      expected liability was $0.4 million which is expected to be completed in 2007.





*Stock-Based
      Compensation*





See
      Note
      3 for discussion of the Company’s restatements related to stock-based
      compensation. Prior to January 1, 2006, we accounted for our stock-based
      employee compensation arrangements under the intrinsic value method prescribed
      by APB 25, as allowed by SFAS 123, as amended by SFAS 148, “Accounting for
      Stock-Based Compensation - Transition and Disclosure” (“SFAS 148”). As a result,
      no expense was recognized for options to purchase our common stock that were
      granted with an exercise price equal to fair market value at the date of grant
      and no expense was recognized in connection with purchases under our employee
      stock purchase plan for the year ended December 31, 2005, nor in the year ended
      December 31, 2004.





In
      December 2004, FASB issued SFAS 123(R), which amended SFAS 123. SFAS 123(R)
      required measurement of the cost of share-based payments to employees, including
      grants of employee stock options, to be recognized in the financial statements
      based on their fair values beginning with the first annual period after June
      15,
      2005.





Effective
      January 1, 2006, we have adopted SFAS 123(R) using the modified prospective
      method. Under this method, compensation cost recognized during the year ended
      December 31, 2006, includes: (a) compensation cost for all share-based payments
      granted prior to, but not yet vested as of January 1, 2006, based on the grant
      date fair value estimated in accordance with the original provisions of SFAS
      123
      amortized over the awards’ vesting period, and (b) compensation cost for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS 123(R)
      amortized on a straight-line basis over the awards’ vesting period. The fair
      value of stock options is estimated at the date of grant using the Black-Scholes
      option pricing model with weighted average assumptions for the activity under
      our stock plans. Option pricing model input assumptions such as expected term,
      expected volatility, and risk-free interest rate, impact the fair value
      estimate. Further, the forfeiture rate impacts the amount of aggregate
      compensation. These assumptions are subjective and generally require significant
      analysis and judgment to develop. When estimating fair value, some of the
      assumptions were based on or determined from external data (for example, the
      risk free interest rate) and other assumptions were derived from our historical
      experience with share-based payment arrangements (for example, volatility and
      expected term). The appropriate weight to place on historical experience is
      a
      matter of judgment, based on relevant facts and circumstances. Pro forma results
      for prior periods have not been restated. Implementation of SFAS 123(R) resulted
      in an additional $9.7 million in stock option expense during the year ended
      December 31, 2006. The adoption of SFAS 123(R) had no impact on cash flows
      from
      operations or financing activities.





We
      have
      elected to use the simplified method for estimating our expected term equal
      to
      the midpoint between the vesting period and the contractual term as allowed
      by
      SAB 107, “Share-Based Payment.”





We
      currently estimate volatility by using the weighted average historical
      volatility of our common stock.





The
      risk-free interest rate is the implied yield currently available on U.S.
      Treasury zero-coupon issues with a remaining term equal to the expected term
      input to the Black-Scholes model.





We
      estimate forfeitures using a weighted average historical forfeiture rate. Our
      estimate of forfeitures will be adjusted over the requisite service period
      based
      on the extent to which actual forfeitures differ, or are expected to differ,
      from our estimate.





In
      connection with the Company’s restatement of its consolidated financial
      statements, the Company has applied judgment in determining the correct
      measurement dates for prior option grants. Information regarding the restatement
      is set forth in the “Explanatory Note Regarding Restatements” immediately
      preceding Part I, Item 1 and in Note 3, “Review of Stock Option Practices
      and Restatements of Consolidated Financial Statements” in Notes to the
      Consolidated Financial Statements of this Form 10-K.





24


**Results
      of Operations**




*Revenues*




We
      derive
      revenues from licensing our software and the delivery of services including
      software and hardware maintenance; professional services (including
      implementation, integration, training and consulting); remote hosting services;
      outsourcing services; network services; and the sale of computer hardware.
      Our
      software and services are sold to clients under contracts that generally range
      in duration from 3 to 7 years.




*Costs
      of Revenues*




The
      principal costs of systems and services revenues are salaries, benefits and
      related overhead costs for implementation, maintenance, remote hosting and
      outsourcing personnel. Other significant costs include third party costs,
      software rental and maintenance and the amortization of capitalized software
      development costs and acquired technology intangible assets. Capitalized
      software development costs are generally amortized over three years on a
      straight-line basis commencing upon general release of the related software,
      or
      are based on the ratio that current revenues bear to total anticipated revenues
      for the applicable software. Acquired technology is amortized over three to
      five
      years based upon the estimated economic life of the underlying asset.  Cost
      of revenues related to hardware sales includes our cost to acquire the hardware
      from the manufacturer.





*Sales
      and Marketing*




Sales
      and
      marketing expenses consist primarily of salaries, benefits, commissions, and
      related overhead costs. Other costs include expenditures for marketing programs
      and events, public relations, trade shows, advertising, and related
      communications.




*Research
      and Development*




Research
      and development expenses consist primarily of salaries, benefits and related
      overhead, as well as consultants for the design, development and testing of
      new
      software. We capitalize certain software development costs subsequent to
      attaining technological feasibility. These costs are amortized as an element
      of
      the cost of systems and services.




*General
      and Administrative*




General
      and administrative expenses consist primarily of salaries, benefits and related
      overhead costs for administration, executive, finance, legal, human resources,
      purchasing and internal systems personnel, as well as accounting and legal
      fees
      and expenses.




*Depreciation
      and Amortization*




We
      depreciate the costs of our tangible capital assets on a straight-line basis
      over the estimated economic lives of the assets, which generally range from
      3 to
      7 years. Acquisition-related intangible assets, which primarily consist of
      the
      value of ongoing client relationships and acquired technology, have been
      amortized based upon their estimated economic lives at the time of the
      acquisition, and range from 3 to 5 years. Acquisition-related goodwill is not
      amortizable since it has an indefinite life. In accordance with SFAS 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”), we conduct an impairment
      review of our goodwill balance on at least an annual basis. As of December
      31,
      2006 and 2005, there was no impairment of the goodwill balance.




*Taxes*




At
      December 31, 2006, we had U.S. net operating loss carryforwards for federal
      income tax purposes of approximately $309.3 million.  Of this amount, $6.0
      million expires in 2012 and $23.9 million  expires
      in 2013; the balance expires in varying amounts through 2026.  Of the total
      U.S. net operating loss carryforward, $91.7 million relate to stock option
      tax
      deductions which will be tax-effected and the benefit credited as additional
      paid-in-capital when realized.  Additionally, the Company has Canadian net
      operating loss carryovers of approximately $20.4 million that expire in varying
      amounts through 2013. Additionally, the Company has an Indian net operating
      loss
      of approximately $0.8 million. Our Indian subsidiary is entitled to a tax
      holiday which expires in 2009.





We
      did
      not record a benefit for the resulting net deferred tax asset for any of the
      periods presented, because we believe it is more likely than not that we would
      not realize our net deferred tax asset. Accordingly, we have recorded a
      valuation allowance against our total net deferred tax asset.  We are
      required to reverse the valuation allowance and record a benefit for the net
      deferred tax asset if and to the extent that we conclude that it is more likely
      than not that we will realize the asset.  This will result in a
      non-recurring benefit in the period that we make the determination.  For
      all future periods, after the recognition of the non-recurring benefit, we
      will
      record income tax expense in any period in which we earn taxable
      income.





In
      addition, we evaluated the impact of the restatements on our tax provision.
      Based on the analysis, the Company did not record an incremental income tax
      provision for the periods impacted by the restatement as the Company had
      previously provided a full valuation allowance on its deferred tax asset.




25


**Statement
                  of Operations Data****(in
                  thousands, except per share data)****2006**
              
              
              
              **2005****%
                  of Total**
              
              
              
              **%
                  of Total****2006**
              
              **Revenue**
              
              **2005**
              
              **Revenue**
              
              **Change
                  $**
              
              **Change
                  %****As
                  restated**Revenues:Systems
                  and services
              
              
              
              
              $
              409,450
              
              
              95.8
              %
              $
              370,380
              
              
              96.6
              %
              $
              39,070
              
              
              10.5
              %Hardware
              
              
              
              
              
              18,092
              
              
              4.2
              %
              
              12,962
              
              
              3.4
              %
              
              5,130
              
              
              39.6
              %Total
                  revenues
              
              
              
              
              
              427,542
              
              
              100.0
              %
              
              383,342
              
              
              100.0
              %
              
              44,200
              
              
              11.5
              %Costs
                  and expenses:Cost
                  of systems and services
              
              
              
              
              
              237,914
              
              
              55.6
              %
              
              225,131
              
              
              58.7
              %
              
              12,783
              
              
              5.7
              %Cost
                  of hardware
              
              
              
              
              
              14,592
              
              
              3.4
              %
              
              11,055
              
              
              2.9
              %
              
              3,537
              
              
              32.0
              %Sales
                  and marketing
              
              
              
              
              
              63,516
              
              
              14.9
              %
              
              64,080
              
              
              16.7
              %
              
              (564
              )
              
              -0.9
              %Research
                  and development
              
              
              
              
              
              57,973
              
              
              13.6
              %
              
              51,771
              
              
              13.5
              %
              
              6,202
              
              
              12.0
              %General
                  and administrative
              
              
              
              
              
              24,345
              
              
              5.7
              %
              
              19,479
              
              
              5.1
              %
              
              4,866
              
              
              25.0
              %Depreciation
                  and amortization
              
              
              
              
              
              15,736
              
              
              3.7
              %
              
              14,659
              
              
              3.8
              %
              
              1,077
              
              
              7.3
              %Restructuring
                  charge
              
              
              
              
              
              14,670
              
              
              3.4
              %
              
              -
              
              
              0.0
              %
              
              14,670
              
              
              -Total
                  costs and expenses
              
              
              
              
              
              428,746
              
              
              100.3
              %
              
              386,175
              
              
              100.7
              %
              
              42,571
              
              
              11.0
              %Loss
                  from operations
              
              
              
              
              
              (1,204
              )
              
              -0.3
              %
              
              (2,833
              )
              
              -0.7
              %
              
              1,629
              
              
              57.5
              %Interest
                  income, net
              
              
              
              
              
              5,335
              
              
              1.2
              %
              
              3,102
              
              
              0.8
              %
              
              2,233
              
              
              72.0
              %Income
                  before income taxes
              
              
              
              
              
              4,131
              
              
              1.0
              %
              
              269
              
              
              0.1
              %
              
              3,862
              
              
              1435.7
              %Provision
                  for income taxes
              
              
              
              
              
              38
              
              
              0.0
              %
              
              -
              
              
              0.0
              %
              
              38
              
              
              -Net
                  income
              
              
              
              
              $
              4,093
              
              
              
              
              $
              269
              
              
              
              
              
              3,824Basic
                  net income per common share
              
              
              
              
              $
              0.08
              
              
              
              
              $
              0.01
              
              
              
              
              $
              0.07Diluted
                  net income per common share
              
              
              
              
              $
              0.08
              
              
              
              
              $
              0.01
              
              
              
              
              $
              0.07


**Year
      Ended December 31, 2006 compared to December 31, 2005**





*Revenues*


Total
      revenues for the year ended December 31, 2006 increased $44.2 million or 11.5%
      to $427.5 million, from $383.3 million in 2005.




Systems
      and services revenues increased $39.1 million or 10.5% to $409.5 million for
      the
      year ended December 31, 2006 compared to $370.4 million in 2005. The increase
      in
      systems and services revenues was primarily a result of an increase in revenues
      recognized on a ratable basis related to software, maintenance, outsourcing
      and
      remote hosting. These revenues increased $28.2 million or 11.3% to $277.0
      million in 2006 from $248.8 million in 2005. We expect that remote hosting
      will
      continue to expand as a delivery option in future periods. Additionally,
      professional services revenues, which include implementation, integration,
      consulting and training services, increased $15.4 million or 18.4% to $99.1
      million in 2006 from $83.8 million in 2005. The
      increase in professional services was a result of a higher volume of services
      being purchased by our clients related to implementation and activation of
      our
      software solutions. R evenue
      related to one time software licenses and networking services decreased $4.3
      million or 11.4% to $33.5 million in 2006 compared to $37.8 million in 2005.
      Software license revenues increased by $0.3 million to $20.9 million in 2006.
      This includes our software and third party software. Software revenues,
      recognized upon delivery of our software, increased from $12.1 million in 2005
      to $13.0 million in 2006. Third-party related software revenues decreased from
      $8.6 million in 2005 to $8.0 million in 2006. The decrease in third party
      software was a result of lower software sales in 2006. Networking services
      decreased $4.6 million to $12.6 million in 2006 compared to $17.2 million in
      2005.  The decrease in networking services related to lower sales volume in
      2006.





Hardware
      revenues increased approximately $5.1 million, or 39.6% to $18.1 million for
      the
      year ended December 31, 2006 compared to $13.0 million in 2005.  We expect
      hardware revenue to continue to fluctuate on a year-to-year basis. We
      expect hardware and network service transactions will fluctuate in future
      periods due to a variety of factors, including competition within the hardware
      industry, the status of the client implementations and future sales volumes
      related to hardware and network services.





*Operating
      Expenses*




The
      adoption of SFAS 123(R) on January 1, 2006, which resulted in the expensing
      of
      stock option grants, in addition to restricted stock awards, as stock based
      compensation, increased expenses as indicated in the table below (in thousands):


Year
                  Ended
                December
                  31, 2006Cost
                  of systems and services
              
              $
              3,215Sales
                  and marketing
              
              
              3,495Research
                  and development
              
              
              1,921General
                  and administrative
              
              
              2,626Restructuring
                  charge
              
              
              2,846Total
                  stock-based compensation expense
              
              $
              14,103


The
      restructuring charge of $2.8 million reflected in the table above, is included
      in the $14.7 million restructuring charge disclosed separately on the Statement
      of Operations.




26





Cost
      of
      systems and services increased approximately $12.8 million or 5.7% to $237.9
      million, for the year ended December 31, 2006 compared to $225.1 million in
      2005.  The increase in cost of systems and services in 2006 was related to
      the following:




- higher
          payroll related costs associated with an increase in headcount;
- higher
          ammortization of capitalized software development costs
          associated with the release of Sunrise Clinical Manager 4.5 XA in January
          2006;
- higher
          costs associated with incremental remote hosting and outsourcing revenue;
          and
- increased
          implementation costs as a result of higher professional service
          volumes;
- increased
          stock-based compensation as a result of
          adoption of SFAS 123(R).

Cost
      of
      hardware increased $3.5 million or 32.0% to $14.6 million in 2006 compared
      to
      $11.1 million in 2005. The increase in these costs was directly related to
      the
      higher hardware volumes discussed above. The gross margin percentage on hardware
      revenue increased to 19.3% in 2006 compared to 14.7% in 2005.





Sales
      and
      marketing expenses decreased $0.6 million or 0.9% to $63.5 million in 2006
      compared to $64.1 million in 2005. The decrease in sales and marketing expenses
      was related primarily to reduced sales headcount resulting from a sales force
      reorganization and changes to our sales incentive compensation plan. This
      decrease was offset by an increase in stock-based compensation as a result
      of
      the adoption of SFAS 123(R) and higher payroll expenses related to health
      insurance costs.




Research
      and development expenses were $58.0 million in 2006 compared to $51.8 million
      in
      2005. Gross research and development spending, which consists of research and
      development expenses and capitalized software development costs, increased
      $0.2
      million to $72.1 million in 2006 compared to $71.9 million in 2005. Net research
      and development expense increased primarily as a result of a lower level of
      capitalization associated with coding and development as a result of the release
      of Sunrise 4.5 XA in January 2006 and increased stock-based compensation as
      a result of adoption of SFAS 123(R). Amortization of capitalized software
      development costs, which is included as a component of cost of systems and
      services, increased by approximately $3.3 million to $17.5 million in 2006
      compared to $14.3 million for the same period in 2005, due to prior period
      increases in capitalized software development costs.





In
      summary, research and development expense was as follows:


**(in
                  thousands)****2006**
              
              **2005**
              
              **$
                  Change**
              
              **%
                  Change**Research
                  and development expenses
              
              $
              57,973
              
              $
              51,771
              
              $
              6,202
              
              
              12.0
              %Capitalized
                  software development costs
              
              
              14,106
              
              
              20,144
              
              
              (6,038
              )
              
              -30.0
              %Gross
                  research and development expenses
              
              $
              72,079
              
              $
              71,915
              
              $
              164
              
              
              0.2
              %Amortization
                  of capitalized software development costs
              
              $
              17,494
              
              $
              14,274
              
              $
              3,220
              
              
              22.6
              %


General
      and administrative expenses increased approximately $4.8 million or 25.0% to
      $24.3 million in 2006 compared to $19.5 million in 2005. The increase was
      primarily related to the increase in stock-based compensation as a result of
      the
      adoption of SFAS 123(R); higher employee related costs; higher professional
      service fees including legal and accounting; and higher costs associated with
      the implementation of our new enterprise resource planning system.





Depreciation
      and amortization increased $1.1 million or 7.3% to $15.7 million in 2006
      compared to $14.7 million in 2005. The increase was primarily the result of
      higher depreciation associated with the activation of our enterprise resource
      planning solution during the second quarter of 2006.




In
      January 2006, we effected a restructuring of our operations which included
      a
      reduction in headcount of approximately 100 individuals, and the reorganization
      of our company. This was undertaken to better align our organization, reduce
      costs, and re-invest some of the cost savings into client-related activities
      including client support and professional services.


In
      December 2006, we realigned certain management resources and consolidated some
      facilities to eliminate excess office space. These activities resulted in
      restructuring charges of $14.7 million in the year ended December 31, 2006.
      Severance charges were $12.2 million, of which $3.6 million related to the
      termination of employment of certain management personnel. Of this charge,
      $2.8
      million was for non-cash stock-based compensation. The excess office space
      consolidation resulted in charges of $2.5 million related to the closing of
      three facilities.




These
      restructuring activities will result in savings which are being reinvested
      in
      our business to help finance increases in our research and development
      capabilities and client services.





***Interest
      Income***


Interest
      income increased $2.2 million to $5.3 million in 2006 compared to $3.1 million
      in 2005. The increase was due to an improvement in yields on marketable
      securities as well as higher marketable securities balances.




As
      a
      result of these factors, our net income was $3.7 million for the year ended
      December 31, 2006, compared to net income of $0.3 million for the year ended
      December 31, 2005.




27


**Statement
                  of Operations****(in
                  thousands, except per share data)****2005**
              
              
              
              **2004****%
                  of Total**
              
              
              
              **%
                  of Total****2005**
              
              **Revenue**
              
              **2004**
              
              **Revenue**
              
              **Change
                  $**
              
              **Change
                  %****As
                  restated**
              
              
              
              **As
                  restated**Revenues:Systems
                  and services
              
              
              
              
              $
              370,380
              
              
              96.6
              %
              $
              282,124
              
              
              91.3
              %
              $
              88,256
              
              
              31.3
              %Hardware
              
              
              
              
              
              12,962
              
              
              3.4
              %
              
              26,951
              
              
              8.7
              %
              $
              (13,989
              )
              
              -51.9
              %Total
                  revenues
              
              
              
              
              
              383,342
              
              
              100.0
              %
              
              309,075
              
              
              100.0
              %
              $
              74,267
              
              
              24.0
              %Costs
                  and expenses:Cost
                  of systems and services
              
              
              
              
              
              225,131
              
              
              58.7
              %
              
              168,748
              
              
              54.6
              %
              $
              56,383
              
              
              33.4
              %Cost
                  of hardware revenues
              
              
              
              
              
              11,055
              
              
              2.9
              %
              
              22,949
              
              
              7.4
              %
              $
              (11,894
              )
              
              -51.8
              %Sales
                  and marketing
              
              
              
              
              
              64,080
              
              
              16.7
              %
              
              65,599
              
              
              21.2
              %
              $
              (1,519
              )
              
              -2.3
              %Research
                  and development
              
              
              
              
              
              51,771
              
              
              13.5
              %
              
              58,187
              
              
              18.8
              %
              $
              (6,416
              )
              
              -11.0
              %General
                  and administrative
              
              
              
              
              
              19,479
              
              
              5.1
              %
              
              15,951
              
              
              5.2
              %
              $
              3,528
              
              
              22.1
              %Depreciation
                  and amortization
              
              
              
              
              
              14,659
              
              
              3.8
              %
              
              13,284
              
              
              4.3
              %
              $
              1,375
              
              
              10.4
              %Total
                  costs and expenses
              
              
              
              
              
              386,175
              
              
              100.7
              %
              
              344,718
              
              
              111.5
              %
              $
              41,457
              
              
              12.0
              %Loss
                  from operations
              
              
              
              
              
              (2,833
              )
              
              -0.7
              %
              
              (35,643
              )
              
              -11.5
              %
              $
              32,810
              
              
              92.1
              %Interest
                  income, net
              
              
              
              
              
              3,102
              
              
              0.8
              %
              
              1,614
              
              
              0.5
              %
              $
              1,488
              
              
              92.2
              %Income
                  (loss) before income taxes
              
              
              
              
              
              269
              
              
              
              
              
              (34,029
              )
              
              
              
              $
              34,298Provision
                  for income taxes
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              $
              -Net
                  income (loss)
              
              
              
              
              $
              269
              
              
              
              
              $
              (34,029
              )
              
              
              
              $
              34,298Basic
                  net income (loss) per common share
              
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.73
              )
              
              
              
              $
              0.74Diluted
                  net income (loss) per common share
              
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.73
              )
              
              
              
              $
              0.74








**Year
      Ended December 31, 2005 compared to December 31, 2004**





***Revenues***


Total
      revenues for the year ended December 31, 2005 increased $74.3 million or 24.0
      %
      to $383.3 million, from $309.1 million in 2004.




Systems
      and services revenues increased $88.3 million or 31.3% to $370.4 million for
      the
      year ended December 31, 2005 compared to $282.1 million in 2004. The increase
      in
      systems and services revenues was primarily a result of an increase in revenues
      recognized on a ratable basis related to software, maintenance, outsourcing
      and
      remote hosting. These revenues increased $50.8 million or 25.7% to $248.8
      million in 2005 from $198.0 million in 2004. Additionally, professional services
      revenues which include implementation, integration, consulting and training
      services increased $28.3 million or 51.0% to $83.8 million in 2005 from $55.5
      million in 2004. Also, revenue related to software and networking services
      increased $9.2 million or 32.2% to $37.8 million in 2005 compared to $28.6
      million in 2004.




Increases
      in ratably generated revenues were primarily driven by increases in outsourcing,
      remote hosting and subscription revenues which include software maintenance
      and
      software.  The increase in outsourcing revenues was primarily the result of
      revenues associated with a large contract entered into in Q4 2004.  Remote
      hosting revenues were favorably impacted by a shift in sales mix as more clients
      began to elect this option in-lieu of purchasing hardware as a mechanism to
      deliver their software applications.  We expect that remote hosting will
      continue to expand as a delivery option in future periods.  Subscription
      revenues increased as a result of progress made on a significant number of
      client implementations during the past twelve months as our clients continue
      to
      activate our clinical and financial modules.  These activations resulted in
      higher revenues under these contracts.  Additionally, new sales bookings in
      2005 and 2004 favorably impacted subscription related revenues.




Revenues
      related to software and networking services increased $9.2 million in 2005
      compared to the prior year.  Networking services increased $2.0 million to
      $17.2 million in 2005 compared to $15.2 million in 2004.  These increases
      were related to higher sales volume.  Software related revenues increased
      $7.2 million to $20.6 million in 2005.  This increase was primarily driven
      by an increase in third-party related software revenues which increased from
      $3.5 million in 2004 to $8.6 million in 2005.   Other software related
      revenues, which includes revenues recognized upon delivery of our software
      and
      content sold directly by us or through third parties, increased from $10.0
      million in 2004 to $12.1 million in 2005. These revenues can vary significantly
      from period to period and past levels are not necessarily indicative of future
      performance. Other software related revenues increased primarily as a result
      of
      a higher volume of revenues related to sales of our clinical practice content
      under a remarketing arrangement with a third-party.  There is no assurance
      that we will generate comparable amounts under this arrangement in future
      periods.  The increase in third party software was a result of higher
      software sales in 2005.




Professional
      service revenues increased as a result of major activation activities at
      numerous client installations during 2005.  Additionally, we experienced
      significant growth in our consulting practice as clients have begun to acquire
      these services from us to improve their respective work flow and processes
      associated with their ongoing operations.  In 2005, new sales levels
      associated with consulting and implementation services have significantly
      increased as clients have purchased higher volumes of these offerings to improve
      their workflows and benefits derived from using our software.  We expect
      this trend to continue in the future.




28


Hardware
      revenues decreased approximately $14.0 million, or 51.9% to $13.0 million for
      the year ended December 31, 2005 compared to $27.0 million in 2004.  The
      decrease was a result of lower software related sales in 2004 and the first
      half
      of 2005 associated with the previously discussed software issue. 
Additionally, we have begun to experience a change in sales mix as more clients
      have elected remote hosting services in-lieu of hardware purchases to operate
      their respective software applications.  We expect hardware and network
      service transactions will fluctuate in future periods due a variety of factors,
      including competition within the hardware industry, the status of the client
      implementations and future sales volumes related to hardware and network
      services.





Revenue
      increases in any period are attributable, to a significant degree, to sales
      contracts entered into in prior-years.





***Operating
      Expenses***


Cost
      of
      systems and services revenues increased approximately $56.4 million or 33.4%
      to
      $225.1 million, for the year ended December 31, 2005 compared to $168.7 million
      in 2004.  The increase in costs of systems and services revenues in 2005
      was related to the following:




- higher
          payroll related costs associated with an increase in outsourcing;
- higher
        costs associated with incremental remote hosting revenue;
- higher
          amortization of capitalized software development costs associated with
          the
          release of Sunrise Clinical Manager 3.5 XA in June 2005 and 4.0 XA in March
          2005;
- higher
          costs associated with a higher volume networking services revenues;
- higher
        costs associated with an increase in third party related software revenues
        ;
        and
- higher
          implementation costs associated with an expanded implementation team in
          connection with higher professional services volumes and an increased usage
          of
          third party consultants to augment these services.

During
      2005, we experienced a significant increase in costs associated with the use
      of
      third party consultants to augment our implementation services.  In Q4
      2005, we implemented an initiative to improve our professional services area
      which included a reorganization of these resources.  Additionally, we are
      investing incremental resources in training related activities and improvements
      in our services infrastructure.




Cost
      of
      hardware revenues decreased $11.8 million to $11.1 million or 51.8% in 2005
      compared to $22.9 million in 2004. The decrease in these costs was directly
      related to the lower hardware volumes discussed above. The gross margin
      percentage on hardware revenue decreased to 14.7% in 2005 compared to 14.8%
      in
      2004.




Research
      and development expenses were $51.8 million in 2005 compared to $58.2 million
      in
      2004. Gross research and development spending, which consists of research and
      development expense plus capitalized software development costs, decreased
      $1.5
      million to $71.9 million in 2005 compared to $73.4 million in 2004. The decrease
      in overall spending was driven by an improvement in internal processes within
      the research and development organization and a shifting of resources from
      third
      party consultants to internal resources.





In
      summary, research and development was as follows:





**(in
                  thousands)****2005**
              
              **2004**
              
              **$
                  Change**
              
              **%
                  Change**Research
                  and development expenses
              
              $
              51,771
              
              $
              58,187
              
              $
              (6,416
              )
              
              -11.0
              %Capitalized
                  software development costs
              
              
              20,144
              
              
              15,194
              
              
              4,950
              
              
              32.6
              %Gross
                  research and development expenses
              
              $
              71,915
              
              $
              73,381
              
              $
              (1,466
              )
              
              -2.0
              %Amortization
                  of capitalized software development costs
              
              $
              14,274
              
              $
              10,634
              
              $
              3,640
              
              
              34.2
              %





The
      increase in amortization of capitalized software development costs was a result
      of the release of Sunrise Clinical Manager 3.5 XA in June 2004 and Sunrise
      Clinical Manager 4.0 XA in March 2005. These costs are included as a component
      of cost of systems and services revenues.




General
      and administrative expenses increased approximately $3.5 million or 22.1% to
      $19.5 million in 2005 compared to $16.0 million in 2004. The increase was
      primarily related to costs associated with the transition of our CEO resulting
      in incremental costs of $2.7 million.  Additionally, costs increased as a
      result of an incremental investment in our infrastructure related to the
      expansion of our management team and an increase in costs associated with
      incentive related compensation.  These increases were partially offset by
      lower legal costs and a reduction in insurance related expenses.





Depreciation
      and amortization increased $1.4 million or 10.4% to $14.7 million in 2005
      compared to $13.3 million in 2004. The increase was a result of an on-going
      investment in our infrastructure in research and development area and other
      areas of the Company.  The increase was also attributable to a full year of
      amortization for acquired intangible assets in the current year compared to
      a
      pro-rated period in the prior year.




29


***Interest
      Income***


Interest
      income increased $1.5 million to $3.1 million in 2005 compared to $1.6 million
      in 2004. The increase was primarily related to better yields earned on cash
      and
      cash equivalent balances in 2005.




As
      a
      result of these factors, our net income was $0.3 million for the year ended
      December 31, 2005, compared to a net loss of $34.0 million for the year ended
      December 31, 2004.




**Liquidity
      and Capital Resources**





During
      2006, operating activities provided $26.6 million of cash. Operating
      activities were favorably impacted in 2006 as a result of new business signed
      in
      2006. Cash from operating activities was also favorably impacted by the
      restructuring (see Note 6 to the consolidated financial statements). Investing
      activities used $89.7 million of cash, consisting of net purchases of marketable
      securities of $52.1 million, purchases of property and equipment of
      $17.5 million, capitalized software development costs of $14.1million, and
      two acquisitions for a total of $6.0 million. The property and equipment
      expenditures were related to activities at our Technology Solutions Center,
      or
      TSC, for the continued expansion of our remote hosting function, as well as
      investments in our enterprise resource planning solution. Financing activities
      provided $27.7 million from the proceeds of stock options exercised and proceeds
      from the employee stock purchase plan. Stock option exercises were higher than
      usual during the year ended December 31, 2006 as a result of exercises of
      options from option holders whose employment was terminated in connection with
      our restructuring.  The timing and amount of cash provided by future
      stock option exercises is uncertain.  At December 31, 2006, the unpaid
      liability related to the restructuring of our operations effected in 2006 was
      $5.7 million and will be paid out through 2009. See Note 7 to the
      Consolidated Financial Statements.





During
      2005, operating activities provided $14.4 million of cash. Operating activities
      were favorably impacted in 2005 as a result of increased revenues and related
      contribution across all significant areas of our business. Investing activities
      used $77.2 million of cash, consisting of net purchases of marketable
      securities of $37.5 million, $20.1 million of capitalized software
      development costs and $19.3 million for the procurement of property and
      equipment. The property and equipment expenditures were related to activities
      at
      our TSC for the expansion of our remote hosting function and activities in
      our
      research and development area, as well as investments in our Oracle ERP
      solution. Financing activities provided $17.0 million from the proceeds of
      stock options exercised and proceeds from the issuance of common stock in the
      employee stock purchase plan. Cash provided by the exercise of stock options
      was
      higher in 2005 than in 2004.





During
      2004, operating activities used $3.2 million of cash, primarily as a result
      of
      the impact of our new contract arrangements. Investing activities used $36.1
      million of cash, consisting of $15.2 million of capitalized software development
      costs, $15.3 million for the procurement of property and equipment and $5.5
      million for two acquisitions. The property and equipment expenditures were
      primarily related to activities at our Technology Solutions Center for the
      expansion of our remote hosting function and activities in our research and
      development area. Financing activities provided $9.6 million from the exercise
      of stock options and proceeds from the employee stock purchase plan.




As
      of
      December 31, 2006, our principal source of liquidity was our cash and cash
      equivalents and marketable-securities balances of $130.8 million. Our
      future liquidity requirements will depend on a number of factors including,
      among other things, the timing and level of our new sales volumes, the cost
      of
      our development efforts, the success and market acceptance of our future product
      releases, and other related items. We believe that our current cash and cash
      equivalents and marketable securities balances, combined with our anticipated
      cash collections from customers is expected to be adequate to meet our currently
      anticipated liquidity requirements for the next twelve months.





These
      amounts are expected to be funded from current cash and cash equivalent balances
      and future net income from operations.




**Off-Balance
      Sheet Arrangements**




At
      December 31, 2006, we do not have any material off-balance sheet
      arrangements.





**Contracts
      and Commitments**




The
      following table provides information related to our contractual obligations
      under various financial and commercial agreements as of December 31,
      2006:


**Payments
                  Due by Period**(in
                  thousands)**Less
                  than**
              
              
              
              
              
              **More
                  than****Contractual
                  Obligations**
              
              
              **Total**
              
              
              **1
                  year**
              
              
              **1-3
                  years**
              
              
              **3-5
                  years**
              
              
              **5
                  years**Operating
                  Leases
              
              $
              27,859
              
              $
              11,832
              
              $
              13,311
              
              $
              2,716
              
              $
              -Unconditional
                  Purchase Obligations
              
              
              69,623
              
              
              44,815
              
              
              20,875
              
              
              3,933
              
              
              -Total
              
              $
              97,482
              
              $
              56,647
              
              $
              34,186
              
              $
              6,649
              
              $
              -


The
      unconditional purchase obligations consist of minimum purchase commitments
      for
      telecommunication services, computer equipment, maintenance, consulting and
      other commitments.




These
      amounts are expected to be funded from current cash and cash equivalent balances
      and the income generated from operations.





30


**Item
      7A.** **** **Quantitative
      and Qualitative Disclosures about Market Risk**




We
      do not
      currently use derivative financial instruments. We do not currently enter into
      foreign currency hedge transactions. Foreign currency fluctuations, through
      December 31, 2006, have not had a material impact on our financial position
      or
      results of operations.





We
      generally invest in high quality debt instruments with relatively short
      maturities. Based upon the nature of our investments, we do not expect any
      material loss from our investments. Nevertheless, investments in both fixed
      rate
      and floating rate interest earning instruments carry a degree of interest rate
      risk. Fixed rate securities may have their fair market value adversely impacted
      due to a rise in interest rates, while floating rate securities may produce
      less
      income than expected if interest rates fall. Due in part to these factors,
      our
      future investment income may fall short of expectations due to changes in
      interest rates or we may suffer losses in principal if forced to sell securities
      that have seen a decline in market value due to changes in interest
      rates.





The
      following table illustrates potential fluctuation in annualized interest income
      based upon hypothetical values for blended interest rates for marketable
      securities balances.





Hypothetical
              
              Marketable
                  securities balances (in thousands)Interest
                  Rate
              
              $
              100,000
              
              $
              110,000
              
              $
              120,0001.5%
              
              
              1,500
              
              
              1,650
              
              
              1,8002.0%
              
              
              2,000
              
              
              2,200
              
              
              2,4002.5%
              
              
              2,500
              
              
              2,750
              
              
              3,0003.0%
              
              
              3,000
              
              
              3,300
              
              
              3,6003.5%
              
              
              3,500
              
              
              3,850
              
              
              4,2004.0%
              
              
              4,000
              
              
              4,400
              
              
              4,800





We
      estimate that a one-percentage point decrease in interest rates for our
      marketable securities portfolio as of December 31, 2006 would have resulted
      in a
      decrease in interest income of $0.9 million for a twelve month period.
  This sensitivity analysis contains certain simplifying assumptions
      (for example, it does not consider the impact of changes in the portfolio as
      a
      result of our business needs or as a response to changes in the market).
      Therefore, although it gives an indication of our exposure to changes in
      interest rates, it is not intended to predict future results and our actual
      results will likely vary.





We
      account for cash equivalents and marketable securities in accordance with SFAS
      115. “Accounting for Certain Investments in Debt and Equity Securities.” Cash
      equivalents are short-term highly liquid investments with original maturity
      dates of three months or less. Cash equivalents are carried at cost, which
      approximates fair market value.



















31





**Item
      8.** ****** ***Financial
      Statements and Supplementary Data***





**Index
      to Consolidated Financial Statements:**





*Financial
                  Statements:***Page**Report
                  of Independent Registered Certified Public Accounting Firm
              33Consolidated
                  Balance Sheets as of December 31, 2006 and 2005 (restated)
              34Consolidated
                  Statements of Operations for the years endedDecember
                  31, 2006, 2005 (restated) and 2004 (restated)
              35Consolidated
                  Statements of Cash Flows for the years endedDecember
                  31, 2006, 2005 (restated) and 2004 (restated)
              36Consolidated
                  Statement of Changes in Stockholders’ Equity andComprehensive
                  Income (Loss) for the years ended December 31, 2006, 2005 (restated)
                  and
                  2004 (restated)
              37Notes
                  to the Consolidated Financial Statements
              38*Financial
                  Statement Schedule:*Schedule
                  II — Valuation of Qualifying Accounts for theyears
                  ended December 31, 2006, 2005 (restated) and 2004
                  (restated)
              60All
                  other schedules are omitted as they are not applicable or the required
                  information is shown in the financial statements or notes
                  thereto.Signatures
              88




32
 ***Report
        of Independent Registered Certified Public Accounting
        Firm***




To
      the
      Board of Directors and Stockholders of Eclipsys Corporation:




We
      have
      completed integrated audits of Eclipsys Corporation’s consolidated financial
      statements and of its internal control over financial reporting as of December
      31, 2006, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States).  Our opinions, based on our audits, are
      presented below.




Consolidated
      financial statements and financial statement schedule




In
      our
      opinion, the consolidated financial statements listed in the accompanying index
      present fairly, in all material respects, the financial position of Eclipsys
      Corporation and its subsidiaries at December 31, 2006 and 2005, and the results
      of their operations and their cash flows for each of the three years in the
      period ended December 31, 2006 in conformity with accounting principles
      generally accepted in the United States of America.  In addition, in our
      opinion, the financial statement schedule listed in the accompanying index
      presents fairly, in all material respects, the information set forth therein
      when read in conjunction with the related consolidated financial
      statements.  These financial statements and financial statement schedule
      are the responsibility of the Company’s management.  Our responsibility is
      to express an opinion on these financial statements and financial statement
      schedule based on our audits.  We conducted our audits of these statements
      in accordance with the standards of the Public Company Accounting Oversight
      Board (United States).  Those standards require that we plan and perform
      the audit to obtain reasonable assurance about whether the financial statements
      are free of material misstatement.  An audit of financial statements
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, and evaluating the overall
      financial statement presentation.  We believe that our audits provide a
      reasonable basis for our opinion.





As
      discussed in Note 3 to the consolidated financial statements, the Company
      restated its 2005 and 2004 consolidated financial statements.





As
      discussed in Note 4 to the consolidated financial statements, the Company
      changed the manner in which it accounts for share-based compensation in
      2006.





Internal
      control over financial reporting




Also,
      we
      have audited management’s assessment, included in Management’s Report on
      Internal Control Over Financial Reporting appearing under Item 9A, that Eclipsys
      Corporation did not maintain effective internal control over financial reporting
      as of December 31, 2006, because of the effect of not maintaining effective
      controls over the accuracy of the accounting for and disclosure of stock-based
      compensation expense, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The Company’s management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting.  Our responsibility is to
      express opinions on management’s assessment and on the effectiveness of the
      Company’s internal control over financial reporting based on our audit.





We
      conducted our audit of internal control over financial reporting in accordance
      with the standards of the Public Company Accounting Oversight Board (United
      States).  Those standards require that we plan and perform the audit to
      obtain reasonable assurance about whether effective internal control over
      financial reporting was maintained in all material respects.  An audit of
      internal control over financial reporting includes obtaining an understanding
      of
      internal control over financial reporting, evaluating management’s assessment,
      testing and evaluating the design and operating effectiveness of internal
      control, and performing such other procedures as we consider necessary in the
      circumstances.  We believe that our audit provides a reasonable basis for
      our opinions.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles.  A company’s internal
      control over financial reporting includes those policies and procedures that
      (i) pertain to the maintenance of records that, in reasonable detail,
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the company; (ii) provide reasonable assurance that transactions are
      recorded as necessary to permit preparation of financial statements in
      accordance with generally accepted accounting principles, and that receipts
      and
      expenditures of the company are being made only in accordance with
      authorizations of management and directors of the company; and
      (iii) provide reasonable assurance regarding prevention or timely detection
      of unauthorized acquisition, use, or disposition of the company’s assets that
      could have a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements.  Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. The following material weakness has been identified and included
      in
      management's assessment as of December 31, 2006.





The
      Company did not maintain effective controls over the accuracy of the accounting
      for and disclosure of non-cash stock-based compensation expense. Specifically,
      effective quarterly controls, including monitoring to detect input errors,
      were
      not maintained to ensure the accuracy of the amortization of stock options
      and
      consequently the Company did not timely identify an input error that occurred
      in
      the second quarter of 2006 that changed amortization of costs for certain equity
      awards. This control deficiency resulted in the misstatement of non-cash
      stock-based compensation expense, additional paid-in capital accounts and
      related financial disclosures, and in the restatement of the Company’s
      consolidated financial statements for the quarters ended June 30, 2006 and
      September 30, 2006 and in an adjustment to the consolidated financial statements
      for the quarter ended December 31, 2006. Additionally, this control deficiency
      could result in misstatements of the aforementioned accounts and disclosures
      that would result in a material misstatement of the consolidated financial
      statements that would not be prevented or detected. Accordingly, the Company
      has
      determined that this control deficiency constitutes a material
      weakness.





This
      material weakness was considered in determining the nature, timing and extent
      of
      audit tests applied in our audit of the 2006 consolidated financial statements,
      and our opinion regarding the effectiveness of the Company's internal control
      over financial reporting does not affect our opinion on those consolidated
      financial statements.




In
      our
      opinion, management's assessment that Eclipsys Corporation did not maintain
      effective internal control over financial reporting as of December 31, 2006,
      is
      fairly stated, in all material respects, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the COSO. Also, in our opinion, because of the effect of the material
      weakness described above on the achievement of the objectives of the control
      criteria, Eclipsys Corporation has not maintained effective internal control
      over financial reporting as of December 31, 2006, based on criteria established
      in *Internal
      Control - Integrated Framework* issued
      by the COSO.




PricewaterhouseCoopers
      LLP


Atlanta,
      Georgia


May
      22,
      2007


33





**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Balance Sheets****(in
                  thousands, except share data)****December
                  31,****2006**
              
              **2005****Assets**
              
              
              
              
              
              **As
                  restated**Current
                  assets:Cash
                  and cash equivalents
              
              $
              41,264
              
              $
              76,693Marketable
                  securities
              
              
              89,549
              
              
              37,455Accounts
                  receivable, net of allowance for doubtful accountsof
                  $3,907 and $5,676, respectively
              
              
              93,821
              
              
              80,833Inventory
              
              
              1,076
              
              
              2,289Prepaid
                  expenses
              
              
              22,947
              
              
              17,909Other
                  current assets
              
              
              1,026
              
              
              2,184Total
                  current assets
              
              
              249,683
              
              
              217,363Property
                  and equipment, net
              
              
              45,806
              
              
              40,640Capitalized
                  software development costs, net
              
              
              32,302
              
              
              35,690Acquired
                  technology, net
              
              
              1,224
              
              
              584Intangible
                  assets, net
              
              
              3,307
              
              
              2,940Goodwill
              
              
              12,281
              
              
              6,624Deferred
                  tax asset
              
              
              3,661
              
              
              3,866Other
                  assets
              
              
              15,014
              
              
              20,964Total
                  assets
              
              $
              363,278
              
              $
              328,671**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Deferred
                  revenue
              
              $
              103,298
              
              $
              107,889Accounts
                  payable
              
              
              19,879
              
              
              26,103Accrued
                  compensation costs
              
              
              12,997
              
              
              16,273Deferred
                  tax liability
              
              
              3,699
              
              
              3,866Other
                  current liabilities
              
              
              20,213
              
              
              10,987Total
                  current liabilities
              
              
              160,086
              
              
              165,118Deferred
                  revenue
              
              
              11,289
              
              
              16,772Other
                  long-term liabilities
              
              
              1,247
              
              
              1,252Total
                  liabilities
              
              
              172,622
              
              
              183,142Commitments
                  and contingenciesStockholders’
                  Equity:Common
                  stock, $0.01 par value, 200,000,000 shares authorized; issued and
                  outstanding,issued
                  and outstanding 52,536,853 and 49,903,325,
                  respectively
              
              
              525
              
              
              499Additional
                  paid-in capital
              
              
              495,240
              
              
              454,322Accumulated
                  deficit
              
              
              (305,359
              )
              
              (309,452
              )Accumulated
                  other comprehensive income
              
              
              250
              
              
              160Total
                  stockholders’ equity
              
              
              190,656
              
              
              145,529Total
                  liabilities and stockholders’ equity
              
              $
              363,278
              
              $
              328,671




The
      accompanying notes are an integral part of these Consolidated Financial
      Statements.




34


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Statements of Operations****(in
                  thousands, except per share data)****Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****As
                  restated**
              
              **As
                  restated**Revenues:Systems
                  and services
              
              $
              409,450
              
              $
              370,380
              
              $
              282,124Hardware
              
              
              18,092
              
              
              12,962
              
              
              26,951Total
                  revenues
              
              
              427,542
              
              
              383,342
              
              
              309,075Cost
                  and expenses:Cost
                  of systems and services
              
              
              237,914
              
              
              225,131
              
              
              168,748Cost
                  of hardware
              
              
              14,592
              
              
              11,055
              
              
              22,949Sales
                  and marketing
              
              
              63,516
              
              
              64,080
              
              
              65,599Research
                  and development
              
              
              57,973
              
              
              51,771
              
              
              58,187General
                  and administrative
              
              
              24,345
              
              
              19,479
              
              
              15,951Depreciation
                  and amortization
              
              
              15,736
              
              
              14,659
              
              
              13,284Restructuring
                  charge
              
              
              14,670
              
              
              -
              
              
              -Total
                  costs and expenses
              
              
              428,746
              
              
              386,175
              
              
              344,718Loss
                  from operations
              
              
              (1,204
              )
              
              (2,833
              )
              
              (35,643
              )Interest
                  income, net
              
              
              5,335
              
              
              3,102
              
              
              1,614Income
                  (loss) before income taxes
              
              
              4,131
              
              
              269
              
              
              (34,029
              )Provision
                  for income taxes
              
              
              38
              
              
              -
              
              
              -Net
                  income (loss)
              
              $
              4,093
              
              $
              269
              
              $
              (34,029
              )Net
                  income (loss) per common share:Basic
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )Diluted
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )Basic
                  weighted average common shares outstanding
              
              
              51,472
              
              
              47,947
              
              
              46,587Diluted
                  weighted average common shares outstanding
              
              
              52,948
              
              
              50,638
              
              
              46,587


The
      accompanying notes are an integral part of these Consolidated Financial
      Statements.





35


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Statements of Cash Flows****(in
                  thousands)****Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****As
                  restated**
              
              **As
                  restated**Operating
                  activities:Net
                  income (loss)
              
              $
              4,093
              
              $
              269
              
              $
              (34,029
              )Adjustments
                  to reconcile net income (loss) to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization
              
              
              36,681
              
              
              32,556
              
              
              27,488Provision
                  for bad debts
              
              
              1,457
              
              
              3,011
              
              
              1,800Provision
                  for income taxes
              
              
              38
              
              
              -
              
              
              -Loss
                  on sale of marketable securities
              
              
              -
              
              
              -
              
              
              131Stock
                  compensation expense
              
              
              14,103
              
              
              2,427
              
              
              1,768Changes
                  in operating assets and liabilities, excludingthe
                  effects of acquisitions:Increase
                  in accounts receivable
              
              
              (14,489
              )
              
              (18,966
              )
              
              (11,520
              )Increase
                  in prepaid expenses and other current assets
              
              
              (3,781
              )
              
              (4,507
              )
              
              (534
              )Decrease
                  / (Increase) in inventory
              
              
              1,213
              
              
              (645
              )
              
              (1,079
              )Decrease
                  / (Increase) in other assets
              
              
              2,625
              
              
              (9,283
              )
              
              (2,724
              )(Decrease)
                  / Increase in deferred revenue
              
              
              (10,571
              )
              
              1,965
              
              
              21,403(Decrease)
                  / Increase in accrued compensation
              
              
              (4,897
              )
              
              2,527
              
              
              (4,420
              )Increase
                  / (Decrease) in accounts payable and othercurrent
                  liabilties
              
              
              103
              
              
              3,973
              
              
              (969
              )Increase
                  / (Decrease) in other long-term liabilities
              
              
              (4
              )
              
              1,130
              
              
              (562
              )Total
                  adjustments
              
              
              22,478
              
              
              14,188
              
              
              30,782Net
                  cash provided by (used in) operating activities
              
              
              26,571
              
              
              14,457
              
              
              (3,247
              )Investing
                  activities:Purchases
                  of property and equipment
              
              
              (17,465
              )
              
              (19,288
              )
              
              (15,333
              )Purchases
                  of marketable securities
              
              
              (73,044
              )
              
              (117,984
              )
              
              (164,074
              )Proceeds
                  from sale of marketable securities
              
              
              20,950
              
              
              80,529
              
              
              163,943Capitalized
                  software development costs
              
              
              (14,106
              )
              
              (20,144
              )
              
              (15,194
              )Cash
                  paid for acquisitions
              
              
              (6,039
              )
              
              (312
              )
              
              (5,458
              )Net
                  cash used in investing activities
              
              
              (89,704
              )
              
              (77,199
              )
              
              (36,116
              )Financing
                  activities:Proceeds
                  from stock options exercised
              
              
              26,712
              
              
              16,853
              
              
              7,892Proceeds
                  from employee stock purchase plan
              
              
              990
              
              
              195
              
              
              1,664Net
                  cash provided by financing activities
              
              
              27,702
              
              
              17,048
              
              
              9,556Effect
                  of exchange rates on cash and cash equivalents
              
              
              2
              
              
              356
              
              
              155Net
                  decrease in cash and cash equivalents
              
              
              (35,429
              )
              
              (45,338
              )
              
              (29,652
              )Cash
                  and cash equivalents — beginning of year
              
              
              76,693
              
              
              122,031
              
              
              151,683Cash
                  and cash equivalents — end of year
              
              $
              41,264
              
              $
              76,693
              
              $
              122,031Cash
                  paid for income taxes
              
              $
              -
              
              $
              -
              
              $
              133Non-cash
                  investing activities:Purchases
                  of property and equipment
              
              $
              2,352
              
              $
              -
              
              $
              -Common
                  stock issued pursuant to earn-out agreements
              
              $
              1,673
              
              $
              2,660
              
              $
              2,500




The
      accompanying notes are an integral part of these Consolidated Financial
      Statements.





36





**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Statement of Changes in Stockholders’ Equity and Comprehensive Income
                  (Loss)****(in
                  thousands, except share data)****Common
                  Stock**
              
              
              
              **Additional
                  Paid-in**
              
              **Accumulated**
              
              **Comprehensive
                  Income**
              
              **Accumulated
                  Other Comprehensive****Shares**
              
              **Amount**
              
              **Capital**
              
              **Deficit**
              
              **(Loss)**
              
              **Income
                  (Loss)**
              
              **Total****Balance
                  at December 31, 2003, as reported**
              
              
              45,976,655
              
              $
              460
              
              $
              410,839
              
              $
              (267,778
              )
              
              
              
              $
              (367
              )
              $
              143,154Cumulative
                  effect of restatements
              
              
              
              
              
              
              
              
              7,567
              
              
              (7,914
              )
              
              
              
              
              
              
              
              (347
              )**Balance
                  at December 31, 2003, as restated**
              
              
              45,976,655
              
              
              460
              
              
              418,406
              
              
              (275,692
              )
              
              
              
              
              (367
              )
              
              142,807Exercise
                  of stock options
              
              
              872,576
              
              
              8
              
              
              7,884
              
              
              
              
              
              
              
              
              
              
              
              7,892Employee
                  stock purchase plan
              
              
              167,709
              
              
              1
              
              
              1,663
              
              
              
              
              
              
              
              
              
              
              
              1,664Issuance
                  of restricted stock
              
              
              295,000
              
              
              2
              
              
              (2
              )
              
              
              
              
              
              
              
              
              
              
              -Stock
                  compensation expense
              
              
              
              
              
              
              
              
              1,768
              
              
              
              
              
              
              
              
              
              
              
              1,768Stock
                  issued for acquisition
              
              
              184,202
              
              
              1
              
              
              2,499
              
              
              
              
              
              
              
              
              
              
              
              2,500Comprehensive
                  income:Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (34,029
              )
              $
              (34,029
              )
              
              
              
              
              (34,029
              )Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              155
              
              
              155
              
              
              155Other
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              155Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (33,874
              )**Balance
                  at December 31, 2004, as restated**
              
              
              47,496,142
              
              
              472
              
              
              432,218
              
              
              (309,721
              )
              
              
              
              
              (212
              )
              
              122,757Exercise
                  of stock options
              
              
              1,957,912
              
              
              21
              
              
              16,827
              
              
              
              
              
              
              
              
              
              
              
              16,848Employee
                  stock purchase plan
              
              
              10,848
              
              
              
              
              
              195
              
              
              
              
              
              
              
              
              
              
              
              195Issuance
                  of restricted stock
              
              
              372,500
              
              
              5
              
              
              (5
              )
              
              
              
              
              
              
              
              
              
              
              -Stock
                  compensation expense
              
              
              
              
              
              
              
              
              2,427
              
              
              
              
              
              
              
              
              
              
              
              2,427Stock
                  issued issued for acquisitions
              
              
              65,923
              
              
              1
              
              
              2,660
              
              
              
              
              
              
              
              
              
              
              
              2,661Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              269
              
              $
              269
              
              
              
              
              
              269Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              372
              
              
              372
              
              
              372Other
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              372Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              641**Balance
                  at December 31, 2005, as restated**
              
              
              49,903,325
              
              
              499
              
              
              454,322
              
              
              (309,452
              )
              
              
              
              
              160
              
              
              145,529Exercise
                  of stock options
              
              
              2,583,484
              
              
              26
              
              
              26,686
              
              
              
              
              
              
              
              
              
              
              
              26,712Employee
                  stock purchase plan
              
              
              39,638
              
              
              
              
              
              732
              
              
              
              
              
              
              
              
              
              
              
              732Issuance
                  of restricted stock
              
              
              100,000
              
              
              1
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1Stock
                  compensation expense
              
              
              
              
              
              
              
              
              14,103
              
              
              
              
              
              
              
              
              
              
              
              14,103Stock
                  issued for acquisitions
              
              
              76,458
              
              
              1
              
              
              727
              
              
              
              
              
              
              
              
              
              
              
              728Restricted
                  stock retained for tax withholdings
              
              
              (166,023
              )
              
              (2
              )
              
              (1,386
              )
              
              
              
              
              
              
              
              
              
              
              (1,388
              )Deferred
                  stock unit grants
              
              
              
              
              
              
              
              
              56
              
              
              
              
              
              
              
              
              
              
              
              56Comprehensive
                  income:Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              4,093
              
              $
              4,093
              
              
              
              
              
              4,093Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              90
              
              
              90
              
              
              90Other
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              90Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,183**Balance
                  at December 31, 2006**
              
              
              52,536,882
              
              $
              525
              
              $
              495,240
              
              $
              (305,359
              )
              
              
              
              $
              250
              
              $
              190,656


The
      accompanying notes are an integral part of these Consolidated Financial
      Statements.








37


ECLIPSYS
      CORPORATION AND SUBSIDIARIES


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS




**1.            
      Organization and Description of Business**




Eclipsys
      Corporation (“Eclipsys” or the “Company”, “We”, “Us” or “Our”) is a healthcare
      information technology company and a leading provider of advanced integrated
      information software clinical content and professional services that help
      healthcare organizations improve clinical, financial and operational
      processes.  The Company develops and licenses proprietary software and
      content that is designed for use in connection with many of the key clinical,
      administrative and financial functions that healthcare organizations
      require.  Among other things, the software enables physicians, nurses and
      other clinicians to order tests, treatments and medications, and to record,
      access and share information about patients. The software also facilitates
      hospitals’ patient admissions, scheduling, records maintenance, invoicing,
      inventory control, cost accounting, and assessment of profitability of specific
      medical procedures and personnel.  The Company’s clinical content, which is
      integrated with our software, provides practice guidelines for use by
      physicians, nurses and other clinicians.




**2.            
      Summary of Significant Accounting Policies**




**Basis
      of Presentation**




The
      consolidated financial statements include the accounts of Eclipsys and our
      wholly owned subsidiaries. All material intercompany transactions have been
      eliminated in consolidation. Eclipsys manages its business as one reportable
      segment.





**Revision
      to the Statement of Cash Flows**





The
      statement of cash flows for the year ended December 31, 2005 has been revised
      to
      reflect auction rate securities that are held "at market" or held "at rate"
      on a
      net basis. Previously, these cash flows were presented by the Company on a
      gross
      basis within "Net cash used in investing activities." The impact of this revised
      presentation was to decrease purchases of marketable securities and proceeds
      from sales of marketable securities during the year ended December 31, 2005
      by
      $384.0 million. These changes had no impact on net cash used in investing
      activities. No auction rate securities were held during the year ended December
      31, 2004.





**Segment
      Information**





The
      Company follows SFAS. 131, “Disclosures about Segments of an Enterprise and
      Related Information” (“SFAS 131”). SFAS 131 requires that a company report
      financial and descriptive information about its reportable operating segments.
      Operating segments are components of an enterprise for which separate financial
      information is available and is evaluated regularly by the chief operating
      decision maker in deciding how to allocate resources and in assessing
      performance. The Company’s chief operating decision maker currently evaluates
      the Company’s operations from a number of different operational perspectives
      including but not limited to a client by client basis. The Company derives
      all
      significant revenues from a single reportable operating segment of business,
      healthcare information technology. Accordingly, the Company does not report
      more
      than one segment; nevertheless, management evaluates, at least quarterly,
      whether the Company continues to have one single reportable
      segment.





**Use
      of Estimates**




The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets, liabilities, revenues and expenses, and disclosures of
      contingent assets and liabilities. The estimates and assumptions used in the
      accompanying consolidated financial statements are based upon management’s
      evaluation of the relevant facts and circumstances as of the date of the
      financial statements. Actual results could differ from those estimates. The
      most
      significant estimates relate to the allowance for doubtful accounts, revenues
      recognized, the amounts recorded for capitalized software development costs
      and
      related useful lives, the warranty reserve, stock-based compensation, the
      valuation allowance for deferred tax assets, and allocation of purchase prices
      to acquisitions.




**Cash
      and Cash Equivalents**




For
      purposes of the consolidated statements of cash flows, the Company considers
      all
      highly liquid investments with an original maturity of three months or less
      to
      be cash equivalents.




**Revenue
      Recognition**




Revenues
      are derived from licensing of computer software; software and hardware
      maintenance; professional services (including implementation, integration,
      training and consulting); remote hosting; outsourcing; network services; and
      the
      sale of computer hardware.




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 7 years. We evaluate revenue
      recognition on a contract-by-contract basis as the terms of each arrangement
      vary. The evaluation of our contractual arrangements often requires judgments
      and estimates that affect the timing of revenue recognized in our statements
      of
      operations. Specifically, we may be required to make judgments
      about:




- whether
          the fees associated with our software and services are fixed or
          determinable;
- whether
          collection of our fees is considered probable;
- whether
          professional services are essential to the functionality of the related
          software;
- whether
          we have the ability to make reasonably dependable estimates in the application
          of the percentage-of-completion method; and
- whether
          we have verifiable objective evidence of fair value for our software and
          services.



38


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




Many
      of
      our contracts with our clients are multiple element arrangements which may
      provide for multiple software modules including the rights to unspecified future
      versions and releases we may offer within the software suites the client
      purchases or rights to unspecified 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 unspecified future software or platform protection
      rights.  We refer to these arrangements as traditional software
      contracts.  Finally, we offer much of our software and services on a
      stand-alone basis. Revenue under each of these arrangements is recognized as
      set
      forth below:




*Subscription
      Contracts*




Our
      subscription contracts typically include the following
      deliverables:




- Software
          license fees;
- Maintenance;
- Professional
          services; and
- Third
          party hardware or remote hosting services.



Software
      license fees are recognized ratably over the term of the contract, commencing
      upon the delivery of the software provided that (1) there is evidence of an
      arrangement, (2) the fee is fixed or determinable and (3) collection
      of our fee is considered probable. The value of the software is determined
      using
      the residual method pursuant to SOP 98-9, “Modification of SOP 97-2,
      Software Revenue Recognition, With Respect to Certain Transactions." These
      contracts contain the rights to unspecified future software within the suite
      purchased and/or unspecified platform transfer rights that do not qualify for
      exchange accounting. Accordingly, these arrangements are accounted for pursuant
      to paragraphs 48 and 49 of SOP 97-2. Under certain arrangements, we
      capitalize related direct costs consisting of third party software costs and
      direct software implementation costs. These costs are amortized over the term
      of
      the arrangement.





In
      the
      case of maintenance revenues, vendor-specific objective evidence (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 and 66 of SOP 97-2.




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




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




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




*Traditional
      Software Contracts*




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




Software
            license fees;
        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.




39


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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




*Software
      Contracts Requiring Contract Accounting*




We
      enter
      into certain multiple element arrangements containing milestone provisions
      in
      which the professional services are considered essential to the functionality
      of
      the software. Under these arrangements, software license fees and professional
      service revenues are recognized using the percentage-of-completion method over
      the implementation period which generally ranges from 12 to 24 months.
      Under the percentage-of-completion method, revenue and profit are recognized
      throughout the term of the implementation based upon estimates of total labor
      hours incurred and revenues to be generated over the term of the implementation.
      Changes in estimates of total labor hours and the related effect on the timing
      of revenues and profits are recognized in the period in which they are
      determinable. Accordingly, changes in these estimates could occur and have
      a
      material effect on our operating results in the period of change.




*Stand-Alone
      Software and Services*




We
      also
      market certain software and services on a stand-alone basis, including the
      following:


Software
            license fees;
        Maintenance;
        Professional
            services,
        Hardware,
        Network
            Services,
        Outsourcing,
            and
        Remote
            Hosting
            services.


Revenue
      related to such software and services are recognized as
      follows:




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




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




Hardware
      is recognized upon delivery pursuant to SAB 104.




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




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




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





The
      Company records reimbursable out-of-pocket expenses in both systems and services
      revenues and as a direct cost of system and services in accordance with EITF
      01-14, “Income Statement Characterization of Reimbursements Received for
“Out-of-Pocket” Expenses Incurred” ** (“EITF
      01-14”) *.* For
      2006, 2005, and 2004 reimbursable out-of-pocket expenses were $9.0 million,
      $9.2
      million and $5.7 million, respectively.




In
      accordance with EITF 00-10, “Accounting for Shipping and Handling Fees,” the
      Company has classified the re-imbursement by clients of shipping and handling
      costs as revenue and the associated cost as cost of revenue.




40


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS -
          (Continued)


*Warranty
      Reserve*





The
      agreements that we use to license our software include a limited warranty
      providing that our software, in its unaltered form, will perform substantially
      in accordance with the related documentation. Through September 30, 2003,
      we did not incur any material warranty costs related to our software. Due to
      the
      response time issues related to our software that we identified in October
      2003,
      we recorded provisions related to warranty costs of $4.6 million through
      December 31, 2004. This provision was reduced by $0.3 million during the year
      ended December 31, 2006, as a result of a decrease in the estimation of expected
      warranty costs. To date $3.9 million has been expended against the provision.
      Warranty costs are charged to costs of systems and services revenues when they
      are probable and reasonably estimable. We have substantially completed the
      work
      under the warranty reserve. At December 31, 2006, the remaining liability is
      $0.4 million which is expected to be utilized in 2007.




A
      summary
      of the activity in our warranty reserve is as follows:


(in
                  thousands)December
                  31,2006
              
              2005Beginning
                  Balance
              
              $
              1,071
              
              $
              2,057Provision
                  reduction
              
              
              (290
              )
              
              -Warranty
                  utilized
              
              
              (343
              )
              
              (986
              )Ending
                  Balance
              
              $
              438
              
              $
              1,071


**Marketable
      Securities**





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.





Marketable
      securities balances consist of the following:


(in
                  thousands)December
                  31,2006
              
              2005Security
                  TypeAuction
                  Rate Securities:Debt
                  securities issued by the U.S. Treasury and other U.S. government
                  corporations and agencies
              
              $
              45,139
              
              $
              14,117Debt
                  securities issued by states of the United States and political
                  subdivisions of the states
              
              
              21,187
              
              
              17,08466,326
              
              
              31,201Other
                  Securities:Government
                  Bonds/Agencies
              
              
              11,259
              
              
              6,206Other
                  debt securities
              
              
              11,964
              
              
              48Total
              
              $
              89,549
              
              $
              37,455


As
      of
      December 31, 2006, most of our marketable securities have a maturity of more
      than 1 year. Auction rate securities of $21.2 million, held at December 31,
      2006, typically have an interest rate reset feature every 30 days pursuant
      to
      which we can sell or reset the interest rate on the security. Eclipsys policy
      for all securities in the portfolio is to hold them less than one year, and
      therefore, we believe that these investments are part of our working capital
      and
      are appropriately classified as current assets.





In
      an
      effort to maximize the yield of our excess cash, we transferred cash in 2006
      from money market investments to marketable securities, which include auction
      rates securities and government bonds. These funds remain highly
      liquid.





41


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


**Accounts
      Receivable and Unbilled Receivables**




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.  Client
      payments are due under these arrangements in varying amounts primarily 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.




Accounts
      receivable was composed of the following:


(in
                  thousands)December
                  31,2006
              
              2005Billed
                  accounts receivable, net
              
              $
              77,570
              
              $
              69,772Total
                  unbilled accounts receivable, net
              
              
              16,251
              
              
              11,061Total
                  accounts receivable, net
              
              $
              93,821
              
              $
              80,833





**Allowance
      for Doubtful Accounts**




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







**Inventory**




Inventory
      consists of computer equipment, parts and peripherals and is stated at the
      lower
      of cost or market. Cost is determined using the first-in, first-out
      method.




**Capitalized
      Software Development Costs**




We
      capitalize a portion of our computer software development costs incurred
      subsequent to establishing technological feasibility. These costs include
      salaries, benefits, consulting and other directly related costs incurred in
      connection with programming and testing software. Capitalization ceases when
      the
      software is generally released for sale to clients. Management monitors the
      net
      realizable value of development costs to ensure that the investment will be
      recovered through future revenues. Capitalized software development costs were
      $14.1 million, $20.1 million, and $15.2 million for the years ended
      December 31, 2006, 2005, and 2004, respectively. These costs are amortized
      over the greater of the ratio that current revenues are to total and anticipated
      future revenues for the applicable software or the straight-line method over
      three years. Amortization of capitalized software development costs, which
      is
      included in costs of systems and services revenues, was $17.5 million, $14.3
      million, and $10.6 million for the years ended December 31, 2006,
      2005, and 2004, respectively. Accumulated amortization of capitalized software
      development costs was $27.6 million and $19.5 million as of December 31,
      2006 and 2005, respectively.




**Acquired
      Technology and Intangible Assets**




Acquired
      technology and intangible assets are amortized over their estimated useful
      lives
      generally on a straight-line basis. The carrying values of acquired technology
      and intangible assets are reviewed if the facts and circumstances suggest that
      they may be impaired and goodwill is reviewed annually in accordance with
      SFAS 142. Testing would be done on a more frequent basis, if impairment
      indicators arise. The test for impairment is based upon a number of factors,
      including operating results, business plans and projected future cash flows.
      No
      impairment has been identified or recorded during fiscal 2006 or 2005.





During
      the year ended December 31, 2006, we recorded goodwill of $3.9 million and
      other
      intangible assets of $2.4 million in connection with the acquisition of two
      entities. During the year ended December 31, 2006, we also recorded goodwill
      of
      $1.7 million in connection with earnout agreements. See Note 11, “Acquisitions,”
for additional information.





The
      changes in the carrying amount of goodwill for the year ended December 31,
      2006
      and 2005, were as follows:


(in
                  thousands)December
                  31,2006
              
              2005Beginning
                  Balance
              
              $
              6,624
              
              $
              2,863Earnouts
              
              $
              1,719
              
              $
              3,761Sysware
                  and Mosum acquisitions
              
              
              3,029
              
              
              -VSA
                  acquisition
              
              
              909
              
              
              -Ending
                  Balance
              
              $
              12,281
              
              $
              6,624





42
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


For
      the
      year ended December 31, 2006 and 2005, the gross and net amounts for acquired
      technology, ongoing customer relationships and goodwill consist of the
      following:





(in
                  thousands)December
                  31, 2006
              
              December
                  31, 2005Gross
              
              
              
              
              
              Net
              
              
              Gross
              
              
              
              
              
              NetCarrying
              
              
              Accumulated
              
              
              Book
              
              
              Carrying
              
              
              Accumulated
              
              
              Book
              
              
              EstimatedAmount
              
              
              Amortization
              
              
              Value
              
              
              Amount
              
              
              Amortization
              
              
              Value
              
              
              LifeIntangibles
                  subject to amortizationAcquired
                  technology
              
              $
              1,967
              
              $
              (743
              )
              $
              1,224
              
              $
              914
              
              $
              (330
              )
              $
              584
              
              
              3-5
                  yearsOngoing
                  customer relationships
              
              
              5,644
              
              
              (2,337
              )
              
              3,307
              
              
              4,335
              
              
              (1,395
              )
              
              2,940
              
              
              5-7
                  yearsTotal
              
              $
              7,611
              
              $
              (3,080
              )
              $
              4,531
              
              $
              5,249
              
              $
              (1,725
              )
              $
              3,524Intangibles
                  not subject to amortization:Goodwill
              
              
              
              
              
              
              
              $
              12,281
              
              
              
              
              
              
              
              $
              6,624 Amortization
        expense was $1.3 million for the year-ended December 31, 2006, comprised
        of $0.4
        million for acquired technology and $0.9 million for client relationships. 
Amortization expense was $1.2 million for the year-ended December 31, 2005,
        comprised of $0.3 million for acquired technology and $0.9 million for client
        relationships.  Amortization expense for the year-ended December 31, 2004
        was $0.6 million and mostly related to client relationships.





The
      estimated aggregate amortization expense for each of the five succeeding fiscal
      years is as follows:


(in
                  thousands)2007
              
              2008
              
              2009
              
              2010
              
              2011
              
              TotalTotal
                  amortization expense
              
              $
              1,742
              
              $
              1,463
              
              $
              845
              
              $
              303
              
              $
              178
              
              $
              4,531





Amortization
      of the acquired technology is included in the cost of systems and
      services.





**Long-Lived
      Assets**




Long-lived
      assets, including separate and identifiable intangible assets, are reviewed
      for
      potential impairment at such time when events or changes in circumstances
      indicate that the carrying amount of an asset might not be recoverable. Any
      impairment loss would be recognized when the sum of the expected, undiscounted
      net cash flows is less than the carrying amount of the asset. If an asset is
      impaired, the asset is written down to its estimated fair value. We did not
      record any impairment of long-lived assets as of December 31, 2006 and
      2005.




**Fair
      Value of Financial Instruments**




The
      carrying amounts of our financial instruments, including cash and cash
      equivalents, accounts receivable, and other current liabilities, approximate
      fair value due to the short-term nature of these assets and liabilities.




**Income
      Taxes**




The
      provision for income taxes and corresponding balance sheet accounts are
      determined in accordance with SFAS 109, “Accounting for Income Taxes”
(“SFAS 109”). Under SFAS 109, deferred tax assets and liabilities are
      determined based on the temporary differences between the bases of certain
      assets and liabilities for income tax and financial reporting purposes. The
      deferred tax assets and liabilities are classified according to the financial
      statement classification of the assets and liabilities generating the
      differences. The Company provides a valuation allowance for that portion of
      deferred tax assets, which it cannot determine is more likely than not to be
      recognized due to the Company’s cumulative losses and the uncertainty as to
      future recoverability.




**Stock-Based
      Compensation**




See
      Note
      3 for discussion of the restatement relating to stock-based compensation. Prior
      to January 1, 2006, we accounted for our stock-based employee compensation
      arrangements under the intrinsic value method prescribed by APB 25, as allowed
      by SFAS 123, as amended by SFAS 148. As a result, no expense was recognized
      for
      options to purchase our common stock that were granted with an exercise price
      equal to fair market value at the date of grant, and no expense was recognized
      in connection with purchases under our employee stock purchase plan for the
      years ended December 31, 2005, and 2004.





In
      December 2004, FASB issued SFAS 123(R), which amended SFAS 123. SFAS 123(R)
      required measurement of the cost of share-based payments to employees, including
      grants of employee stock options, to be recognized in the financial statements
      based on their fair values beginning with the first annual period after June
      15,
      2005. Subsequent to the effective date, the pro forma disclosures previously
      made under SFAS 123 are no longer an alternative to financial statement
      recognition.


43


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Effective
      January 1, 2006, we adopted SFAS 123(R) using the modified prospective method.
      Under this method, compensation cost recognized during the year ended December
      31, 2006, includes: (a) compensation cost for all share-based payments granted
      prior to, but not yet vested as of January 1, 2006, based on the grant date
      fair
      value estimated in accordance with the original provisions of SFAS 123 amortized
      over the awards vesting period, and (b) compensation cost for all share-based
      payments granted subsequent to January 1, 2006, based on the grant-date fair
      value estimated in accordance with the provisions of SFAS 123(R) amortized
      on a
      straight-line basis over the awards vesting period. The fair value of stock
      options is estimated at the date of grant using the Black-Scholes option pricing
      model with weighted average assumptions for the activity under our stock plans.
      Option pricing model input assumptions such as expected term, expected
      volatility, and risk-free interest rate, impact the fair value estimate.
      Further, the forfeiture rate impacts the amount of aggregate compensation.
      These
      assumptions are subjective and generally require significant analysis and
      judgment to develop. When estimating fair value, some of the assumptions were
      based on or determined from external data (for example the risk free interest
      rate) and other assumptions were derived from our historical experience with
      share-based payment arrangements (for example, volatility and expected term).
      The appropriate weight to place on historical experience is a matter of
      judgment, based on relevant facts and circumstances. Implementation of SFAS
      123(R) resulted in $9.7 million in stock option expense during the year ended
      December 31, 2006. The adoption of SFAS 123(R) had no impact on cash flows
      from
      operations or financing activities. For additional information, see Notes 3
      and
      4.




We
      have
      elected to use the simplified method for estimating our expected term equal
      to
      the midpoint between the vesting period and the contractual term as allowed
      by
      SAB 107, “Share-Based Payment.” We currently estimate volatility by using the
      weighted average historical volatility of our common stock. The risk-free
      interest rate is the implied yield currently available on U.S. Treasury
      zero-coupon issues with a remaining term equal to the expected term input to
      the
      Black-Scholes model. We estimate forfeitures using a weighted average historical
      forfeiture rate. Our estimate of forfeitures will be adjusted over the requisite
      service period based on the extent to which actual forfeitures differ, or are
      expected to differ, from our estimate.





**Basic
      and Diluted Net Income (Loss) Per Share**




For
      all
      periods presented, basic and diluted net income (loss) per common share is
      presented in accordance with SFAS 128, “Earnings per Share,” which provides for
      the accounting principles used in the calculation of earnings per share. Basic
      net income (loss) per common share excludes dilution and is calculated by
      dividing net income (loss) available to common shareholders by the weighted
      average number of shares of common stock outstanding during the period. Diluted
      net income per common share reflects the potential dilution from assumed
      conversion of all dilutive securities such as stock options, warrants and
      unvested restricted stock using the treasury stock method.  When the
      effects of the outstanding stock options or warrants are anti-dilutive, they
      are
      not included in the calculation of diluted earnings per common share. For the
      year ended December 31, 2006, anti-dilutive stock options totaling 4.0 million
      shares were excluded from the determination of diluted earnings per common
      share.





The
      computations of the basic and diluted earnings per common share were as follows:


(in
                  thousands, except per share data)December
                  31,2006
              
              2005
              
              2004As
                  restated
              
              As
                  restatedBasic
                  earnings per common share:Net
                  income (loss)
              
              $
              4,093
              
              $
              269
              
              $
              (34,029
              )Weighted
                  average common shares outstanding
              
              
              51,472
              
              
              47,947
              
              
              46,587Basic
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )Diluted
                  net income (loss) per common share :Net
                  income (loss)
              
              $
              4,093
              
              $
              269
              
              $
              (34,029
              )Weighted
                  average common shares outstanding
              
              
              51,472
              
              
              47,947
              
              
              46,587Dilutive
                  effect of:Stock
                  options, restricted stock awards, and other stockcompensation
              
              
              1,442
              
              
              2,618
              
              
              -Contingent
                  shares issuable pursuant to earn-outagreements
              
              
              34
              
              
              73
              
              
              -Total
                  shares
              
              
              52,948
              
              
              50,638
              
              
              46,587Diluted
                  net income (loss) per common share
              
              $
              0.08
              
              $
              0.01
              
              $
              (0.73
              )




**Concentration
      of Credit Risk**




Our
      clients operate primarily in the healthcare industry. We sell our software
      and
      services under contracts with varying terms. The accounts receivable amounts
      are
      unsecured. We believe that the allowance for doubtful accounts is sufficient
      to
      cover credit losses. We do not believe that the loss of any one client would
      have a material effect on our financial position.




44


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**Foreign
      Currency**




Our
      financial position and results of operations of foreign subsidiaries are
      measured using the currency of the respective countries as the functional
      currency. Assets and liabilities are translated at the foreign exchange rate
      in
      effect at the balance sheet date, while revenue and expenses for the year are
      translated at the average exchange rate in effect during the year. Translation
      gains and losses are not included in determining net income or loss but are
      accumulated and reported as a separate component of stockholders’ equity. We
      have not entered into any hedging contracts during the three-year period ended
      December 31, 2006.




**Comprehensive
      Income**




SFAS
      130,
“Reporting Comprehensive Income” requires that the total changes in equity
      resulting from revenue, expenses, and gains and losses, including those that
      do
      not affect the accumulated deficit, be reported. Accordingly, those amounts,
      which are comprised solely of foreign currency translation adjustments, are
      included in other comprehensive income in the consolidated statement of changes
      in stockholders’ equity.






**New
      Accounting Pronouncements**




In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 enhances existing guidance
      for measuring assets and liabilities using fair value. Prior to the issuance
      of
      SFAS 157, guidance for applying fair value was incorporated in several
      accounting pronouncements. SFAS 157 provides a single definition of fair value,
      together with a framework for measuring it, and requires additional disclosure
      about the use of fair value to measure assets and liabilities. SFAS 157 also
      emphasizes that fair value is a market-based measurement, not an entity-specific
      measurement, and sets out a fair value hierarchy with the highest priority
      being
      quoted prices in active markets. Under SFAS 157, fair value measurements are
      disclosed by level within that hierarchy. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. Eclipsys has not yet determined
      the
      impact of adopting SFAS 157 on its financial statements.





In
      September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans” (“SFAS 158”), an amendment of
      SFAS 87, 88, 106, and 132R. The requirement by SFAS 158 to recognize the funded
      status of a benefit plan and the disclosure requirements of SFAS 158 are
      effective as of the end of the fiscal year ending after December 15, 2006 for
      entities with publicly traded equity securities. The requirement to measure
      plan
      assets and benefit obligations as of the date of the employer’s fiscal year-end
      statement of financial position is effective for fiscal years ending after
      December 15, 2008. The adoption of SFAS 158 did not have a material effect
      on
      the Company’s financial position at December 31, 2006.





In
      September 2006, the Securities and Exchange Commission released SAB 108, which
      provides the Staff's views on applying generally accepted accounting principles
      to the quantification of financial statement errors based on the effects of
      the
      error on each of a company’s financial statements. SAB 108 is effective for
      financial statements issued for fiscal years beginning after November 15, 2006.
      SAB 108 did not have a material impact on Eclipsys’ results of
      operations.





In
      June
      2006, the FASB issued Financial Interpretation 48, "Accounting for Uncertainty
      in Income Taxes" (FIN 48) which clarifies the accounting for uncertainty in
      income taxes recognized in financial statements in accordance with SFAS 109,
      "Accounting for Income Taxes." This Interpretation prescribes a recognition
      threshold and measurement attribute of tax positions taken or expected to be
      taken on a tax return. We adopted this Interpretation effective January 1,
      2007.
      The adoption did not have a material impact on our results of
      operations.





In
      June
      2006, EITF 06-3, “How Sales Taxes Collected from Clients and Remitted to
      Governmental Authorities Should Be Presented in the Income Statement (That
      is,
      Gross Versus Net Presentation)” (“EITF 06-3”) was issued. EITF 06-3 requires
      disclosure of the presentation of taxes on either a gross (included in revenues
      and costs) or a net (excluded from revenue) basis as an accounting policy
      decision. The provisions of this standard are effective for interim and annual
      reporting periods beginning after December 15, 2006. The adoption of EITF 06-3
      did not have a material impact on our consolidated financial
      statements.





**3.**  **Review
        of Stock Option Practices and Restatements of Consolidated Financial
        Statements**




***Review
      of Historical Stock Option Practices***




As
      previously announced on February 13, 2007, the Company initiated a voluntary
      review of its stock option grants addressing the timing of the grants and their
      related accounting and tax treatment, including whether the Company properly
      applied Accounting Principles Board Opinion (“APB”) 25 “Accounting for Stock
      Issued to Employees” (“APB 25”), in accounting for those grants. This review was
      conducted under the oversight of a special committee, consisting of two
      independent directors of the Company, as appointed by our Board of Directors.
      Outside counsel was engaged to conduct investigative and analytical portions
      of
      the review.




The
      review covered all stock option grants made from the Company’s initial public
      offering in August 1998 until the present, with particular focus upon grants
      made before implementation of the Sarbanes-Oxley Act in July 2002.




45
 **ECLIPSYS
        CORPORATION AND SUBSIDIARIES**


NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




***Findings***




Through the
      review, the Company identified various stock option grants made during the
      period that had exercise prices lower than the fair market value of the
      Company’s common stock on the appropriate accounting measurement dates for those
      grants. Most of these instances occurred from March 1999 until August 2002;
      during that period there were instances of selecting favorable grant dates
      and
      associated exercise prices with hindsight, repricing of previously issued
      options to lower exercise prices, adding additional stock options after the
      fact
      to a previously approved batch of options, and reallocation of previously issued
      options to different recipients at a later time, as well as administrative
      errors. The affected options were widely distributed to various personnel
      throughout the organization, and were not focused on grants to officers or
      other
      selected optionees.




The
      Company concluded that it did not properly apply APB 25 in accounting for some
      past stock option grants, primarily during the period from March 1999 to August
      2002, and that approximately $8.9 million in additional aggregate non-cash
      stock-based compensation expense should have been recognized over the period
      1999 through 2005.  The errors have been grouped into the following
      five categories:




*Selection
      of Grant Dates and Associated Exercise Prices with Hindsight*




It
      was
      determined that the exercise prices used for 6.5 million options,
      representing 15 separate grant dates, were selected in hindsight, often
      resulting in a more favorable exercise price than the fair market value of
      the
      underlying shares on the appropriate accounting measurement date. This resulted
      in an aggregate adjustment of $5.1 million.




*Reallocated
      Options*




It
      was
      determined that 113,132 options were reallocated from one recipient to another
      after the first or “principal” measurement date, resulting in an incorrect
      measurement date for the allocated options. This resulted in an aggregate
      adjustment of $0.9 million.




*Adding
      Stock Options to a Previously Approved Batch of Options*




It
      was
      determined that 510,818 option grants were added to a prior batch of approved
      options after the fact. This error resulted in an aggregate adjustment of $1.2
      million.




*Re-priced
      Options*




It
      was
      determined that 189,500 options were originally granted in the first and second
      quarters of 2000 and subsequently repriced in one stated grant date in May
      2000;
      however, variable accounting treatment under FIN 44 was not applied to these
      options to properly account for the re-pricing of these options. This error
      resulted in an aggregate adjustment of $1.2 million.




*Options
      Granted with Administrative Errors*




It
      was
      determined that 140,172 options granted had incorrect measurement dates due
      to
      administrative errors in processing. The administrative errors resulted in
      an
      aggregate adjustment of $0.5 million.




*Adjustments*




The
      impact from recognizing stock-based compensation expense resulting from the
      investigation of past stock option grants and
      other
      adjustments is as follows (in thousands):


**Net
                  Income****(Loss)
                  as**
              
              **Stock-Based**
              
              
              
              
              
              **Net
                  Income****Previously
                  Reported**
              
              **Compenation
                  Expense**
              
              **Other
                  Adjustments**
              
              **Total
                  Adjustments**
              
              **(Loss)
                  as Restated**Cumulatived
                  effect as of the beginning of fiscal 2004
              
              
              
              
              $
              (7,567
              )
              $
              (347
              )
              $
              (7,914
              )**Years
                  ended December 31,**2004
              
              
              (32,565
              )
              
              (1,291
              )
              
              (173
              )
              
              (1,464
              )
              
              (34,029
              )2005
              
              
              485
              
              
              (74
              )
              
              (142
              )
              
              (216
              )
              
              269Cumulative
                  effect as of the end of fiscal 2005
              
              
              
              
              $
              (8,932
              )
              $
              (662
              )
              $
              (9,594
              )


*Adjustments
      and Impact on Financial Statements*




To
      correct our past accounting for stock options, we recorded additional
      stock-based compensation expense of $0.1 million for the year ended
      December 31, 2005, $1.3 million for the year ended December 31, 2004 and $7.5
      million for the periods prior to December 31, 2003. In addition to restating
      the
      consolidated financial statements to reflect the findings of the stock option
      review, we are recording additional adjustments, not included in previously
      filed financial statements due to their immateriality. Other adjustments to
      the
      financial statements relate to sales and use tax of $0.3 million not previously
      self-assessed on certain fixed asset purchases and the timing of revenue
      recognition on one professional service client engagement of less than $0.1
      million.







46


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The
      cumulative effect of the restatements through December 31, 2003 increased
      additional paid-in capital by $7.5 million and increased accumulated deficit
      by
      $7.9 million.




In
      addition, the Company evaluated the impact of the restatements on its tax
      provision. Based on the analysis, the Company did not record an incremental
      income tax provision for the periods impacted by the restatement as the Company
      had previously provided a full valuation allowance on its deferred tax asset.
      Additionally, the Company recorded a liability of $0.5 million as of December
      31, 2006 and 2005 for payroll withholding taxes related to options issued at
      a
      discount.




The
      following table presents the effects of the stock-based compensation, related
      payroll tax adjustments and other adjustments made to the Company’s previously
      reported consolidated balance sheet as of December 31, 2005 (in thousands,
      except share amounts):


**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Balance Sheets****(in
                  thousands, except share data)****December
                  31, 2005****As
                  previously reported**
              
              **Adjustments**
              
              **As
                  Restated****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              76,693
              
              $
              -
              
              $
              76,693Marketable
                  securities
              
              
              37,455
              
              
              -
              
              
              37,455Accounts
                  receivable, net of allowance for doubtful accounts of $5,676 and
                  $4,952 at
                  December 31, 2005 and 2004, respectively
              
              
              80,833
              
              
              -
              
              
              80,833Inventory
              
              
              2,289
              
              
              -
              
              
              2,289Prepaid
                  expenses
              
              
              17,909
              
              
              -
              
              
              17,909Other
                  current assets
              
              
              2,184
              
              
              -
              
              
              2,184Total
                  current assets
              
              
              217,363
              
              
              -
              
              
              217,363Property
                  and equipment, net
              
              
              40,500
              
              
              140
              
              
              40,640Capitalized
                  software development costs, net
              
              
              35,690
              
              
              -
              
              
              35,690Acquired
                  technology, net
              
              
              584
              
              
              -
              
              
              584Intangible
                  assets, net
              
              
              2,940
              
              
              -
              
              
              2,940Goodwill
              
              
              6,624
              
              
              -
              
              
              6,624Deferred
                  tax asset
              
              
              4,124
              
              
              (258
              )
              
              3,866Other
                  assets
              
              
              20,964
              
              
              -
              
              
              20,964Total
                  assets
              
              $
              328,789
              
              $
              (118
              )
              $
              328,671**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Deferred
                  revenue
              
              $
              107,960
              
              $
              (71
              )
              $
              107,889Accounts
                  payable
              
              
              26,103
              
              
              -
              
              
              26,103Accrued
                  compensation costs
              
              
              15,974
              
              
              299
              
              
              16,273Deferred
                  tax liability
              
              
              4,124
              
              
              (258
              )
              
              3,866Other
                  current liabilities
              
              
              10,413
              
              
              574
              
              
              10,987Total
                  current liabilities
              
              
              164,574
              
              
              544
              
              
              165,118Deferred
                  revenue
              
              
              16,772
              
              
              -
              
              
              16,772Other
                  long-term liabilities
              
              
              1,252
              
              
              -
              
              
              1,252Total
                  liabilities
              
              
              182,598
              
              
              544
              
              
              183,142Commitments
                  and contingenciesStockholders’
                  equity:Common
                  stock, $0.01 par value, 200,000,000 shares authorized; issued and
                  outstanding,issued
                  and outstanding 52,536,853 and 49,903,325,
                  respectively
              
              
              499
              
              
              -
              
              
              499Additional
                  paid-in capital
              
              
              445,390
              
              
              8,932
              
              
              454,322Accumulated
                  deficit
              
              
              (299,858
              )
              
              (9,594
              )
              
              (309,452
              )Accumulated
                  other comprehensive income
              
              
              160
              
              
              -
              
              
              160Total
                  stockholders’ equity
              
              
              146,191
              
              
              (662
              )
              
              145,529Total
                  liabilities and stockholders’ equity
              
              $
              328,789
              
              $
              (118
              )
              $
              328,671




47
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




The
      following table presents the effects of the stock-based compensation, related
      tax payroll adjustments and other adjustments made to the Company’s previously
      reported consolidated statements of operations (in thousands, except per share
      amounts):




**Consolidated
                  Statements of Operations****(in
                  thousands, except per share data)****Year
                  Ended December 31, 2005**
              
              **Year
                  Ended December 31, 2004****As
                  previously reported**
              
              **Adjustments**
              
              **As
                  restated**
              
              **As
                  previously reported**
              
              **Adjustments**
              
              **As
                  restated**Revenues:Systems
                  and services
              
              $
              370,309
              
              $
              71
              
              $
              370,380
              
              $
              282,124
              
              $
              -
              
              $
              282,124Hardware
              
              
              12,962
              
              
              -
              
              
              12,962
              
              
              26,951
              
              
              -
              
              
              26,951Total
                  revenues
              
              
              383,271
              
              
              71
              
              
              383,342
              
              
              309,075
              
              
              -
              
              
              309,075Cost
                  and expenses:Cost
                  of systems and services
              
              
              225,080
              
              
              51
              
              
              225,131
              
              
              168,393
              
              
              355
              
              
              168,748Cost
                  of hardware
              
              
              11,055
              
              
              -
              
              
              11,055
              
              
              22,949
              
              
              -
              
              
              22,949Sales
                  and marketing
              
              
              64,140
              
              
              (60
              )
              
              64,080
              
              
              65,024
              
              
              575
              
              
              65,599Research
                  and development
              
              
              51,789
              
              
              (18
              )
              
              51,771
              
              
              58,095
              
              
              92
              
              
              58,187General
                  and administrative
              
              
              19,191
              
              
              288
              
              
              19,479
              
              
              15,524
              
              
              427
              
              
              15,951Depreciation
                  and amortization
              
              
              14,659
              
              
              -
              
              
              14,659
              
              
              13,284
              
              
              -
              
              
              13,284Total
                  costs and expenses
              
              
              385,914
              
              
              261
              
              
              386,175
              
              
              343,269
              
              
              1,449
              
              
              344,718Loss
                  from operations
              
              
              (2,643
              )
              
              (190
              )
              
              (2,833
              )
              
              (34,194
              )
              
              (1,449
              )
              
              (35,643
              )Interest
                  income, net
              
              
              3,128
              
              
              (26
              )
              
              3,102
              
              
              1,629
              
              
              (15
              )
              
              1,614Income
                  (loss) before income taxes
              
              
              485
              
              
              (216
              )
              
              269
              
              
              (32,565
              )
              
              (1,464
              )
              
              (34,029
              )Provision
                  for income taxes
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              
              
              
              -Net
                  income (loss)
              
              $
              485
              
              $
              (216
              )
              $
              269
              
              $
              (32,565
              )
              $
              (1,464
              )
              $
              (34,029
              )Net
                  income (loss) per share:Basic
                  net income (loss) per common share
              
              $
              0.01
              
              
              
              
              $
              0.01
              
              $
              (0.70
              )
              
              
              
              $
              (0.73
              )Diluted
                  net income (loss) per common share
              
              $
              0.01
              
              
              
              
              $
              0.01
              
              $
              (0.70
              )
              
              
              
              $
              (0.73
              )Basic
                  weighted average common shares outstanding
              
              
              47,947
              
              
              
              
              
              47,947
              
              
              46,587
              
              
              
              
              
              46,587Diluted
                  weighted average common shares outstanding
              
              
              50,644
              
              
              
              
              
              50,638
              
              
              46,587
              
              
              
              
              
              46,587




48


ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


The
      following table presents the effects of the stock-based compensation, related
      payroll tax adjustments and other adjustments made to the Company’s previously
      reported consolidated statements of cash flows (in thousands):




**ECLIPSYS
                  CORPORATION AND SUBSIDIARIES****Consolidated
                  Statements of Cash Flows****(in
                  thousands)****Year
                  Ended December 31, 2005**
              
              **Year
                  Ended December 31, 2004****As
                  previously reported**
              
              **Adjustments**
              
              **As
                  restated**
              
              **As
                  previously reported**
              
              **Adjustments**
              
              **As
                  restated**Operating
                  activities:Net
                  income (loss)
              
              $
              485
              
              $
              (216
              )
              $
              269
              
              $
              (32,565
              )
              $
              (1,464
              )
              $
              (34,029
              )Adjustments
                  to reconcile net income (loss) to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization
              
              
              32,472
              
              
              84
              
              
              32,556
              
              
              27,410
              
              
              78
              
              
              27,488Provision
                  for bad debts
              
              
              3,011
              
              
              -
              
              
              3,011
              
              
              1,800
              
              
              -
              
              
              1,800Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Loss
                  on sale of marketable securities
              
              
              -
              
              
              -
              
              
              -
              
              
              131
              
              
              -
              
              
              131Stock
                  compensation expense
              
              
              2,353
              
              
              74
              
              
              2,427
              
              
              477
              
              
              1,291
              
              
              1,768Changes
                  in operating assets and liabilities, excludingthe
                  effects of acquisitions:Increase
                  in accounts receivable
              
              
              (18,966
              )
              
              -
              
              
              (18,966
              )
              
              (11,520
              )
              
              -
              
              
              (11,520
              )Increase
                  in prepaid expenses and other current assets
              
              
              (4,507
              )
              
              -
              
              
              (4,507
              )
              
              (534
              )
              
              -
              
              
              (534
              )Decrease
                  / (Increase) in inventory
              
              
              (645
              )
              
              -
              
              
              (645
              )
              
              (1,079
              )
              
              -
              
              
              (1,079
              )Decrease
                  / (Increase) in other assets
              
              
              (9,283
              )
              
              -
              
              
              (9,283
              )
              
              (2,724
              )
              
              -
              
              
              (2,724
              )(Decrease)
                  / Increase in deferred revenue
              
              
              2,036
              
              
              (71
              )
              
              1,965
              
              
              21,403
              
              
              -
              
              
              21,403(Decrease)
                  / Increase in accrued compensation
              
              
              2,441
              
              
              86
              
              
              2,527
              
              
              (4,486
              )
              
              66
              
              
              (4,420
              )Increase
                  / (Decrease) in accounts payable and othercurrent
                  liabilties
              
              
              3,930
              
              
              43
              
              
              3,973
              
              
              (998
              )
              
              29
              
              
              (969
              )Increase
                  / (Decrease) in other long-term liabilities
              
              
              1,130
              
              
              -
              
              
              1,130
              
              
              (562
              )
              
              -
              
              
              (562
              )Total
                  adjustments
              
              
              13,972
              
              
              216
              
              
              14,188
              
              
              29,318
              
              
              1,464
              
              
              30,782Net
                  cash provided by (used in) operating activities
              
              
              14,457
              
              
              -
              
              
              14,457
              
              
              (3,247
              )
              
              -
              
              
              (3,247
              )Investing
                  activities:Purchases
                  of property and equipment
              
              
              (19,288
              )
              
              -
              
              
              (19,288
              )
              
              (15,333
              )
              
              -
              
              
              (15,333
              )Purchases
                  of marketable securities
              
              
              (501,717
              )
              
              383,733
              
              
              (117,984
              )
              
              (164,074
              )
              
              -
              
              
              (164,074
              )Proceeds
                  from sale of marketable securities
              
              
              464,262
              
              
              (383,733
              )
              
              80,529
              
              
              163,943
              
              
              -
              
              
              163,943Capitalized
                  software development costs
              
              
              (20,144
              )
              
              -
              
              
              (20,144
              )
              
              (15,194
              )
              
              -
              
              
              (15,194
              )Cash
                  paid for acquisitions
              
              
              (312
              )
              
              -
              
              
              (312
              )
              
              (5,458
              )
              
              -
              
              
              (5,458
              )Net
                  cash used in investing activities
              
              
              (77,199
              )
              
              -
              
              
              (77,199
              )
              
              (36,116
              )
              
              -
              
              
              (36,116
              )Financing
                  activities:Proceeds
                  from stock options exercised
              
              
              16,853
              
              
              -
              
              
              16,853
              
              
              7,892
              
              
              -
              
              
              7,892Proceeds
                  from employee stock purchase plan
              
              
              195
              
              
              -
              
              
              195
              
              
              1,664
              
              
              -
              
              
              1,664Net
                  cash provided by financing activities
              
              
              17,048
              
              
              -
              
              
              17,048
              
              
              9,556
              
              
              -
              
              
              9,556Effect
                  of exchange rates on cash and cash equivalents
              
              
              356
              
              
              -
              
              
              356
              
              
              155
              
              
              -
              
              
              155Net
                  decrease in cash and cash equivalents
              
              
              (45,338
              )
              
              -
              
              
              (45,338
              )
              
              (29,652
              )
              
              -
              
              
              (29,652
              )Cash
                  and cash equivalents — beginning of year
              
              
              122,031
              
              
              -
              
              
              122,031
              
              
              151,683
              
              
              -
              
              
              151,683Cash
                  and cash equivalents — end of year
              
              $
              76,693
              
              $
              -
              
              $
              76,693
              
              $
              122,031
              
              $
              -
              
              $
              122,031Cash
                  paid for income taxes
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              133
              
              $
              -
              
              $
              133Non-cash
                  investing activities:Purchase
                  price pursuant to earn-out agreements
              
              $
              2,660
              
              $
              -
              
              $
              2,660
              
              $
              2,500
              
              $
              -
              
              $
              2,500




49
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)






**4. 
      Stock-Based Compensation**




Pro
      forma
      information regarding net income and net income per share is required by SFAS
      123 and has been determined as if the Company had accounted for its employee
      stock option plan under the method of SFAS 123. For purposes of pro forma
      disclosures, the estimated fair value of the stock awards, as prescribed by
      SFAS
      123, is amortized to expense over the vesting period of such awards The impact
      of the restatements on the pro forma information is as follows (in thousands,
      except per share data):


Year
                  ended December 31,2005
              
              2004As
                  restated
              
              As
                  restatedNet
                  income (loss):
              
              $
              269
              
              $
              (34,029
              )Add:
                  stock-based employee compensation expense includedin
                  net income (loss), net of related tax effects
              
              
              2,427
              
              
              1,768Deduct:
                  Total stock-based compensation expensedetermined
                  under fair value based method for all awards,net
                  of related tax effects
              
              
              (11,599
              )
              
              (11,330
              )Pro
                  forma net loss
              
              $
              (8,903
              )
              $
              (43,591
              )Basic
                  net income (loss) per common share:As
                  reported
              
              $
              0.01
              
              $
              (0.73
              )Pro
                  forma
              
              $
              (0.19
              )
              $
              (0.94
              )Diluted
                  income (loss) per common share:As
                  reported
              
              $
              0.01
              
              $
              (0.73
              )Pro
                  forma
              
              $
              (0.19
              )
              $
              (0.90
              )










The
      historical pro forma impact of applying the fair value method prescribed by
      SFAS
      123 is not representative of the impact that may be expected in the future
      due
      to changes resulting from additional grants in future years and changes in
      assumptions such as volatility, interest rates and expected life used to
      estimate fair value of the grants in future years.





There
      was
      no stock-based employee compensation cost capitalized under SFAS 86 or SOP
      98-1or tax benefit recognized during the year ended December 31, 2006.





Stock-based
      employee compensation expense was recorded as follows in the consolidated
      statement of operations (in thousands):


Year
                  Ended December 31, 2006Cost
                  of systems and services
              
              $
              3,215Sales
                  and marketing
              
              
              3,495Research
                  and development
              
              
              1,921General
                  and administrative
              
              
              2,626Restructuring
                  charge
              
              
              2,846Total
                  stock-based compensation expense
              
              $
              14,103
 The
      restructuring charge of $2.8 million reflected in the table above, is included
      in the $14.7 million restructuring charge disclosed separately on the Statement
      of Operations.




**5.**  **Employee
      Benefit Plans**





**2005
      Stock Incentive Plan**





At
      our
      Annual Meeting of Stockholders held June 29, 2005, our shareholders approved
      the
      2005 Stock Incentive Plan (“the 2005 Plan”). Under the 2005 Plan, no further
      awards will be granted under our prior Stock Incentive Plans which include
      our
      1996, 1998, 1999 and 2000 plans. Awards may be made under the 2005 Plan for
      a
      number of shares (subject to adjustment in the event of stock splits and other
      similar events) equal to the sum of (1) 2,000,000 shares of the Company’s common
      stock, (2) any shares reserved for issuance under the Amended and Restated
      2000
      Stock Incentive Plan that remain available for issuance as of the date the
      2005
      Plan was approved by our stockholders and (3) any shares subject to outstanding
      awards under our 1996 Stock Plan, the Amended and Restated 1998 Stock Incentive
      Plan, the Amended and Restated 1999 Stock Incentive Plan and the Amended and
      Restated 2000 Stock Incentive Plan that expire or are terminated, surrendered
      or
      canceled without having been fully exercised, are repurchased or forfeited
      in
      whole or part or result in any shares subject to such award not being issued.
      We
      expect to satisfy option exercises by issuing the Company’s common stock. As of
      December 31, 2006, there were 2.3 million shares available for future issuance
      under the 2005 Plan.




We
      issued
      400,000 stock options and 100,000 shares of restricted stock in the year ended
      December 31, 2006 as an inducement grant made without stockholder approval
      and
      outside the 2005 Plan. The grant date fair value of the restricted stock was
      $21.15 per share.





50
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




*Stock
      Options*




A
      summary
      of stock option activity is as follows:


Number
                  of Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contractual Life
              
              Aggregate
                  Intrinsic Value (in thousands)Outstanding
                  at January 1, 2006
              
              
              7,605,609
              
              $
              12.80Options
                  granted
              
              
              1,407,000
              
              $
              20.80Options
                  exercised
              
              
              (2,584,605
              )
              $
              10.34
              
              
              
              
              $
              30,548Options
                  canceled or forfeited
              
              
              (796,420
              )
              $
              16.54Outstanding
                  at December 31, 2006
              
              
              5,631,584
              
              $
              15.40
              
              
              6.32
              
              $
              32,480Vested
                  and expected to vest at December 31, 2006
              
              
              5,345,678
              
              $
              15.25
              
              
              0.06
              
              $
              31,632Exercisable
                  at December 31, 2006
              
              
              3,219,244
              
              $
              13.77
              
              
              4.61
              
              $
              23,902




As
      of
      December 31, 2006, $31.2 million of total unrecognized compensation costs
      related to stock options is expected to be recognized over a weighted average
      period of 3.8 years.


The
      weighted average estimated fair value of our employee stock options granted
      at
      grant date market prices was $15.10 per share during the year ended December
      31,
      2006. There were 52,852 shares issued under our stock purchase plan as a result
      of employee participation during the year ended December 31, 2006.




The
      weighted average fair value of outstanding stock options has been estimated
      at
      the date of grant using a Black-Scholes option pricing model. The following
      are
      significant weighted average assumptions used for estimating the fair value
      of
      the activity under our stock option plans:





Year
                Ended
              December
                31,2006
            
            2005Expected
                term (in years)
            
            
            6.46
            
            
            6.01Risk
                free interest rate
            
            
            4.99
            %
            
            4.02
            %Expected
                volatility
            
            
            77.14
            %
            
            80.26
            %Dividend
                yield
            
            
            0
            %
            
            0
            %




We
      have
      elected to use the simplified method for estimating our expected term equal
      to
      the midpoint between the vesting period and the contractual term as allowed
      by
      SAB 107, “Share-Based Payment.”





We
      currently estimate volatility by using the weighted average historical
      volatility of our common stock.





The
      risk-free interest rate is the implied yield currently available on U.S.
      Treasury zero-coupon issues with a remaining term equal to the expected term
      input to the Black-Scholes model.





We
      estimate forfeitures using a weighted average historical forfeiture rate. Our
      estimate of forfeitures will be adjusted over the requisite service period
      based
      on the extent to which actual forfeitures differ, or are expected to differ,
      from our estimate.





*Non-Vested
      Restricted Stock*





From
      time
      to time the Company has issued non-vested restricted stock grants to members
      of
      senior management.  The Company issued 100,000 and 372,500 shares in 2006
      and 2005, respectively.  Generally, restricted stock grants vest over a
      five-year period.





51


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




Non-vested
      restricted stock award activity for the year ended December 31, 2006 is
      summarized as follows:


Non-vested
                Number
                  of Shares
              
              Weighted
                  Average Grant -Date Fair ValueNonvested
                  balance at January 1, 2006
              
              
              623,994
              
              $
              16.72Granted
              
              
              100,000
              
              $
              21.14Vested
              
              
              (259,966
              )
              $
              16.67Forfeited
              
              
              (97,900
              )
              $
              19.21Nonvested
                  balance at December 31, 2006
              
              
              366,128
              
              $
              17.29




Compensation
      expense for non-vested restricted common stock issued at discounted prices
      is
      recognized over the vesting period for the difference between the purchase
      price
      and the fair market value on the measurement date. Compensation expense recorded
      for stock-based awards of restricted stock was $2.6 million, $2.4 million,
      and
      $0.5 million, for the years ended December 31, 2006, 2005 and 2004,
      respectively.





As
      of
      December 31, 2006, $5.7 million of total unrecognized compensation costs related
      to non-vested restricted awards is expected to be recognized over a weighted
      average period of 3.6 years.  The cumulative fair value of shares
      vested through the year ended December 31, 2006 was $6.0 million.





*Deferred
      Stock Units*





Effective
      May 10, 2006, we implemented a deferred stock unit plan to provide for equity
      compensation for our non-employee directors in the form of deferred stock units
      ("DSUs") granted under the Company's 2005 Stock Incentive Plan ("2005 Plan").
      As
      of the date of each annual meeting of the Company's stockholders, each
      continuing non-employee director receives a number of DSUs determined by
      dividing $75,000 by the fair market value of a share of the Company's common
      stock on the grant date. These DSUs vest quarterly over the course of the
      ensuing year. After cessation of board service, the Company will pay the DSUs
      by
      issuing to the former director a number of shares of the Company's common stock
      equal to the number of accumulated vested deferred stock units. In addition,
      a
      non-employee director may elect to receive DSUs in lieu of all or a portion
      of
      his or her cash fees. All DSUs received for cash fees are fully
      vested.





We
        granted 26,459 deferred stock units during the year ended December 31, 2006
        at
        an average market value of $18.91. The value of these deferred stock units
        is
        amortized to compensation expense and director fees ratably over the vesting
        period. In the year ended December 31, 2006, recorded expense for deferred
        stock
        units was $313,000.





**Employee
      Savings Plan**





During
      1997, we established a Savings Plan (the “Plan”) pursuant to Section 401(k) of
      the Internal Revenue Code (the “Code”), whereby employees may contribute a
      percentage of their compensation, not to exceed the maximum amount allowable
      under the Code. At the discretion of our Board of Directors, we may elect to
      make matching contributions, as defined in the Plan. For the years ending
      December 31, 2006, 2005, and 2004 the Board of Directors approved contributions
      to the Plan of $1.3 million, $0.6 million, and $0.8 million
      respectively.





**2005
      Employee Stock Purchase Plan**




On
      June
      29, 2005, our shareholders approved the 2005 Employee Stock Purchase Plan (the
      “2005 Purchase Plan”).  In connection with the approval, the Second Amended
      and Restated 1998 Employee Stock Purchase Plan was terminated and no further
      awards will be made under such plan.  Under the provisions of the 2005
      Purchase Plan, our employees may purchase shares of our stock at a purchase
      price of 95% of the closing price of our stock on the final day of the quarterly
      offering period as defined.  As of December 31, 2006, there were 949,514
      shares available for future issuance under the 2005 Purchase Plan.





52


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**6.**  **Property
      and Equipment**




Property
      and equipment are stated at cost. Depreciation and amortization are provided
      for
      using the straight-line method over the estimated useful lives, which generally
      range from 2 to 7 years. Computer equipment is depreciated over 2 to 5 years.
      Office equipment is depreciated over 2 to 7 years. Purchased software
      for internal use is amortized over 3 years. Expenditures for our resource
      planning system, or ERP, are depreciated over 8 years. Leasehold improvements
      are amortized over the shorter of the useful lives of the assets or the
      remaining term of the lease. When assets are retired or otherwise disposed
      of,
      the related costs and accumulated depreciation are removed from the accounts
      and
      any resulting gain or loss is reflected in income. Expenditures for repairs
      and
      maintenance not considered to substantially lengthen the property and equipment
      lives are charged to expense as incurred. The balances for property and
      equipment were as follows:


(in
                  thousands)December
                  31,2006
              
              2005As
                  restatedComputer
                  equipment
              
              $
              51,595
              
              $
              43,723Office
                  equipment and other
              
              
              7,008
              
              
              6,723Purchased
                  software
              
              
              30,108
              
              
              20,722Leasehold
                  improvements
              
              
              14,227
              
              
              12,805102,938
              
              
              83,973Less:
                  Accumulated depreciation and amortization
              
              
              (57,132
              )
              
              (43,333
              )$
              45,806
              
              $
              40,640


Depreciation
      expense for property and equipment totaled $14.8 million, $13.8 million, and
      $12.8 million, in 2006, 2005, and 2004, respectively.




**7.**  **Restructuring**





In
      January 2006, we effected a restructuring of our operations which included
      a
      reduction in headcount of approximately 100 individuals, and the reorganization
      of our Company. In December 2006, we realigned certain management resources
      and
      consolidated some facilities to eliminate excess office space.





These
      activities resulted in restructuring charges of $14.7 million in the year ended
      December 31, 2006. Severance charges were $12.2 million, of which $3.6 million
      related to the termination of employment of certain management personnel. Of
      this charge, $2.8 million was for non-cash stock-based compensation. The excess
      office space consolidation resulted in charges of $2.5 million related to the
      closing of three facilities.





The
      restructuring charges have been recorded in our consolidated statements of
      operations as “restructuring charge.” At December 31, 2006, the remaining unpaid
      restructuring liability of $5.7 million relates to severance and future lease
      payments which we expect to pay out through 2009.





A
      summary
      of the restructuring activity was as follows (in thousands):





FacilitySeverance
              
              Closures
              
              TotalBalance
                  at January 1, 2006
              
              
              
              
              $
              -
              
              $
              -
              
              $
              -Restructuring
                  charge
              
              
              
              
              
              12,184
              
              
              2,486
              
              
              14,670Non-cash
                  charges related tostock
                  option modifications
              
              
              
              
              
              (2,846
              )
              
              -
              
              
              (2,846
              )Payments
              
              
              
              
              
              (6,164
              )
              
              -
              
              
              (6,164
              )Balance
                  at December 31, 2006
              
              
              
              
              $
              3,174
              
              $
              2,486
              
              $
              5,660




**8.            
      Stockholders’ Equity**





**Undesignated
      Preferred Stock**




We
      have
      available for issuance, 5,000,000 shares of preferred stock. As discussed below
      under “Shareholder Rights Plan”, the Board has designated 100,000 of the
      5,000,000 authorized shares of preferred stock as Series A Junior Participating
      Preferred Stock. Eclipsys has a balance of 4,900,000 authorized shares of
      undesignated preferred stock (the “Undesignated Preferred”). The liquidation,
      voting, conversion and other related provisions of the Undesignated Preferred
      will be determined by the Board of Directors at the time of issuance. Currently,
      there are no outstanding preferred shares.




53


ECLIPSYS
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**Shareholder
      Rights Plan**




On
      July
      26, 2000, our Board of Directors declared a dividend of one Right for each
      outstanding share of Eclipsys’ Common Stock to stockholders of record at the
      close of business on August 9, 2000. Each Right entitles the registered holder
      to purchase from Eclipsys one one-thousandth of a share of Series A Junior
      Participating Preferred Stock, $0.01 par value per share, at a Purchase Price
      of
      $65.00 in cash, subject to adjustment. The Rights will initially trade together
      with Eclipsys’ Common Stock, and will not be exercisable. If a person or group
      (other than an exempt person) acquires 15% or more of the outstanding shares
      of
      Eclipsys Common Stock, the Rights generally will become exercisable and allow
      the holder (other than the 15% purchaser) to purchase shares of Eclipsys’ Common
      Stock at a 50% discount to the market price. The effect will be to discourage
      acquisitions of 15% or more of Eclipsys’ Common Stock without negotiations with
      the Board of Directors. The terms of the Rights are set forth in a Rights
      Agreement dated as of July 26, 2000 (the “Rights Agreement”) between Eclipsys
      and Fleet National Bank, as Rights Agent. The Board has designated 100,000
      of
      the 5,000,000 authorized shares of preferred stock as Series A Junior
      Participating Preferred Stock.




**9.            
      Income Taxes**





The
      income tax provision is as follows:


(in
                  thousands)December
                  31,2006
              
              2005
              
              2004Current
                  Tax Provision:Federal
              
              $
              -
              
              $
              -
              
              $
              -State
              
              
              -
              
              
              -
              
              
              -Foreign
              
              
              -
              
              
              -
              
              
              -$
              -
              
              $
              -
              
              $
              -Deferred
                  Provision:Federal
              
              $
              34
              
              $
              -
              
              $
              -State
              
              
              4
              
              
              -
              
              
              -Foreign
              
              
              -
              
              
              -
              
              
              -Total
                  Provision
              
              $
              38
              
              $
              -
              
              $
              -




At
      December 31, 2006 and 2005, the Company has recorded a noncurrent deferred
      tax
      asset and current deferred tax liability based upon the pro rata allocation
      of
      the valuation allowance in accordance with SFAS 109.




A
      reconciliation of the effect of applying the federal statutory rate and the
      effective income tax rate on our income tax provision is as
      follows:


(in
                  thousands)Year
                  EndedDecember
                  31,2006
              
              2005
              
              2004As
                  restated
              
              As
                  restatedStatutory
                  federal income tax rate
              
              $
              1,405
              
              $
              91
              
              $
              (11,570
              )State
                  income taxes
              
              
              164
              
              
              11
              
              
              (1,348
              )Incentive
                  stock options
              
              
              (2,065
              )
              
              -
              
              
              -Other
              
              
              666
              
              
              636
              
              
              640Valuation
                  allowance
              
              
              (132
              )
              
              (738
              )
              
              12,278Income
                  tax provision
              
              $
              38
              
              $
              -
              
              $
              -
  54
 ECLIPSYS
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  The
        significant components of our net deferred tax assets (liabilities are as
        follows:


(in
                  thousands)December
                  31,2006
              
              2005**Deferred
                  tax assets:**
              
              
              
              As
                  restatedIntangible
                  assets
              
              $
              20,317
              
              $
              24,012Stock
                  based compensation
              
              
              5,797
              
              
              1,137Allowance
                  for doubtful accounts
              
              
              2,181
              
              
              2,795Accrued
                  expenses
              
              
              3,203
              
              
              1,704Other
              
              
              1,766
              
              
              2,351Net
                  operating loss carryforwards
              
              
              119,791
              
              
              123,415153,055
              
              
              155,414**Deferred
                  tax liabilities:**Unbilled
                  receivables
              
              
              (5,109
              )
              
              (5,272
              )Goodwill
                  amortization
              
              
              (38
              )
              
              -Depreciation
              
              
              (4,161
              )
              
              (3,412
              )Capitalization
                  of software development costs
              
              
              (12,262
              )
              
              (13,548
              )Net
                  deferred tax asset
              
              
              131,485
              
              
              133,182Valuation
                  allowance
              
              
              (131,523
              )
              
              (133,182
              )$
              (38
              )
              $
              -




(in
                  thousands)December
                  31,2006
              
              2005Balance
                  sheet classification:Noncurrent
                  deferred tax asset
              
              $
              3,661
              
              $
              3,866Current
                  deferred tax liability
              
              
              (3,699
              )
              
              (3,866
              )$
              (38
              )
              $
              -


At
      December 31, 2006, the Company had U.S. net operating loss carryforwards for
      federal income tax purposes of approximately $309.3 million.  Of this
      amount, $6.0 million expires in 2012 and $23.9 million expires in 2013; the
      balance expires in varying amounts through 2026.  Of the total U.S. net
      operating loss carryforward, $88.7 million relates to stock option tax
      deductions which will be tax-effected and the benefit credited as additional
      paid-in-capital when realized.  Additionally, the Company has Canadian net
      operating loss carryovers of approximately $20.4 million that expire in varying
      amounts through 2013. Additionally, the company has an Indian net operating
      loss
      of approximately $0.8 million. The Company’s Indian subsidiary is entitled to a
      tax holiday which expires in 2009.




Under
      the
      Tax Reform Act of 1986, the amounts of, and the benefits from, net operating
      loss carryforwards may be impaired or limited in certain circumstances. We
      experienced an ownership change as defined under Section 382 of the Internal
      Revenue Code in November 1998. As a result of the ownership change, net
      operating loss carryforwards of approximately $16.9 million at November 1998,
      which were incurred prior to the date of the change, are subject to annual
      limitations on their future use. As of December 31, 2006, a valuation allowance
      has been established against the deferred tax assets that management does not
      believe are more likely than not to be realized.





In
      addition, the Company evaluated the impact of the restatements on its tax
      provision. The Company recorded a liability of $0.5 million as of December
      31,
      2006 and 2005 for payroll withholding taxes related to options issued at a
      discount.





55
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**10.**  **Commitments
      and Contingencies**





The
      Company and its subsidiaries are from time to time parties to legal proceedings,
      lawsuits and other claims incident to their business activities. Such matters
      may include, among other things, assertions of contract breach or intellectual
      property infringement, claims for indemnity arising in the course of our
      business and claims by persons whose employment with us has been terminated.
      Such matters are subject to many uncertainties and outcomes are not predictable
      with assurance. Consequently, management is unable to ascertain the ultimate
      aggregate amount of monetary liability, amounts which may be covered by
      insurance or recoverable from third parties, or the financial impact with
      respect to these matters as of December 31, 2006. However, based on our
      knowledge at December 31, 2006, 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.




**Non-cancelable
      Operating Leases**




We
      lease
      office space and certain equipment under non-cancelable operating leases. Rental
      expense under operating leases was $8.3 million, $9.4 million, and $9.7 million
      for the years ended December 31, 2006, 2005, and 2004, respectively. Future
      minimum rental payments under non-cancelable operating leases as of December
      31,
      2006 are as follows:


(in
                  thousands)Year
                  Ending December 31,2007
              
              $
              10,3972008
              
              
              7,0262009
              
              
              3,8392010
              
              
              1,4232011
              
              
              1,079Thereafter
              
              
              1,637$
              25,401




We
      have
      unconditional purchase obligations that consist of minimum purchase commitments
      for telecommunication services, computer equipment, maintenance, consulting
      and
      other commitments. In aggregate, these obligations total approximately $69.6
      million. These obligations will require payments of $44.8 million in 2007,
      with the majority of the balance occurring within the next three
      years.




**Employment
      Agreements**




The
      Company has entered into employment agreements with certain key employees. 
These agreements provide for severance and other benefits if the Company, for
      any other reason than cause, as defined in such agreements, terminates these
      employees.




**Indemnification
      clauses**




Our
      standard software license agreements contain indemnification clauses that are
      limited in amount. Pursuant to these clauses, we indemnify, hold harmless,
      and
      agree to reimburse the indemnified party for losses suffered or incurred by
      the
      indemnified party. We account for these clauses under FASB Staff Position FIN
      45
      45-1: Accounting for Intellectual Property Infringement Indemnifications under
      FASB Interpretation No. 45. Accordingly, there are no liabilities recorded
      for
      these agreements as of December 31, 2006.





**11.       
      Acquisitions**





In
      December 2006, we acquired Van Slyck & Associates, Inc., or VSA. VSA is a
      patient classification, acuity-driven nurse staffing service and software
      company.





The
      aggregate purchase consideration includes $1.5 million in cash, as well as
      earnout consideration of up to approximately $2.5 million payable in cash over
      a
      two-year period, based on the attainment of conditions defined in the
      acquisition agreement. All future consideration paid under the earn-out
      provisions of the agreement, if any, will be recorded as additional goodwill.
      The operating results of VSA have been combined with those of Eclipsys since
      December 15, 2006. We did not present unaudited pro forma results of operations
      of Eclipsys combined with VSA for the year ended December 31, 2006 and 2005
      because the acquisition is not material to our operating results or financial
      position.





As
      a
      result of the VSA acquisition, we recorded non-tax deductible goodwill of $0.9
      million and other intangible assets including client relationships of $0.3
      million and acquired technology of $0.4 million. Amortizable intangible assets
      include client relationships and acquired technology, and are being amortized
      over five and three-year periods on a straight-line basis, respectively, which
      we believe reflects the estimated expected utility of these assets.





On
      June
      11, 2006, we entered into an agreement to acquire both the assets of Sysware
      Health Care Systems, Inc. (“Sysware”) and the stock of Sysware’s sister company
      Mosum Technology (India) Private Limited ("Mosum"). In July 2006, we closed
      the
      asset acquisition of Sysware. We closed the stock acquisition of Mosum, which
      is
      based in India, in December, 2006, once all the Indian regulatory approvals
      were
      received. The acquisition of these affiliated companies enabled us to market
      Sysware’s laboratory information solution as a core module of Eclipsys’ Sunrise
      Clinical ManagerTM suite of enterprise-wide advanced clinical solutions, and also
      provided us with the foundation for a development and support organization
      in
      India.


56
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




The
      aggregate purchase consideration includes $3.7 million in cash, as well as
      earnout consideration of up to approximately $3.9 million payable in a
      combination of cash and shares of our common stock over a two-year period,
      based
      on the attainment of conditions defined in the acquisition agreement. All future
      consideration paid under the earn-out provisions of the agreement, if any,
      will
      be recorded as additional goodwill. The operating results of Sysware and Mosum
      have been combined with those of Eclipsys since July 14, 2006. We did not
      present unaudited pro forma results of operations of Eclipsys combined with
      Sysware and Mosum for the year ended December 31, 2006 and 2005 because the
      acquisition is not material to our operating results or financial position.





As
      a
      result of the Sysware acquisition, we recorded tax deductible goodwill of $3.0
      million and other intangible assets including client relationships of $1.0
      million and acquired technology of $0.7 million. Amortizable intangible assets
      include client relationships and acquired technology, and are being amortized
      over five and three-year periods on a straight-line basis, respectively, which
      we believe reflect the estimated expected utility of these assets.




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. CPMRC's evidence-based content and practice guidelines
      have been incorporated into our current releases of SunriseXA software. We
      paid
      $2.5 million in cash and issued 184,202 shares of common stock for
      CPMRC, for a total consideration of $5.0 million. In addition, the
      acquisition agreement permitted the prior owner of CPMRC to earn up to an
      additional $12.5 million over the following 5 year period based on
      future operating results, payable 50% in shares of our common stock and 50%
      in
      cash, 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 the Eclipsys since the date of acquisition.





At
      the
      time of the CPMRC acquisition, we recorded approximately $2.4 million in
      non amortizable goodwill and $3.2 million in amortizable intangible assets.
      Amortizable intangible assets include client relationships and acquired
      technology and are being amortized over a seven and five year period,
      respectively, which we believe approximates the expected utility of these
      assets. The non amortizable goodwill is not tax deductible. Since the date
      of
      the CPMRC acquisition we have recorded incremental non amortizable goodwill
      related to consideration earned by the prior owner as part of the earn-out
      provisions of the agreement.




In
      December of 2004, we acquired eSys Medical Inc. (eSys). eSys develops and
      markets radiology information systems (RIS) that enable clinicians to view
      patient medical records, diagnostic images and reports in real time. In 2004,
      we
      paid $2.3 million in cash consideration for the eSys acquisition. In
      addition, the terms of the acquisition agreement permitted the prior owners
      of
      eSys to earn up to an additional $2.5 million of future consideration
      related to certain milestones in connection with future development of the
      acquired technology, payable in cash (25%) and our common stock (75%).
      Additionally, the agreement contains an earn out provision permitting the prior
      owners to earn up to an additional $5.0 million in future consideration
      based on sales of the acquired technology over the five years following the
      closing of the transaction, payable in cash or shares of our common stock.




As
      a
      result of the eSys acquisition, we recorded approximately $2.0 million in
      amortizable intangible assets. Amortizable intangible assets include client
      relationships of $1.1 million and acquired technology of $0.9 million and
      are being amortized over a five and three year period, 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. The majority of future consideration, if earned,
      will be recorded as non amortizable goodwill.




In
      each
      of these acquisitions, we assigned the total purchase price to the assets,
      liabilities and identifiable intangible assets acquired with the remaining
      amount assigned to goodwill.





Under
      the
      provisions of the earn-out agreements related to the acquisitions, we recorded
      incremental goodwill of $1.7 million and $2.2 million in 2006 and 2005,
      respectively.  In connection with these earn-outs, we issued 76,429 and
      65,923 shares of our common stock in 2006 and 2005, respectively, and paid
      cash
      consideration totaling $1.0 million and $0.3 million, respectively.




**12.         
      Related Party Transactions**




We
      lease
      office space in Boston, Massachusetts from a former stockholder of SDK Medical
      Computer Services Corporation, or SDK, and lease office space in Grand Rapids,
      Michigan from the former stockholder of CPMRC. SDK was acquired in 1997. During
      the years ended December 31, 2006, 2005, and 2004, we paid under the Boston
      lease, $0.7 million, $0.6 million, and $0.7 million, respectively, and under
      the
      Michigan lease, we paid $62,000, $72,000, and $42,000, respectively. The leases
      are non-cancelable and expire in 2009 and 2008, respectively.




Our
      former Chairman Emeritus, Harvey J. Wilson, owns a company, RMSC of West Palm
      Beach Inc. (“RMSC”), which leases an aircraft to a charter company. The charter
      company provides aircraft charter services to us as well as other outside
      parties. Mr. Wilson has no ownership or other interest in the charter
      company. We paid the charter company $0.6 million, $0.3 million, and $0.8
      million in 2006, 2005, and 2004, respectively, for charters using the aircraft
      owned by RMSC. We also paid the charter company $0, $163,000, and $74,000 in
      2006, 2005, and 2004, respectively, for charters of other aircraft, not owned
      by
      RMSC. In January 2006, the Company entered into an arrangement whereby the
      remaining commitment of $0.5 million was utilized during the first half of
      2006.  Additionally, under this agreement the Company and Chairman Emeritus
      terminated the arrangement pursuant to which Mr. Wilson served as Chairman
      Emeritus.  In connection with this termination we recorded a provision of
      approximately $0.2 million in the fourth quarter of 2005.




**License
      Agreement with Partners HealthCare System, Inc.**





We
      have a
      license agreement with Partners HealthCare System, Inc. (“Partners”). Jay
      Pieper, a director of Eclipsys, is Vice President of Corporate Development
      and
      Treasury Affairs for Partners. Under the terms of this license, we may develop,
      commercialize, distribute and support certain technology of Partners (the
“Partners’ Technology”) and license it, as well as sell related services, to
      other healthcare providers and hospitals throughout the world (with the
      exception of the Boston, Massachusetts metropolitan area). No royalties are
      payable by us pursuant to the license with Partners. We are obligated to offer
      to Partners and certain of its affiliates a license for internal use, granted on
      most favored customer terms, to all new software applications developed by
      us,
      whether or not derived from the Partners’ Technology, and major architectural
      changes to the Partners’ Technology. Partners and certain of its affiliates are
      also entitled to receive internal use licenses, also granted on most favored
      customer terms, for any changes to any module or application included in the
      Partners’ Technology requiring at least one person-year of technical effort.
      Additionally, as part of the agreement, we have previously provided development
      services to Partners related to commercializing its intellectual property.
      No
      fees were paid to us by Partners for development services in 2006. In
      2001,
      Partners entered into a contract with us for the license of a new software
      application and related professional services. This new software application
      consisted of an upgrade to an existing software application that Partners had
      licensed from Transition Systems, Inc, an entity that was acquired by us in
      December 1998. Under this new contract, Partners paid us the sums of $0.9
      million, $0.9 million, and $0.7 million, in 2006, 2005, and 2004, respectively.
      As of December 31, 2006, Partners owed us the sum of approximately $0.2,million
      related to this contract. Mr. Pieper, was not affiliated with Eclipsys at
      the time of the negotiation of the Partners license from Transition Systems,
      Inc.


57
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**Investment
      in Healthvision, Inc.**





During
      July 1999, we invested in Healthvision, Inc. (“Healthvision”), a Dallas-based,
      privately held Internet healthcare company. Mr. Kelly, a member of our
      Board of Directors, served until December 2006 on the board of directors of
      Healthvision. We beneficially own common stock of Healthvision representing
      approximately 16% of its outstanding common stock on a fully diluted basis.




In
      1999,
      we entered into an agreement with Healthvision under which each organization
      agreed to jointly market products and services of the other party to its
      customers. In late 2003, we mutually agreed with Healthvision to terminate
      the
      joint marketing provisions of our agreement. Under the remaining provisions
      of
      this agreement, we paid Healthvision approximately $0.3 million during 2006
      for
      the sale by Healthvision of our products and services. During 2006 we earned
      revenues from Healthvision of approximately $1.1 million for remote hosting
      and other related services and had accounts receivable due from Healthvision
      of
      approximately $0.1 million at December 31, 2006.





For
      the
      year ended December 31, 2006, Healthvision had total revenues of approximately
      $17.4 million and a net loss of approximately $1.9 million with total
      assets of approximately $10.1 million.





We
      account for our investment in Healthvision using the equity method of
      accounting.  Due to losses recognized under the equity method, the recorded
      balance of the investment in Healthvision was $0 as of December 31, 2006. We
      are
      not required to provide funding to Healthvision, and have made no guarantees
      on
      their behalf.




**13.         
      Quarterly Financial Information (Unaudited)**




The
      following table presents quarterly consolidated statement of operations data
      for
      each of the eight quarters in the years ended December 31, 2006 and 2005. The
      data in the statement of operations is unaudited and, in the opinion of
      management, includes all adjustments (consisting of normal recurring
      adjustments) necessary to state fairly the data for such periods. Additionally,
      the data is derived from our audited financial statements, which appear
      elsewhere in this document. See Exhibit 99.1 for additional information related
      to quarterly restatements.


For
                  the Year Ended December 31, 2006(in
                  thousands, except per share data)First
              
              Second
              
              Third
              
              FourthQuarter
              
              Quarter
              
              Quarter
              
              Quarter
              
              YearAs
                  restated
              
              As
                  restated
              
              As
                  restatedRevenues
              
              $
              100,891
              
              $
              102,397
              
              $
              108,566
              
              $
              115,688
              
              $
              427,542Income
                  (loss) from operations
              
              
              (9,061
              )
              
              448
              
              
              4,199
              
              
              3,210
              
              
              (1,204
              )Net
                  income (loss)
              
              
              (7,912
              )
              
              1,761
              
              
              5,577
              
              
              4,667
              
              
              4,093Basic
                  net income (loss) per common share
              
              $
              (0.16
              )
              $
              0.03
              
              $
              0.11
              
              $
              0.09
              
              $
              0.08Diluted
                  net income (loss) per common share
              
              $
              (0.16
              )
              $
              0.03
              
              $
              0.11
              
              
              0.09
              
              $
              0.08For
                  the Year Ended December 31, 2005(in
                  thousands, except per share data)First
              
              
              Second
              
              
              Third
              
              
              FourthQuater
              
              
              Quarter
              
              
              Quarter
              
              
              Quarter
              
              
              YearAs
                  restated
              
              
              As
                  restated
              
              
              As
                  restated
              
              
              As
                  restated
              
              
              As
                  restatedRevenues
              
              $
              84,435
              
              $
              95,865
              
              $
              97,852
              
              $
              105,190
              
              $
              383,342Income
                  (loss) from operations
              
              
              (7,468
              )
              
              (3,196
              )
              
              3,851
              
              
              3,980
              
              
              (2,833
              )Net
                  income (loss)
              
              
              (6,913
              )
              
              (2,483
              )
              
              4,710
              
              
              4,955
              
              
              269Basic
                  net income (loss) per common share
              
              $
              (0.15
              )
              $
              (0.05
              )
              $
              0.10
              
              $
              0.10
              
              $
              0.01Diluted
                  net income (loss) per common share
              
              $
              (0.15
              )
              $
              (0.05
              )
              $
              0.09
              
              $
              0.10
              
              $
              0.01




58
 ECLIPSYS
        CORPORATION AND SUBSIDIARIES


NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)




**14.**  **Geographic
      Information**




A
      summary
      of the Company's revenues by geographic area is summarized below (in
      thousands):


Year
                  ended December 31,2006
              
              2005
              
              2004As
                  restatedUnited
                  States
              
              $
              394,536
              
              $
              359,331
              
              $
              293,120Canada
              
              
              30,592
              
              
              21,339
              
              
              13,029Other
              
              
              2,414
              
              
              2,672
              
              
              2,926Total
              
              $
              427,542
              
              $
              383,342
              
              $
              309,075Revenues
                  are attributed to countries based on the location of
                  customers.




A
      summary
      of the Company’s long-lived assets by geographic area is summarized below (in
      thousands):


December
                  31,2006
              
              2005As
                  restatedUnited
                  States
              
              $
              109,834
              
              $
              108,406Canada
              
              
              1,144
              
              
              2,902India
              
              
              2,617
              
              
              -Total
              
              $
              113,595
              
              $
              111,308





**15.**  **Subsequent
      Event**





In
      April
      2007, we entered into a letter of credit agreement in the amount of $1.9 million
      with Wachovia Bank to secure our obligation under a new lease agreement for
      our
      Atlanta location. The letter of credit is collateralized by the Company’s cash
      of $2.0 million. The letter of credit expires in October 2008, but, is
      automatically extended for one year periods, not beyond December
      2017.





59


**SCHEDULE
      II — VALUATION OF QUALIFYING ACCOUNTS**


**For
      the Years Ended December 31, 2006, 2005 (restated) and 2004
      (restated)**


**(in
      thousands)**




Balance
                  at
                Beginning
                  of Period
              
              Additions
              
              Write-offs
              
              Balance
                  at
                End
                  of PeriodDecember
                  31, 2006Allowance
                  for doubtful accounts
              
              $
              5,676
              
              $
              1,457
              
              $
              (3,226
              )
              $
              3,907Valuation
                  allowance for deferred tax asset
              
              $
              133,182
              
              $
              -
              
              $
              (1,659
              )
              $
              131,523As
                  restatedDecember
                  31, 2005Allowance
                  for doubtful accounts
              
              $
              4,952
              
              $
              3,998
              
              $
              (3,274
              )
              $
              5,676Valuation
                  allowance for deferred tax asset
              
              $
              128,745
              
              $
              4,437
              
              $
              -
              
              $
              133,182December
                  31, 2004Allowance
                  for doubtful accounts
              
              $
              4,807
              
              $
              4,117
              
              $
              (3,972
              )
              $
              4,952Valuation
                  allowance for deferred tax asset
              
              $
              128,181
              
              $
              564
              
              $
              -
              
              $
              128,745




**Item
      9.** ****** ***Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure***




Not
      applicable.




**Item
      9A.*****Controls
      and Procedures***





*Evaluation
      of Disclosure Controls and Procedures*




Our
      management, with the participation of our Chief Executive Officer and Chief
      Financial Officer, evaluated the effectiveness of our disclosure controls and
      procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of
      1934, as amended (the “Exchange Act”) as of December 31, 2006.  Our
      disclosure controls and procedures are designed to ensure that information
      we
      are required to disclose in the reports we file or submit under the Exchange
      Act
      is accumulated and communicated to our management, including our Chief Executive
      Officer and Chief Financial Officer, as appropriate to allow timely decisions
      regarding required disclosures, and is recorded, processed, summarized and
      reported, within the time periods specified in the SEC's rules and forms. 
Based upon the evaluation described above our Chief Executive Officer and Chief
      Financial Officer concluded that, as of December 31, 2006, our disclosure
      controls and procedures were not effective because of the material weakness
      described below in Management's Report on Internal Control Over Financial
      Reporting.





*Management’s
      Report on Internal Control Over Financial Reporting*





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act
      Rule 13a-15(f).




We
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2006. In making this assessment, we used the criteria set forth
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      in *Internal Control — Integrated Framework.*





A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.





Management
      identified the following material weakness in our internal control over
      financial reporting as of December 31, 2006:





We
      did
      not maintain effective controls over the accuracy of the accounting for and
      disclosure of our non-cash stock-based compensation expense. Specifically,
      effective quarterly controls, including monitoring to detect input errors,
      were
      not maintained to ensure the accuracy of the amortization of stock options
      and
      consequently we did not timely identify an input error that occurred in the
      second quarter of 2006 that changed amortization of costs for certain equity
      awards. This control deficiency resulted in the misstatement of our non-cash
      stock-based compensation expense, additional paid-in capital accounts and
      related financial disclosures, and in the restatement of the Company’s
      consolidated financial statements for the quarters ended June 30, 2006 and
      September 30, 2006 and in an adjustment to the consolidated financial statements
      for the quarter ended December 31, 2006. Additionally, this control deficiency
      could result in misstatements of the aforementioned accounts and disclosures
      that would result in a material misstatement of the consolidated financial
      statements that would not be prevented or detected. Accordingly, our management
      has determined that this control deficiency constitutes a material
      weakness.





As
      a
      result of the material weakness described above, management concluded that
      our
      internal control over financial reporting was not effective as of December
      31,
      2006 based on the criteria established in *Internal
      Control - Integrated Framework* issued
      by the COSO.




Our
      management’s assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2006 has been audited by
      PricewaterhouseCoopers LLP, an independent registered certified public
      accounting firm, as stated in their report which is included
      herein.




60


*Plan
      for Remediation of the Material Weakness*





To
      remediate the material weakness described above and to enhance our internal
      control over financial reporting, management has supplemented its existing
      non-cash stock-based compensation expense controls with the following additional
      controls:





A
      review
      of the method of amortization in Equity Edge (the Company’s non-cash stock-based
      compensation expense application) for all grants on a quarterly basis to detect
      changes to previously input information.





A
      review
      of an Equity Edge system report, “Valuation Data Check,” on a quarterly basis
      that includes all grants, as opposed to only reviewing new grants in the quarter
      to detect changes to previously input information.





Notwithstanding
      the material weakness, management believes that the financial statements
      included in this report fairly present in all material respects our financial
      position, results of operations and cash flows for the periods
      presented.





*Changes
      in Internal Control Over Financial Reporting*





No
      change
      in our internal control over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act) occurred during the quarter ended December
      31, 2006 that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.




**Item
      9B.** ****** ***Other
      Information***




On
      December 20, 2006, the Compensation Committee approved for Frank E. Stearns,
      our
      Executive Vice President Client Operations, (i) an increase in salary to
      $400,000 per annum, and (ii) an award of 100,000 shares of restricted stock,
      each in connection with an increase in Mr. Stearns’ duties. The award of
      restricted stock was completed in January 2007. Mr. Stearns paid $.01 per share
      and, subject to continued employment, 26.666%
      of the total number of shares vest on June 1, 2008, and an additional 10% of
      the
      total number of shares vest on each December 1 and June 1 thereafter, with
      the
      final 3.334% of the total number of shares vesting on June 1, 2012. The shares
      may not be sold prior to vesting, and any shares not vested at the time Mr.
      Stearns’ employment with Eclipsys terminates, and that do not vest on an
      accelerated basis in connection with termination of his employment as described
      in his severance agreement, may be repurchased by Eclipsys at the original
      purchase price of $.01 per share.




**Part
      III**




**Item
      10.** **** **** ***Directors,
      Executive Officers and Corporate Governance***





**DIRECTORS
      OF ECLIPSYS CORPORATION**





The
      table
      below lists each of our directors. A summary of the background and experience
      of
      each of these individuals is set forth after the table.


**Name**
              
              **Age**
              
              **Position**
              
              **Member
                  Since**Dan
                  L. Crippen
              
              55
              
              Director
              
              June
                  2004Steven
                  A. Denning
              
              58
              
              Director
              
              March
                  1997R.
                  Andrew Eckert
              
              46
              
              Director,
                  Chief Executive Officer and President
              
              November
                  2005Eugene
                  V. Fife
              
              66
              
              Chairman
                  of the Board
              
              May
                  1997Edward
                  A. Kangas
              
              63
              
              Director
              
              June
                  2004Braden
                  R. Kelly
              
              36
              
              Director
              
              February
                  2001Jay
                  B. Pieper
              
              63
              
              Director
              
              May
                  1996




***Dan
      L. Crippen***  has
      been
      a Director of Eclipsys since
      June 2004. Mr. Crippen is currently self-employed as a consultant, advising
      medical device manufacturers, pharmaceutical companies, medical management
      firms, healthcare policy organizations, state and local governments, and others
      conducting business with the federal government .
      From
      1999 to 2003, Mr. Crippen served as the Director of the Congressional
      Budget Office. From 1996 to 1999, Mr. Crippen was a founding partner of
      Washington Counsel, P.C., a consulting firm.




***Steven
      A. Denning***  has
      been
      a Director of Eclipsys since
      March 1997. Mr. Denning is the Chairman and a Managing Director of General
      Atlantic LLC, a global private equity investment firm that provides capital
      for
      innovative companies where information technology or intellectual property
      is a
      key driver of growth, and has been with General Atlantic (or its predecessor)
      since 1980. Mr. Denning is also a director of Genpact, a global leader in
      providing high-quality business-process services; Hewitt Associates, Inc.,
      a
      global human resources outsourcing and consulting firm delivering a complete
      range of human capital management services; IHS Inc., a leading global provider
      of critical technical information, decision-support tools and related service;
      Liberata Limited, one of the United Kingdom’s leading specialists in business
      process outsourcing services; and The Thomson Corporation, a provider of
      integrated information solutions to business and professional
      customers.





***R.
      Andrew Eckert*** has
      been
      a Director of Eclipsys, as well as Chief Executive Officer and President, since
      November 14, 2005. From
      March 2004 to October 2005, Mr. Eckert served as Chief
      Executive Officer of
      SumTotal Systems, Inc., a provider of learning and business performance
      technologies and services. From 2002 to March 2004, he served as Chief
      Executive Officer of
      Docent, Inc., until it merged with Click2learn to form SumTotal Systems.
      Previously, Mr. Eckert spent eleven years with ADAC Laboratories, a global
      leader in nuclear medicine and radiation therapy planning systems, where he
      served as Chief Executive Officer (1997 to 2001), Chairman (1999 until its
      sale
      to Philips Medical Systems in 2000), and President (1994 to 1997). Prior to
      ADAC, he worked in the consulting and finance industries with Goldman Sachs,
      Summit Partners and Marakon Associates. Mr. Eckert serves as a board member
      of
      Varian Medical Systems, an oncology capital equipment company.





61


***Eugene
      V. Fife***  has
      been
      a Director of Eclipsys since May 1997 and has served as Chairman of the Board
      since January 2003. From
      April 2005 to November 14, 2005, Mr. Fife served as Chief Executive Officer
      and
      President of Eclipsys on an interim basis. Since December 1999, Mr. Fife
      has served as the founding principal of Vawter Capital, LLC, a private
      investment firm. Mr. Fife was formerly a general partner in Goldman
      Sachs & Co., where he served as a member of its Management Committee
      and as chairman of Goldman Sachs International. He retired from Goldman
      Sachs & Co. in 1995, but continues to serve as a Senior Director of the
      firm. Mr.
      Fife’s healthcare industry experience includes serving as Chief Executive
      Officer of Illuminis, Inc., a medical information systems company, from
      September 1996 to October 2000, and as a former member of the University of
      Virginia Medical Center’s Operating Board. Mr. Fife
      is also a director of Caterpillar, Inc., a heavy equipment and engine
      manufacturer, and is
      the Chairman of the Governing Council of the Miller Center of Public Affairs
      at
      the University of Virginia.





***Edward
      A. Kangas***  has
      been
      a Director of Eclipsys since
      June 2004. Mr. Kangas served as Chairman and Chief Executive Officer of
      Deloitte Touche Tohmatsu from 1989 to 2000. He also served as the Managing
      Partner of Deloitte & Touche (USA) from 1989 to 1994. Since his
      retirement from Deloitte in 2000, Mr. Kangas has served as a consultant to
      Deloitte and as Chairman of the National Multiple Sclerosis Society. He is
      also
      a director of Hovnanian Enterprises Inc., a national homebuilder; Electronic
      Data Systems Corporation, a provider of technology and outsourcing services;
      and
      Tenet Healthcare Corporation, a healthcare services company.





***Braden
      R. Kelly***  has
      been
      a Director of Eclipsys since
      February 2001. Mr. Kelly served as a Managing Director and General Partner
      of General Atlantic LLC, a global private equity investment firm that provides
      capital for innovative companies where information technology or intellectual
      property is a key driver of growth, since 1995. At General Atlantic, Mr. Kelly
      served as head of the firm's Palo Alto office and global healthcare practice,
      and as a member of its Investment Committee. He retired from General Atlantic
      at
      the end of 2006. Mr. Kelly has served on public and private boards of multiple
      healthcare technology and healthcare services companies.





***Jay
      B. Pieper***  has
      been
      a Director of Eclipsys since
      May 1996. Since May 1995, Mr. Pieper has served as Vice President of
      Corporate Development and Treasury Affairs for Partners HealthCare System,
      Inc.,
      the parent of Brigham and Women’s Hospital, Inc. and Massachusetts General
      Hospital. He is also President of Partners International Medical Services LLC.
      Mr. Pieper serves on the Board of Directors of Biopure Corporation, a
      manufacturer of pharmaceuticals and is a member and past director of the
      Financial Executives International.




**EXECUTIVE
      OFFICERS OF ECLIPSYS CORPORATION**





The
      table
      below lists our executive officers. A summary of the background and experience
      of each of these individuals (other than Mr. Eckert, whose information is above)
      is set forth after the table.


**Name**
              
              **Age**
              
              **Position**R.
                  Andrew Eckert
              
              46
              
              President
                  and Chief Executive OfficerJohn
                  E. Deady
              
              43
              
              Executive
                  Vice President Client SolutionsJohn
                  P. Gomez
              
              43
              
              Executive
                  Vice President and Chief Technology Strategy OfficerFrank
                  E. Stearns, Jr.
              
              47
              
              Executive
                  Vice President Client OperationsRobert
                  J. Colletti
              
              48
              
              Senior
                  Vice President, Chief Financial Officer and Chief Accounting
                  OfficerJohn
                  J. McAuley
              
              51
              
              Senior
                  Vice President OutsourcingBrian
                  W. Copple
              
              46
              
              Chief
                  Legal Officer, General Counsel and Corporate
                  Secretary




***John
      E. Deady*** joined
      Eclipsys in January 2006 as our Executive Vice President Client Solutions.
      Prior
      to joining Eclipsys, Mr. Deady served from October 2005 until January 2006
      as
      Vice President and General Manager, Revenue Cycle Solutions, at McKesson
      Corporation, a publicly traded provider of healthcare information technology.
      While at McKesson, Mr. Deady also served as Vice President of Marketing &
Sales Support from April 2004 until October 2005. In addition, Mr. Deady also
      served as National Vice President of New Business from October 2002 to April
      2004, and National Vice President of Clinical Sales Group from August 2001
      to
      October 2002. Previously, Mr. Deady also held executive sales and marketing
      positions at ADAC Laboratories, a global leader in nuclear medicine and
      radiation therapy planning systems; sales management positions with Cerner
      Corporation, a publicly traded provider of enterprise healthcare software and
      services; and a technical sales position at E.I. du Pont de Nemours and Company,
      a manufacturer of medical imaging consumables and capital
      equipment.





***John
      P. Gomez*** has
      served as our Executive Vice President and Chief Technology Strategy Officer
      since December 2004. Mr. Gomez held the title of Senior Vice President and
      Chief
      Technology Officer from August 2003, when he first joined Eclipsys. Prior to
      joining Eclipsys, Mr. Gomez served from October 2002 to January 2003 as senior
      vice president and chief technology officer at WebMD Corporation. Prior to
      that,
      Mr. Gomez served from February 2001 to October 2002 as Chief Technology Officer
      and Senior Vice President of strategic business development at Brill Media
      Holdings, an e-commerce and media publication company. Previously, Mr. Gomez
      held management technology positions at Microsoft Corporation, HRBlock Advanced
      Technology and KYMA Technologies, Inc.





***Frank
      E. Stearns, Jr*** .,
      has
      served as our Executive Vice President Client Operations since January 2007,
      which includes responsibility for all professional services, consulting, product
      support and our Technology Solutions Center. From November 2005 to December
      2006, Mr. Stearns served as our Senior Vice President of Professional Services,
      which included responsibility for Eclipsys’ consolidated services offerings, and
      from January 2003 to November 2005 he led Eclipsys’ consulting group. 
Prior to Eclipsys, from August 1999 to January 2003, Mr. Stearns served as
      a
      Vice President and Partner for Cerner Corporation, a publicly traded provider
      of
      enterprise healthcare software and services.  From October 1993 to August
      1999, Mr. Stearns served as Vice President of Decision Technologies at Computer
      Sciences Corporation (CSC), a worldwide provider of technology products and
      services focusing in the healthcare sector.





***Robert
      J. Colletti*** has
      served as our Senior Vice President, Chief Financial Officer and Chief
      Accounting Officer since August 2001. From June to August 2001, Mr. Colletti
      served as our Senior Vice President Finance and Chief Accounting Officer, and
      from January 1997 to June 2001 as our Vice President of Finance. Mr. Colletti
      joined Eclipsys in January 1997 as part of our acquisition of ALLTEL Healthcare
      Information Services, Inc. Previously, he spent seven years at Arthur Anderson
      LLP, specializing in emerging companies, primarily in the technology
      industry.





***John
      J. McAuley*** has
      served as our Senior Vice President Outsourcing since January 2007. He served
      as
      our Senior Vice President of Sales Support from April 2006 to January 2007.
      Prior to joining Eclipsys, Mr.
      McAuley served
      as
      the North America Sales Manager (December 2002 to April 2006) and Vice President
      and General Manager of Positron Emission Tomography (December 2000 to December
      2002) at Philips Medical, a provider a global leader in diagnostic imaging
      systems, healthcare information technology solutions, and patient monitoring
      and
      cardiac devices.





62


***Brian
      W. Copple*** joined
      Eclipsys in May 2005 as our Chief Legal Officer, General Counsel and Corporate
      Secretary.  Prior to joining Eclipsys, Mr. Copple served as Chief Legal
      Officer and General Counsel of Exult, Inc., a publicly traded provider of human
      resources and related business process outsourcing services, for five years
      until its acquisition by Hewitt Associates.  Previously, Mr. Copple was a
      partner with the law firm of Gibson, Dunn & Crutcher LLP.





**SECTION 16(a)
      BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**





Section 16(a)
      of the Securities Exchange Act of 1934 requires our directors, executive
      officers, and persons who beneficially own more than ten percent of our Voting
      Common Stock, to file reports of ownership and changes in ownership with the
      Securities and Exchange Commission. We are required
      to disclose in this report any late filings during the fiscal year ended
      December 31, 2006.





To
      our
      knowledge, based solely on our review of
      the
      copies of such reports required to be furnished to us and on the representations
      of the reporting persons, all of these reports were timely filed, except that
      Form 4 filings related to grants of deferred stock units made to our
      non-employee directors in 2006 were late due to Company administrative error.
      These late filings included a Form 4 that was filed on June 5, 2006 for each
      non-employee director to report an automatic annual grant of deferred stock
      units on May 12, 2006; one Form 4 was filed on August 21, 2006 for each of
      Messrs. Denning and Kelly to report an elective grant of deferred stock units
      in
      lieu of cash fees on August 14, 2006; and one Form 5 that was filed February
      7,
      2007 for each of Messrs. Denning and Kelly to report an elective grant of
      deferred stock units in lieu of cash fees on November 13, 2006.





**AUDIT
      COMMITTEE**





Our
      Board
      of Directors has established an Audit Committee, which operates under a charter
      that has been approved by the Board. A current copy of the Audit Committee’s
      charter is posted on the “Investor Relations -- Corporate Governance” section of
      our website at www.eclipsys.com .





The
      members of the Audit Committee are Messrs. Pieper (chairman), Crippen and
      Kangas. The Audit Committee met nine times during 2006.




The
      Board
      of Directors has determined that each of Messrs. Pieper, Crippen and Kangas
      is (i) an “audit committee financial expert” as defined in Item 401(h) of
      Regulation S-K, and (ii) independent as defined under the rules of the
      NASDAQ Global Select Market and the independence requirements set forth in
      Rule 10A-3 under the Securities Exchange Act of 1934.




**DIRECTOR
      CANDIDATE NOMINATING PROCEDURES**





The
      process followed by the Company’s Nominating & Governance Committee to
      identify and evaluate director candidates includes requests for recommendations,
      committee meetings from time to time to evaluate biographical information and
      material relating to potential candidates, and interviews of candidates by
      Board
      and Committee members.





In
      considering whether to recommend any particular candidate for inclusion in
      the
      Board’s slate of recommended director nominees, the Nominating & Governance
      Committee will apply the criteria set forth in our Corporate Governance Policy.
      These criteria include the candidate’s integrity, independence, judgment,
      business experience and background, as well as the Board’s needs. The Nominating
& Governance Committee does not assign specific weights to particular
      criteria. The Nominating & Governance Committee believes that the
      backgrounds and qualifications of our directors, considered as a group, should
      provide a composite mix of experience, knowledge and abilities that will allow
      the Board to fulfill its responsibilities.





Stockholders
      may recommend individuals to the Nominating & Governance Committee for
      consideration as potential director candidates and inclusion in our proxy
      statement for the 2008 Annual Meeting of Stockholders by submitting their names,
      together with appropriate biographical information and background materials
      and
      a statement as to whether the stockholder or group of stockholders making the
      recommendation has beneficially owned at least $2,000 in market value or 1%
      of
      our Voting Common Stock for at least a year as of the date such recommendation
      is made. Such information should be sent to the Nominating & Governance
      Committee, c/o Corporate Secretary, Eclipsys Corporation, 1750 Clint Moore
      Road,
      Boca Raton, Florida 33487. Assuming that appropriate biographical and background
      material has been provided on a timely basis and other procedural requirements
      have been satisfied, the Nominating & Governance Committee will evaluate
      stockholder-recommended candidates by following the same process, and applying
      the same criteria, as it follows for candidates submitted by others. If the
      Board determines to nominate a stockholder-recommended candidate and recommends
      his or her election, then his or her name will be included on our proxy card
      for
      the 2008 Annual Meeting of Stockholders.





Stockholders
      also have the right under our bylaws to directly nominate director candidates
      at
      an annual meeting even though such proposal is not included in the proxy
      statement for the annual meeting for which such nomination is to be considered. Pursuant
      to our bylaws, in order for any stockholder-recommended director candidate
      who
      is not included in the proxy statement for the 2008 Annual Meeting of
      Stockholders to be brought before the meeting by a stockholder of record, such
      stockholder must give notice of that director nomination to our Corporate
      Secretary not less than 60 days nor more than 90 days prior to the 2008 Annual
      Meeting of Stockholders. If less than 70 days notice or prior public disclosure
      of the meeting is given to stockholders, notice of the stockholder’s director
      nomination must be received by Eclipsys no later than the 10 th day
      following the date on which the notice was mailed or the 10 th day
      following public disclosure of the meeting date, whichever occurs first. The
      notice must contain the information required by our bylaws. Candidates
      nominated by stockholders in accordance with these bylaw procedures for
      consideration at the 2008 Annual Meeting of Stockholders will not be included
      on
      our proxy card for that annual meeting.








**CODE
      OF BUSINESS CONDUCT AND ETHICS**




Eclipsys
      has adopted a written Code of Business Conduct and Ethics that applies to our
      directors, officers and employees, including our principal executive officer,
      principal financial officer, principal accounting officer or controller, or
      persons performing similar functions. The Code of Business Conduct and Ethics
      is
      posted on the
      “Investor Relations -- Corporate Governance” section of our website at www.eclipsys.com . In
      addition, we intend to post on our website all disclosures that are required
      by
      law or NASDAQ Global Select Market listing standards concerning any amendments
      to, or waivers from, any provision of the Code of Business Conduct and
      Ethics.







63





**Item
      11.** ****** ***Executive
      Compensation***




**COMPENSATION
      DISCUSSION AND ANALYSIS**





**Overview
      and Objectives of our Executive Compensation Program**





The
      primary goals of our compensation program for named executive officers are
      to
      retain those individuals and to motivate and reward them for performance that
      increases value for the Company’s stockholders. The compensation program is
      designed to support these goals in specific ways.





First,
      annual cash bonuses are contingent upon meeting specified performance objectives
      related to earnings, revenue and sales bookings, which are the key contributors
      to increases in the value of our stock. Further, bonuses must “self fund,”
meaning that if payment of bonuses would cause earnings to be less than the
      level of earnings upon which bonus plan funding was based, then bonus plan
      funding must be reduced to the point that earnings meet the appropriate
      threshold net of plan funding. Finally, 2007 bonuses may not be paid in excess
      of target unless the board of directors approves a satisfactory 2008 budget
      for
      the Company. We believe these bonus plan features link payment of bonuses to
      corporate results that should tend to support increases in the value of our
      stock.




Second,
      stock options are granted with an exercise price equal to the fair market value
      of our stock on the date of grant, so the value of these awards depends upon
      increases the Company’s stock price. Both stock options and other equity awards
      can be expected to increase in value over time with sustained performance and
      result in a commensurate increase in the value of stockholders’ investments.





Third,
      the stock options and restricted stock owned by the named executive officers
      vest over a period of five years, providing an incentive for the named executive
      officers to continue serving as our executive officers through the vesting
      period.





Compensation
      of our named executive officers for 2006 should be reviewed in the context
      of
      recent changes in the Company and its executive officers. In late 2004, our
      board of directors determined that significant changes in our management were
      needed to support the Company’s ability to deliver sustained performance and
      growth in our evolving marketplace. Since then, a primary focus of our executive
      compensation program has been to support these changes by enabling us to recruit
      a new management team with appropriate experience and talent, retain that
      management team to formulate and execute upon a cohesive strategy, and motivate
      and reward that management team for success.





In
      January 2006, the compensation committee engaged Frederic W. Cook & Co.,
      Inc. (“Cook”) as its independent compensation consultant. Cook provided market
      benchmark information and recommendations regarding cash and non-cash
      compensation and related policies. Our executive compensation programs and
      the
      2006 compensation as described in this report reflect the compensation
      committee’s implementation of various compensation practices, as discussed
      below, which are based on recommendations provided by Cook, adapted to our
      circumstances as deemed appropriate by the compensation committee. Cook
      continues to advise the compensation committee, and among other things, we
      expect their advice to help guide our design of a long-term equity compensation
      program for the Company, which we expect to implement later in 2007 or in
      2008.





**Elements
      of our Executive Compensation Program**





The
      Company’s executive compensation consists of base salary, equity awards, and
      eligibility for an annual cash bonus based upon attainment of specified
      corporate performance objectives. We choose to provide these basic compensation
      elements because we believe if we did not we would be unable to recruit or
      retain capable executives.





In
      2006,
      the Company did not provide its named executive officers with deferred
      compensation arrangements, pension or supplemental retirement benefits, or
      unusual or excessive perquisites. Our compensation committee believes that
      the
      base salary, annual cash bonus and equity elements of our executive compensation
      are set at levels that, in the aggregate, represent a fair and attractive
      compensation package, and consequently that additional elements were not
      necessary to recruit, retain, motivate and reward the named executive officers.
      This belief could change over time, but currently our compensation committee
      does not plan for any named executive officer compensation for 2007 other than
      base salary, annual cash bonus and equity.





We
      attempt to provide aggregate compensation to our named executive officers that
      is competitive with what they could earn if they worked for the kinds of
      employers with which we compete for executive talent. These include not only
      our
      direct competitors, but also other technology companies and larger organizations
      that have operations similar to ours or otherwise provide training and
      experience relevant to management at Eclipsys. We have evaluated our executive
      compensation by reference to commercially available benchmark data, including
      Radford surveys, and by comparison to various “peer groups” and companies with
      characteristics comparable to ours. We believe that such comparisons, while
      useful, must be kept in perspective. Instead of seeking to compensate our named
      executive officers at a specified percentile within a peer group or survey,
      we
      believe that we must ultimately assess our executive compensation in terms
      of
      its fairness to the Company and the executives and its overall adequacy in
      fulfilling the objectives noted above.





In
      the
      future, we will continue to assess our executive compensation against various
      market benchmarks and will attempt to provide an aggregate compensation package
      that is competitive with what our executives could earn elsewhere. We believe
      that if the Company performs strongly and our stockholders benefit, executive
      officers should earn compensation that corresponds to such Company performance.
      This argues in favor of weighting compensation toward equity and
      performance-based bonuses. On the other hand, we believe executive salaries
      should deliver sufficient compensation to retain our executive team until value
      can be derived from bonus and equity components. Finding the right balance
      among
      these elements requires ongoing review and analysis based upon our operating
      results and market factors.





***Salary***





As
      described in more detail below, the current base salaries have been established
      for newly hired executives by reference to market benchmarks ****** and
      executive compensation precedent for the Company. Salaries for other executive
      officers have in some cases been set by reference to the salaries of newly
      hired
      executives. Salaries are paid to secure the services of the executive team
      and
      compensate for functional role and responsibility.





64


During
      2006, we reviewed our base salary structure company-wide and benchmarked all
      jobs to market comparables. Although we did budget for modest company-wide
      payroll increases, we did not budget for any increase in base salary for named
      executive officers for 2006 or 2007 (other than in connection with Mr. Stearns’
promotion) because we believe the base salary levels of our named executive
      officers are currently appropriate in light of our market comparisons and the
      purposes of the salary portion of our named executive officer compensation,
      including retaining our executives in years when company performance does not
      support earning significant value through performance-based bonus or equity
      awards.





Because
      the Company’s past performance has been inconsistent, we have relied to a
      significant degree upon base salaries to hedge against uncertainty about the
      level of compensation available through performance-based cash bonuses and
      stock
      options. We do not anticipate attempting to decrease the base salary levels
      of
      our named executive officers, and each of our named executive officers has
      a
      severance agreement that would entitle him to resign with “good reason” and
      collect severance compensation if his base salary were reduced. Conversely,
      we
      have not felt a need to increase base salary levels, and we expect that over
      time, as the Company evolves and performance improves, value of cash bonuses
      and
      equity awards will increase, and commensurately base salary will decrease as
      a
      percentage of overall named executive officer compensation.





***Bonus***





*Plan
      Structure*





Our
      corporate bonus plan (the “Bonus Plan”) covers named executive officers and
      other bonus plan participants (excluding sales employees participating in
      incentive compensation plans driven by their individual sales results). Cash
      bonuses for named executive officers and others under the Bonus Plan are
      contingent upon meeting certain specified performance objectives related to
      earnings, revenue and sales bookings, and therefore motivate and reward
      achievement of annual performance goals. We chose earnings (net income,
      excluding stock-based compensation) and revenue as performance criteria because
      we believe these fundamental measures of performance, together with our growth
      prospects, are the most important determinants of the value investors ascribe
      to
      the Company’s stock. We also chose to include sales bookings because current
      sales are the primary source of revenue growth in future periods, and are
      therefore critical to our future success.





Each
      named executive officer other than Mr. Eckert has a target bonus of $200,000;
      Mr. Eckert as CEO has a target of $400,000. Targets are set at a level that
      is
      competitive and intended to provide significant motivation to achieve our goals.
      All named executive officers’ bonuses under the Bonus Plan for 2006 and 2007 are
      earned in whole or part based solely upon Company performance, except that
      the
      2006 bonus for each of Messrs. Eckert and Deady was guaranteed at target as
      part
      of their inducement to leave their prior employment to join the Company. Bonuses
      for Messrs. Eckert and Deady are not guaranteed for 2007 and later. In the
      future, we may include individual performance elements in the bonus
      determination for executive officers. However, for 2006 and 2007, we adopted
      a
      uniform approach based on the Company’s performance because we believe that
      framework aligns most closely with our objective of delivering the fundamental
      financial performance that our stockholders expect. In addition, we think a
      uniform bonus approach omitting individual performance elements, as well as
      a
      common bonus target level, is helpful in fostering a sense of teamwork and
      common purpose among our new management team.





A
      summary
      of the Bonus Plan as applicable to 2006 and 2007, pursuant to which non-equity
      incentive plan awards are made, is set forth below in the “Narrative Disclosure
      Related to Summary Compensation Table and Grants of Plan Based Awards
      Table.”





*2006
      Bonus Payments*





For
      2006,
      the aggregate bonus pool was approximately $2.2 million, and after payment
      of
      approximately $675,000 in guaranteed bonuses not paid earlier in the year,
      the
      balance was allocated to participants according to the Bonus Plan. This resulted
      in payments to Messrs. Colletti, Gomez and Stearns of $40,000 each, representing
      20% of their respective bonus targets. These executive officer bonus payments
      fell well short of target because although the Company exceeded the minimum
      plan
      thresholds for bookings and revenue, the cost of paying bonuses even at 50%
      of
      target would have resulted in earnings below $.57 per share, which was the
      minimum that had to be achieved as a condition to payment of any bonuses. The
      maximum bonus funding that the Company could pay while still meeting the minimum
      of $.57 per share in earnings required under the 2006 Bonus Plan was 20% of
      target. Accordingly, all 2006 bonus plan participants, including the named
      executive officers, were paid at the same 20% level except that, as noted
      previously, 2006 bonuses paid to Messrs. Eckert and Deady were guaranteed at
      target per their employment agreements.




*2007
      Bonus Plan Features*





For
      2007,
      the aggregate of the target bonuses for the named executive officers is $1.2
      million, which represents approximately 12% of the total 2007 target bonus
      pool
      for all participants and is not an increase over 2006. The aggregate target
      bonus pool for all participants for 2007 was established by reference to the
      Company’s 2007 budget and was limited, along with other cost elements such as
      planned headcount increases, in connection with budgeting for target earnings.
      Executive officer target bonuses are set by reference to market benchmarks
      and
      in connection with salary levels and equity compensation; the compensation
      committee is more concerned with the appropriateness of overall compensation
      levels than with maintaining some specified portion of the aggregate bonus
      pool
      for executive officers, and the compensation committee views current target
      bonus levels for named executive officers as appropriate.





The
      2007
      Bonus Plan target thresholds associated with the performance objectives were
      set
      in connection with our annual budgeting process and were designed for
      consistency with our strategic plans and performance projections. It is not
      possible to predict with certainty how likely it will be for the Company to
      achieve performance levels corresponding to target or minimum bonus payments
      for
      2007. The Company’s view is that performance corresponding to payment of bonuses
      at target is realistically achievable but will require consistently strong
      execution throughout the year, and that performing at these levels would
      represent significant growth over 2006 and justify payment of bonuses at target.
      The Company expects at a minimum to achieve performance levels corresponding
      to
      payment of bonuses at 50% of target, and believes that such performance levels
      would represent solid improvement over 2006. As in 2006, the plan must “self
      fund,” so that if payment of bonuses would cause earnings to be less than the
      level of earnings upon which plan funding was based, then plan funding must
      be
      reduced to the point that earnings meet the appropriate threshold net of plan
      funding. The compensation committee believes this is an appropriate plan feature
      because of the importance of establishing a record of earnings performance.





The
      2007
      Bonus Plan provides that bonuses may not be paid in excess of target unless
      the
      board of directors approves a satisfactory 2008 budget for the Company. The
      compensation committee determined that this requirement was appropriate in
      order
      to prevent potential funding of bonuses above target at the expense of future
      performance.





The
      2007
      Bonus Plan provides that the calculation of earnings per share for purposes
      of
      determining bonus pool funding excludes compensation expense resulting from
      FAS
      123R, and, to the extent approved by the board, ** charges
      associated with restructuring activities, and the effect of acquisitions, stock
      splits or repurchases, and other transactions not in the ordinary course of
      business consistent with recent practice. This is to ensure that there is no
      disincentive to take corporate actions that the board determines are in the
      Company’s best interests but that might otherwise reduce bonus plan
      funding.




65


***Equity***





*Overview*





We
      use
      equity compensation to align the interests of named executive officers with
      the
      interests of stockholders, and to help retain named executive officers over
      time. Historically, the Company did not have an established consistent practice
      as to the granting of equity incentive awards. The amount of equity historically
      included in executive compensation has been based on the view that equity grants
      are an effective tool to motivate and reward employees and determined largely
      by
      reference to previous grants to other executives and advice and analysis
      specific to each particular executive officer’s role within the Company. In
      addition, equity awards to recently hired named executive officers were set
      at
      levels we believed were necessary for recruitment of our management team. Going
      forward, we envision a more structured framework regarding executive officer
      equity involving derivation of target total compensation for each executive
      officer based upon market and other factors, establishment of an overall annual
      budget for company-wide equity awards, and allocation from that budget to
      executive officers generally and each named executive specifically based upon
      the expected value of equity over time, so that the equity component, when
      combined with cash elements, approximates the target aggregate compensation
      over
      time. This requires us to assess the “value” of equity based awards, both in
      terms of their cost to the Company from an accounting point of view for budget
      purposes (which requires a “Black-Scholes” or other methodology acceptable under
      FAS 123R), as well as in terms of their value to executive officer recipients
      (which requires an analysis of expected returns).





In
      2006,
      grants of stock options and restricted stock to executive officers were limited
      to specific circumstances involving hiring, promotion or retention; there were
      no “regular” or programmatic equity awards to named executive officers or
      others. For 2006 and beyond, the compensation committee has sought to minimize
      annual awards outside of a structured program. Therefore, we are working to
      implement a more structured ****** equity
      awards program that will include executive officers as well as others in the
      Company. No decisions have been made regarding the details of this program
      or
      the date or dates on which awards might be granted. However, it is anticipated
      that equity awards to named executive officers will be part of the same basic
      program as awards to other participants, and that stock option grants will
      generally be made on scheduled grant dates consistent with our Stock Option
      Grant Date Guidelines described immediately below. The compensation committee
      does not believe it was necessary to implement such a structured program for
      named executive officers in 2006 or early 2007 because all named executive
      officers received new-hire or special grants relatively recently and have
      significant potential value remaining in unvested awards.





*Stock
      Option Grant Date Guidelines*





In
      July
      2006, the compensation committee adopted the Eclipsys Corporation Stock Option
      Grant Date Guidelines for all participants. They provide that stock options
      for
      existing employees and new hires will generally be granted on the regularly
      scheduled grant date coinciding with or next following the date on which the
      grant is approved, or in the case of a new hire the regularly scheduled grant
      date coinciding with or next following the first day of employment. Regularly
      scheduled stock option grant dates are on the 15 th day (or
      if the 15 th day is
      not a business day on which the securities markets are open, then the next
      business day following the 15 th )
      of the
      second and third calendar months of each fiscal quarter. However, if a scheduled
      grant date falls during any regularly scheduled quarterly blackout period under
      the Company’s insider trading policy, then that grant date will occur on the day
      the blackout period ends. The guidelines permit the board or compensation
      committee to choose grant dates other than the specified grant dates on a
      case-by-case basis, but this discretion has not been exercised to
      date.





The
      compensation committee implemented these guidelines for three primary reasons.
      First, they tend to reduce perceptions of inequity among grant recipients who
      should otherwise receive stock options more or less contemporaneously, but
      with
      different exercise prices. Second, concentrating grants reduces administration.
      Third, we believe that, in general, it is appropriate to grant stock options
      during open trading windows under our insider trading policy following the
      release of quarterly or annual financial information, so that the fair market
      value exercise price of the options is likely to reflect all financial and
      other
      information (positive or negative) about the Company that is generally available
      to all investors at the time of the grant. The Company does not have a program,
      plan or practice to time the release of material non-public information for
      the
      purpose of affecting the value of compensation for the named executive
      officers.





*Restricted
      Stock*




In
      addition to stock options, the Company has granted restricted stock to certain
      management-level employees, including each of the named executive officers.
      However, use of restricted stock has been sparing to date, largely because
      the
      accounting treatment of stock options was more favorable than for restricted
      stock before the effectiveness of FAS 123R in January 2006. As of the date
      of
      this filing, in total, there are 12 holders owning a total of
      approximately 500,000 shares of restricted stock not yet vested.
      Approximately half of these shares were issued to our Chief Executive Officer
      and EVP Customer Solutions as inducement grants to attract their services,
      buy
      out compensation from previous employers, and retain them through short-term
      market volatility. It may be beneficial to increase our use of restricted stock
      in the future because a properly structured equity grant program that combines
      stock options and restricted stock may be more efficient economically for the
      Company, and more effective for recruitment, retention and compensatory
      purposes, than grants of stock options alone. Our 2005 Stock Incentive Plan
      includes a 500,000 share sublimit on grants other than stock options and SARs
      ,
      so our ability to use restricted stock in a broad-based manner will be limited
      unless in the future we ask stockholders to modify the 2005 plan, or adopt
      a new
      plan, to eliminate or increase this sublimit.




66


*Inducement
      Grants*





The
      equity awards made to Messrs. Eckert and Deady in connection with their initial
      hire were structured as inducement grants made without stockholder approval
      pursuant to Section 4350(i)(1)(A)(iv) of the NASD Marketplace Rules. The
      compensation committee decided to make these awards as inducement grants because
      they otherwise would have consumed a majority of the shares then available
      under
      the Company’s 2005 Stock Incentive Plan, leaving inadequate shares available for
      grants to other employees. As a consequence, the compensation resulting from
      those awards does not qualify for the performance-based compensation exemption
      from the $1 million limit on deductible compensation under Internal Revenue
      Code
      Section 162(m). We may make inducement grants from time to time in the future
      in
      connection with high-level hires with substantial initial equity awards, but
      in
      general, our policy is to make equity awards under our 2005 Stock Incentive
      Plan
      or a successor plan approved by our stockholders.





**Named
      Executive Officers**





In
      December 2004, the board began a series of changes in executive management.
      The
      compensation of Mr. Eckert (CEO) and Mr. Deady (SVP Client Solutions) was
      recently determined through negotiation as part of their recruitment and hiring.
      As a result of required public disclosure and the importance of “internal
      equity,” the compensation packages of Messrs. Eckert and Deady, as well as other
      recently hired executives, became a *de
      facto* benchmark leading to various adjustments in compensation for other named
      executive officers. However, the compensation committee has taken certain steps
      to adjust the mix of executive compensation and avoid further increases, based
      upon the compensation committee’s perception that current levels of executive
      compensation are adequate for retention, motivation and reward purposes. First,
      when possible, we have reduced the compensation paid for specific jobs and/or
      shifted compensation away from base salary. For example, Mr. Eckert’s base
      salary is $100,000 below the level of his predecessor (although he could earn
      more total cash compensation through his bonus plan if the Company performs
      well). Second, the named executive officers and other direct reports of the
      CEO
      did not receive any increase in base salary or target bonus during 2006 (except
      for increases awarded to Mr. Stearns in connection with his advancement as
      described below). Third, Messrs. Eckert, Deady and Gomez did not receive any
      equity awards in 2006 (other than awards to Mr. Deady in connection with
      commencement of his employment in January 2006, as described
      below).





***R.
      Andrew Eckert, President & CEO.*** Mr.
      Eckert was hired in October 2005 ****** and
      became President and CEO in November 2005. The compensation committee set his
      compensation package taking into account market benchmarks and the compensation
      packages of other executive officers of the Company. The compensation committee
      made substantial initial equity awards to Mr. Eckert in order to induce him
      to
      join the Company and to motivate and reward increases in stockholder value.
      The
      compensation committee intended the initial equity awards to suffice for at
      least two years, and accordingly no additional equity awards were made to Mr.
      Eckert in 2006 and none are anticipated for 2007. Mr. Eckert’s first year bonus
      was guaranteed at its $400,000 target to compensate him for bonus opportunities
      foregone at his prior employer and because factors for which he was not
      responsible could have a significant effect upon the Company’s 2006 results and
      impair his ability to earn a 2006 bonus based upon Company performance. Mr.
      Eckert’s future bonuses are not guaranteed.





***John
      E. Deady, EVP Client Solutions.*** In
      January 2006, we hired Mr. Deady as EVP Client Solutions, one of three key
      operating roles reporting to the Chief Executive Officer. The compensation
      committee set his compensation package taking into account market benchmarks
      and
      the compensation packages of the other executive officers responsible for the
      Company’s operations. The compensation committee made substantial initial equity
      awards to Mr. Deady in order to induce him to join the Company and to motivate
      and reward increases in stockholder value. The compensation committee intended
      the initial equity awards to suffice for at least two years, and accordingly,
      no
      additional equity awards were made to Mr. Deady in 2006 and none are anticipated
      for 2007. Mr. Deady’s first year bonus was guaranteed at its $200,000 target to
      compensate him for bonus opportunities foregone at his prior employer and
      because factors for which he was not responsible could have a significant effect
      upon the Company’s 2006 results and impair his ability to earn a 2006 bonus
      based upon Company performance. Mr. Deady’s future bonuses are not guaranteed.





***Frank
      E. Stearns, EVP Client Services.*** Mr.
      Stearns received an option to purchase 100,000 shares in March 2006 in
      recognition of his performance and the importance of his role in helping us
      achieve the critical objective of improving client service, and in an effort
      to
      retain his services. In May 2006, Mr. Stearns received an increase in his target
      bonus from $150,000 to $200,000, in recognition of his potential contributions
      and the importance of his role, and so that his target bonus would match the
      target bonuses of other named executive officers (other than the CEO). In
      January 2007, Mr. Stearns was promoted to EVP Client Services, one of three
      principal operating roles in the Company under our new management structure.
      In
      recognition of his promotion, he received 100,000 shares of restricted stock
      and
      an increase in his base salary from $300,000 to $400,000. While the intent
      of
      these changes was to compensate him at a level commensurate with his peers
      at
      the Executive Vice President level in the organization, the compensation
      committee determined that a salary of $400,000 was more appropriate than the
      $450,000 salary level of Messrs. Gomez and Deady, based upon market benchmarks.





***John
      P. Gomez, Chief Technology Strategy Officer.*** Early
      in
      2005, Mr. Gomez received an increase in salary to approximate the compensation
      packages of certain other executive officers. The compensation committee deemed
      this to be appropriate in light of Mr. Gomez’s contributions to client service
      and his role in managing the Company’s software development. Since that time,
      Mr. Gomez has not received any salary increases or additional equity awards
      because his current base salary is considered adequate based upon market data
      and previously-granted equity awards are continuing to provide substantial
      additional compensation as they vest.





***Robert
      J. Colletti, SVP and Chief Financial Officer.*** In
      April
      2006, Mr. Colletti received an option to acquire 125,000 shares of our common
      stock. This was Mr. Colletti’s first stock option grant in three years and was
      made in recognition of the importance of his role and in an effort to align
      his
      future equity incentives more closely with those of other executive officers.
      Mr. Colletti did not receive any salary increase in 2006 because his current
      base salary is considered adequate based upon market data.








67





**Additional
      Executive Compensation Matters**





***Role
      of executive officers in determining executive
      compensation***





By
      its
      charter, the compensation committee is responsible for determining compensation
      for the Company’s executive officers. The CEO makes recommendations to the
      compensation committee regarding compensation for other executive officers,
      and,
      together with other executive officers, provides information and advice to
      the
      compensation committee regarding the structure and mechanics of bonus and equity
      award programs. The compensation committee makes it decisions about the CEO’s
      compensation in executive session, although no decisions regarding Mr. Eckert’s
      compensation have been necessary since his hiring in October 2005 because his
      compensation has been governed by his employment agreement.





***Tax
      Considerations***





Historically,
      Internal Revenue Code Section 162(m) has not been a significant consideration
      for the Company for two reasons. First, few employees have had the opportunity
      to receive annual income in excess of $1 million, particularly excluding stock
      option gains that would qualify as “performance-based” for Section 162(m)
      purposes. Second, the Company has generated limited taxable income, has
      accumulated significant net loss carryforwards and a full valuation allowance
      against its net deferred tax asset, so the financial statement effect of
      non-deductibility of any executive officer income would be delayed. However, we
      expect
      our tax situation to evolve as our performance improves, and in the future,
      as
      the deductibility of compensation expense offers immediate financial benefits,
      we will be more reluctant to use forms of compensation that are not deductible
      under Section 162(m). We also anticipate that the Company’s 2007 proxy statement
      will include a proposal for stockholder approval of the Company’s Incentive
      Compensation Plan for 2008 and beyond, which reflects the determination by
      the
      compensation committee that maximizing the extent to which executive
      compensation qualifies as “performance-based” income under Section 162(m) and is
      therefore deductible is expected to confer meaningful economic benefits in
      the
      future.





***Potential
      Effect of Misconduct on Compensation***





The
      Company does not have a policy to seek to recover from named executive officers
      as a result of restatements or adjustments of financial statements or
      performance measures in the absence of fraud or intentional misconduct. However,
      if a named executive officer received compensation based upon financial
      statements or other performance measures that are subsequently restated or
      otherwise adjusted as a result of the named executive officer’s fraud or
      intentional misconduct, and net of the restatement or adjustment, the financial
      statements or performance measures would have dictated lower compensation than
      the named executive officer received, the Company would consider, among other
      remedies and in light of the applicable facts and circumstances, seeking
      reimbursement from the named executive officer of any compensation received
      by
      the named executive officer in excess of what the named executive officer would
      have received based upon the restated or adjusted financial statements or
      performance measures.








**COMPENSATION
      COMMITTEE REPORT**





The
      compensation committee has reviewed the Compensation Discussion and Analysis
      and
      discussed that Analysis with management. Based upon its review and discussions
      with management, the committee recommended to our Board of Directors that the
      Compensation Discussion and Analysis be included in the Company’s Annual Report
      on Form 10-K for 2006 and the Company’s 2007 proxy statement.





Edward
      A.
      Kangas, Chair


Dan
      L.
      Crippen


Steven
      A.
      Denning








68








**EXECUTIVE
      COMPENSATION IN 2006**








**SUMMARY
      COMPENSATION TABLE**


**Non-Equity****Stock**
              
              **Option**
              
              **Incentive
                  Plan**
              
              **All
                  Other****Awards****1**
              
              **Awards****1**
              
              **Compensation****2**
              
              **Compensation**
              
              
              
              **Total****Name
                  and Principal Position**
              
              **Year**
              
              **Salary ($)**
              
              **Bonus ($)**
              
              
              
              **($)**
              
              **($)**
              
              **($)**
              
              **($)**
              
              
              
              **($)****R.
                  Andrew Eckert**,
                  President and Chief Executive Officer (principal executive
                  officer)
              
              
              2006
              
              
              650,000
              
              
              400,0003
              
              
              
              
              
              478,477
              
              
              1,230,860
              
              
              --
              
              
              35,3964
              
              
              
              
              
              2,794,733**Robert
                  J. Colletti**,
                  Senior Vice President and Chief Financial Officer (principal financial
                  officer)
              
              
              2006
              
              
              350,000
              
              
              --
              
              
              
              
              
              30,220
              
              
              250,816
              
              
              40,000
              
              
              1,5005
              
              
              
              
              
              672,536**John
                  E. Deady**,
                  Executive Vice President Client Solutions
              
              
              2006
              
              
              432,692
              
              
              200,0003
              
              
              
              
              
              379,577
              
              
              1,201,962
              
              
              --
              
              
              82,4596
              
              
              
              
              
              2,296,690**John
                  P. Gomez**,
                  Executive Vice President and Chief Technology Strategy
                  Officer
              
              
              2006
              
              
              450,000
              
              
              --
              
              
              
              
              
              366,324
              
              
              817,826
              
              
              40,000
              
              
              --
              
              
              
              
              
              1,674,150**Frank
                  E. Stearns**,
                  Executive Vice President Professional Services7
              
              
              2006
              
              
              303,846
              
              
              --
              
              
              
              
              
              --
              
              
              445,708
              
              
              40,000
              
              
              1,5005
              
              
              
              
              
              791,054**John
                  A. Adams**,
                  former Executive Vice President Business Solutions8
              
              
              2006
              
              
              411,923
              
              
              --
              
              
              
              
              
              356,883
              
              
              1,193,882
              
              
              --
              
              
              2,995,225
              
              
              
              
              
              4,957,913**Russ
                  J. Rudish**,
                  former Executive Vice President Sales, Marketing & Customer
                  Solutions9
              
              
              2006
              
              
              15,576
              
              
              --
              
              
              
              
              
              --
              
              
              --
              
              
              --
              
              
              1,726,426
              
              
              
              
              
              1,742,002





1 In
      accordance with the rules of the Securities and Exchange Commission, these
      amounts are the 2006 expense recognized by the Company for financial statement
      reporting purposes in connection with stock awards or option awards in
      accordance with FAS 123R, but disregarding the estimate of forfeitures related
      to service-based vesting conditions. The Company’s stock option valuation
      approach and related assumptions are described in Note 5 “Employee Benefit
      Plans” to the Consolidated Financial Statements on this Form 10-K. The reported
      amount does not necessarily reflect aggregate income that may be recognized
      by
      the individual for income tax purposes upon vesting of awards or sale of shares,
      or the value that may be realized by the individual upon sale of shares, which
      amounts will depend upon the fair market value of the shares at the times awards
      vest and shares are sold and may be more or less than the amount shown.





2 These
      amounts were earned pursuant to the Company’s 2006 Bonus Plan, under which
      payments were calculated as a function of 2006 earnings per share (subject
      to
      certain adjustments), revenue and bookings. See the narrative disclosure below
      for a description of the 2006 Bonus Plan.





3 Represents a guaranteed bonus for 2006 pursuant to the individual’s employment
      agreement and is in lieu of 2006 Non-Equity Incentive Plan compensation pursuant
      to the Company’s 2006 Bonus Plan.





4 Reimbursement by the Company for tax preparation, legal and other professional
      fees, consisting of $23,910 and $11,486 in income tax gross-up thereon. Mr.
      Eckert is entitled pursuant to his employment agreement to be reimbursed for
      up
      to $25,000 per year for such expenses, plus income tax gross-ups.





5 Represents 401(k) plan matching contributions made by the Company.





6 Represents $65,419 paid by the Company to counsel who represented Mr. Deady
      in a
      legal action filed against Mr. Deady by his former employer in connection with
      commencement of his employment with the Company, and $17,040 paid by the Company
      to counsel who represented Mr. Deady in negotiation of his employment
      arrangements with the Company and preparation of employment documents. The
      Company agreed pursuant to Mr. Deady’s employment agreement to provide these
      benefits as an inducement to Mr. Deady to join the Company.





7 Mr.
      Stearns was promoted to Executive Vice President Professional Services on
      February 7, 2007. Before the promotion his title was Senior Vice President
      Professional Services. His annual salary increased from $300,000 to $400,000
      in
      December 2006 in connection with that promotion.





69


8 The
      Company terminated the employment of Mr. Adams without cause as of November
      22,
      2006. Under the rules of the Securities and Exchange Commission, information
      regarding Mr. Adams is included because the compensation shown in this table
      would have made him one of the Company’s three most highly compensated executive
      officers other than the principal executive officer and principal financial
      officer if he had been serving as an executive officer at the end of 2006.
      The
      amount shown as All Other Compensation represents (i) $47,148 in reimbursement
      by the Company for income tax preparation, legal and other professional fees,
      consisting of $30,213 and an additional $16,935 in income tax gross-up thereon,
      and (ii) $2,948,077 in severance benefits paid to Mr. Adams in 2006 or accrued
      in 2006 for later payment in connection with termination of his employment
      arrangements. See the narrative disclosure below for a description of the
      severance benefits.




9 The
      Company terminated the employment of Mr. Rudish without cause as of January
      5,
      2006. Under the rules of the Securities and Exchange Commission, information
      regarding Mr. Rudish is included because the compensation shown in this table
      would have made him one of the Company’s three most highly compensated executive
      officers other than the principal executive officer and principal financial
      officer if he had been serving as an executive officer at the end of 2006.
      The
      amount shown as All Other Compensation represents (i) $9,220 in reimbursement
      by
      the Company for income tax preparation, legal and other professional fees,
      and
      (ii) $1,717,206 in severance benefits paid to Mr. Rudish in 2006 or accrued
      in
      2006 for later payment in connection with termination of his employment. See the
      narrative disclosure below for a description of the severance
      benefits.





**GRANTS
      OF PLAN-BASED AWARDS TABLE**


**Estimated
                    Possible Payouts Under****Non-Equity Incentive Plan Awards****2****Name**
                
                **Grant**
                
                **Approval**
                
                **Threshold**
                
                **Target**
                
                **Maximum**
                
                **All Other
                    Stock Awards: Number of Shares of Stock or Units**
                
                **All Other
                  Stock Awards: Number
                  of Shares of Stock or Units**
                
                **Exercise
                    or Base Price of Option Awards**
                
                **Closing
                    Price on Grant Date****3******
                
                **Grant
                    Date Fair Value of Stock and Option Awards****4****Date**
                
                **Date****1**
                
                **($)**
                
                **($)**
                
                **($)**
                
                **(#)**
                
                **(#)**
                
                **(S/Sh)**
                
                **($ / Sh)**
                
                **($)**R.
                    Andrew Eckert
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Robert
                    J. Colletti
                
                
                5/12/06
                
                
                4/27/06
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                125,0005
                
                
                19.18
                
                
                19.50
                
                
                1,443,540--
                
                
                --
                
                
                100,000
                
                
                200,000
                
                
                260,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --John
                    E. Deady
                
                
                1/9/06
                
                
                12/21/05
                
                
                --
                
                
                --
                
                
                --
                
                
                100,0006
                
                
                --
                
                
                --
                
                
                --
                
                
                1,939,5951/9/06
                
                
                12/21/05
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                400,0006
                
                
                21.03
                
                
                21.15
                
                
                5,047,384John
                    P. Gomez
                
                
                --
                
                
                --
                
                
                100,000
                
                
                200,000
                
                
                260,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Frank
                    E. Stearns
                
                
                3/8/06
                
                
                2/22/06
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                100,0005
                
                
                25.12
                
                
                24.40
                
                
                1,496,794--
                
                
                --
                
                
                100,000
                
                
                200,000
                
                
                260,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --John
                    A. Adams7
                
                
                --
                
                
                --
                
                
                100,000
                
                
                200,000
                
                
                260,000
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Russ
                    J. Rudish8
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --




1 The
      compensation committee approved the equity awards on the referenced dates,
      and
      specified that the grants would take place in the future, in the case of Mr.
      Deady when his employment commenced, in the case of Mr. Colletti following
      the
      filing of the Company’s quarterly report on Form 10-Q that was pending at the
      time the award was approved, and in the case of Mr. Stearns following the filing
      of the Company’s annual report on Form 10-K that was pending at the time the
      award was approved.





2 All
      Non-Equity Incentive Plan Awards were made under the Company’s 2006 Bonus
      Plan *.* These
      awards are for 2006 only and the actual amount earned in 2006 in respect of
      these awards by each individual other than Mr. Adams was $40,000, as reflected
      in the Summary Compensation Table. Actual payments in respect of these awards
      were less than the Threshold amount because of the plan requirement that bonus
      payments not reduce 2006 earnings below $.57 per share. Pursuant to Mr. Adams’
employment agreement, he received $178,630 as a pro-rata portion of his target
      payment in connection with termination of his employment. As reflected in the
      Summary Compensation Table, Mr. Eckert and Mr. Deady each had a guaranteed
      bonus
      for 2006 pursuant to his employment agreement, which was in lieu of non-equity
      incentive plan awards under the Company’s 2006 Bonus Plan. See the narrative
      disclosure below for additional details.





3 The
      rules of the Securities and Exchange Commission require that if the exercise
      price of a stock option is less than the closing market price of the underlying
      security on the date of grant, this column must be included to show the closing
      market price of the underlying security on the date of grant. At the times
      these
      grants were made, the Company’s convention was to determine the fair market
      value of the Company’s common stock for purposes of setting the exercise price
      of the stock option by reference to the NASDAQ closing price on the trading
      date
      immediately preceding the date of grant. Accordingly, the closing market price
      on the date of grant differs from the exercise price, reflecting market trading
      activity on the date of grant. The Company subsequently changed its convention
      and now uses the NASDAQ closing price on the date of grant as its measure of
      the
      fair market value for purposes of determining the exercise price of stock
      options.





70


4 In
      accordance with the rules of the Securities and Exchange Commission, this amount
      is the entire “fair value” of the award computed in accordance with FAS 123R for
      its anticipated life and is reported for the year in which the grant was made;
      t he
      reported amount does not necessarily reflect the value that may be realized
      by
      the individual because the award vests over approximately five years from the
      date of grant contingent upon continued employment, and the actual amount
      received upon sale of shares will depend upon the fair market value of the
      shares at the times they are sold.





5 Award
      made under the Company’s 2005 Stock Incentive Plan. See the narrative disclosure
      below for terms of the awards.





6 Award
      made under the Company’s 2005 Inducement Grant Stock Incentive Plan as an
      inducement grant pursuant to Section 4350(i)(1)(A)(iv) of the NASD Marketplace
      Rules. Mr. Deady paid $.01 per share to the Company in connection with the
      stock
      award. See
      the
      narrative disclosure below for terms of the awards.





7 The
      Company terminated Mr. Adams’ employment without cause as of November 22,
      2006.





8 The
      Company terminated Mr. Rudish’s employment without cause as of January 5,
      2006.








**Narrative
      Disclosure Related to Summary Compensation Table and Grants of Plan-Based Awards
      Table**





*Employment
      Agreements with Named Executive Officers*





The
      Company has entered into employment agreements with each of Messrs. Eckert,
      Deady and Gomez, which
      provide for the base salary and bonus compensation described in the preceding
      tables, as well as at-will employment and the severance benefits described under the heading “Potential Payments Upon Termination or
      Change-in-Control.”  Messrs. Colletti and Stearns do not have employment
      agreements with the Company; however, Messrs. Colletti and Stearns are parties
      to severance
      agreements with the Company, as more fully described under the heading “Potential
      Payments Upon Termination or Change-in-Control.”





*Terms
      of Awards*





The
      award
      to Mr. Deady of 100,000 shares of the Company’s common stock was made in
      connection with commencement of his employment on January 9, 2006. Mr. Deady
      paid $.01 per share. Subject to continued employment, 26.666%
      of the total number of shares vest on June 1, 2007, and an additional 10% of
      the
      total number of shares vest on each December 1 and June 1 thereafter, with
      the
      final 3.334% of the total number of shares vesting on June 1, 2011. The shares
      may not be sold prior to vesting, and any shares not vested at the time Mr.
      Deady’s employment with the Company terminates, and that do not vest on an
      accelerated basis in connection with termination of his employment as described
      in his employment agreement, may be repurchased by the Company at the original
      purchase price of $.01 per share.





The
      award
      to Mr. Deady of a non-qualified option to purchase up to 400,000 shares of
      the
      Company’s common stock was made in connection with commencement of his
      employment on January 9, 2006. Subject to continued employment, the option
      vests
      with respect to 20% of the underlying shares on February 1, 2007 and with
      respect to the remaining 80% of the underlying shares in 48 equal consecutive
      monthly installments on the first day of each calendar month
      thereafter .
      The
      option is forfeited to the extent not already vested at the time Mr. Deady’s
      employment with the Company terminates and not accelerated in connection with
      termination of his employment as described in his employment agreement.





The
      award
      to Mr. Colletti of a non-qualified option to purchase up to 125,000 shares
      of
      the Company’s common stock was made on May 12, 2006. Subject to continued
      employment, the option vests with respect to 20% of the underlying shares on
      June 1, 2007 and with respect to the remaining 80% of the underlying shares
      in
      48 equal consecutive monthly installments on the first day of each calendar
      month thereafter .
      The
      option is forfeited to the extent not already vested at the time Mr. Colletti’s
      employment with the Company terminates and not accelerated in connection with
      termination of his employment as described in his severance agreement.





The
      award
      to Mr. Stearns of a non-qualified option to purchase up to 100,000 shares of
      the
      Company’s common stock was made on March 8, 2006. Subject to continued
      employment, the option vests with respect to 20% of the underlying shares on
      April 1, 2007 and with respect to the remaining 80% of the underlying shares
      in
      48 equal consecutive monthly installments on the first day of each calendar
      month thereafter .
      The
      option is forfeited to the extent not already vested at the time Mr. Stearns’
employment with the Company terminates and not accelerated connection with
      termination of his employment as described in his severance agreement.





The
      five-year vesting schedules for these awards are consistent with the vesting
      schedules of similar awards made to employees other than the named executive
      officers. The stock options described above, like other stock options granted
      by
      the Company, expire ten years after grant.





71


*Bonuses
      and Non-Equity Incentive Plan Compensation*





The
      Bonus
      Plan as applicable to 2006 and 2007 (pursuant to which non-equity incentive
      plan
      compensation is paid) has the following basic structure:





-
      The
      total target bonus pool consists of the target bonuses of all plan
      participants.





-
      The
      bonus pool is funded based upon actual Company performance against three
      performance objectives: earnings, revenue, and sales bookings.





-
      The
      Company objectives are weighted 50% to earnings, 25% to revenue and 25% to
      sales
      bookings, and each objective has a minimum threshold and a target.





-
      If
      actual performance does not meet the minimum threshold for each performance
      objective, the bonus pool does not fund and bonus payments, if any, are at
      the
      discretion of the board of directors.





-
      If
      actual performance meets at least the minimum threshold for each objective,
      then
      the amount of bonus pool funding will be determined by multiplying the weighting
      of each performance objective by the percentage attainment for that performance
      objective, and adding those products. For these purposes, the minimum threshold
      for each objective corresponds to 50% attainment, the target threshold for
      each
      objective corresponds to 100% attainment, and the maximum threshold for each
      objective corresponds to 130% attainment. Actual results between thresholds
      are
      interpolated.





-
      Actual
      performance against the earnings objective is measured net of total bonus
      payments, so that payment of bonuses does not reduce earnings below the level
      of
      earnings used in calculating the bonus pool. Bonus pool funding is required
      to
      be reduced to the maximum amount that meets this requirement.





-
      Bonus
      pool funding is allocated among plan participants in three tiers according
      to
      the ratio of the total unpaid bonus targets of all participants in each tier
      to
      the aggregate target bonus pool for the entire plan.





As
      described in more detail above, Messrs. Eckert and Deady had guaranteed bonuses
      for 2006. The other named executive officers received non-equity incentive
      plan
      awards under the Bonus Plan, and actual bonus payments were below the 50% of
      target threshold because a portion of bonus accruals were surrendered to satisfy
      the minimum $.57 earnings requirement.





*Severance
      Payments*





Messrs.
      Adams and Rudish had employment agreements providing that upon termination
      by
      the Company of employment without cause, they would be entitled to severance
      compensation equal to 18 months’ salary, 150% of target bonus, a pro-rata bonus
      paid at target for the portion of the year he served until the termination
      of
      his employment, and acceleration of 12 months’ vesting of stock options and
      restricted stock, as well as reimbursement for health insurance premiums for
      up
      to 18 months.





The
      severance benefits for Mr. Adams listed in the Summary Compensation Table above
      consist of $1,153,630 in cash payments, $432,600 in value for accelerated
      vesting of 20,000 shares of restricted stock, $1,194,400 in value (determined
      in
      accordance with FAS 123R) for accelerated vesting of 80,000 stock options,
      $102,447 in value (determined in accordance with FAS 123R) for extension of
      Mr.
      Adams’ post-employment stock option exercise period by 23 days until March 15,
      2007, and $65,000 for benefits including outplacement services and reimbursement
      of health insurance premiums paid under COBRA.





The
      severance benefits for Mr. Rudish listed in the Summary Compensation Table
      above
      consist of $977,739 in cash payments, and $736,050 in value for accelerated
      vesting of 35,000 shares of restricted stock, and $3,417 in reimbursement of
      COBRA health insurance premiums. The Company and Mr. Rudish negotiated for
      vesting of 15,000 shares of restricted stock, in addition to the 12 months’
vesting called for by his employment agreement, in lieu of any accelerated
      vesting of stock options.




*Additional
      Information*





Although
      the Company does not anticipate paying dividends, if the Company were to pay
      dividends, they would be payable on restricted stock, whether or not vested,
      on
      the same basis as other shares of common stock.





72


**EXECUTIVE
      EQUITY PLAN HOLDINGS AND EXERCISE ACTIVITY**





**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END TABLE**


**Option
                  Awards**
              
              
              **Stock
                  Awards****Number
                  of Securities Underlying Unexercised Options (#)****1**
              
              **Option
                  Exercise**
              
              **Option
                  Expiration**
              
              **Number
                  of Shares or Units of Stock that Have Not Vested**
              
              **Market
                  Value of Shares or Units of Stock that Have Not Vested****Name**
              
              **Exercisable**
              
              **Unexercisable**
              
              **Price
                  ($)**
              
              **Date**
              
              **(#)
                  2**
              
              **($)
                  3**R.
                  Andrew Eckert
              
              
              105,000
              
              
              420,000
              
              
              15.90
              
              
              11/14/15120,000
              
              
              2,467,200Robert
                  J. Colletti
              
              
              665
              
              
              --
              
              
              6.50
              
              
              7/15/0710,001
              
              
              --
              
              
              7.50
              
              
              11/4/072,000
              
              
              --
              
              
              13.50
              
              
              4/8/0841,334
              
              
              --
              
              
              23.38
              
              
              3/22/0910,000
              
              
              --
              
              
              15.12
              
              
              10/15/0940,000
              
              
              --
              
              
              9.53
              
              
              5/1/1040,000
              
              
              --
              
              
              8.25
              
              
              7/11/10100,000
              
              
              --
              
              
              13.20
              
              
              9/27/1129,332
              
              
              10,668
              
              
              8.88
              
              
              4/29/13--
              
              
              125,000
              
              
              19.18
              
              
              5/12/165,166
              
              
              106,213John
                  E. Deady
              
              
              --
              
              
              400,000
              
              
              21.03
              
              
              1/9/16100,000
              
              
              2,056,000John
                  P. Gomez
              
              
              20,000
              
              
              10,000
              
              
              13.26
              
              
              8/11/1331,677
              
              
              18,333
              
              
              11.95
              
              
              10/22/1368,000
              
              
              52,000
              
              
              13.35
              
              
              2/4/1456,000
              
              
              84,000
              
              
              19.70
              
              
              12/1/1457,499
              
              
              1,182,179Frank
                  E. Stearns
              
              
              11,000
              
              
              4,000
              
              
              8.88
              
              
              4/29/1322,667
              
              
              17,335
              
              
              13.35
              
              
              2/4/145,250
              
              
              9,750
              
              
              15.77
              
              
              3/4/15--
              
              
              100,000
              
              
              25.12
              
              
              3/8/16John
                  A. Adams4
              
              
              233,348
              
              
              --
              
              
              19.96
              
              
              3/15/07
              
              
              --
              
              
              --Russ
                  J. Rudish5
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --


1 The
      grant date of each stock option is ten years before the expiration date shown
      in
      the table. All of the stock options vest (or vested) with respect to 20% of
      the
      underlying shares on or shortly following the first anniversary of the grant
      date and with respect to the remaining 80% of the underlying shares in equal
      monthly installments over the following 48 months, except some of Mr. Colletti’s
      grants that are already fully exercisable vested over three or four-year
      periods.





2 June 1
      and December 1 of each year are scheduled vesting dates for restricted stock
      awards. Subject to continued employment: the first vesting date is the scheduled
      vesting date that is on or immediately following the first anniversary of the
      grant date, and on that date vesting is 20% of the total number of shares
      covered by the award plus a number of shares equal to the product of 1.667%
      of
      the total number of shares and the number of complete calendar months, if any,
      elapsed during the period beginning on the first anniversary of the grant date
      and ending on the first vesting date. On each of the eight scheduled vesting
      dates next succeeding the first vesting date, an additional 10% of the total
      number of shares covered by the award vests, except that the number of shares
      vesting on the last of such eight succeeding scheduled vesting dates will be
      less than 10% of the total number of shares if and to the extent that the number
      of shares vesting on the first vesting date exceeded 20% of the total number
      of
      shares. Mr. Eckert’s award of 150,000 shares was granted November 14, 2005, and
      the shares unvested at fiscal year-end will (subject to continued employment)
      continue to vest at a rate of 15,000 shares each scheduled vesting date until
      December 1, 2010. Mr. Deady’s award of 100,000 shares was granted on January 9,
      2006, and vests with respect to 26,666 shares on June 1, 2007, and with respect
      to 10,000 shares each scheduled vesting date thereafter, with the final 3,334
      shares vesting on June 1, 2011. Mr. Colletti’s award of 10,000 shares was
      granted July 1, 2004, and the shares unvested at fiscal year end will continue
      to vest at a rate of 1,000 shares each scheduled vesting date with the final
      166
      shares vesting December 1, 2009. Mr. Gomez’s awards were made 30,000 on July 1,
      2004 and 70,000 shares on December 1, 2004 and the shares unvested at fiscal
      year end will continue to vest at an aggregate rate of 10,000 shares each
      scheduled vesting date, with the final 7,499 shares vesting December 1,
      2009.




73


3 In
      accordance with the rules of the Securities and Exchange Commission, the values
      represent the product of the number of shares that have not vested and $20.56,
      which was the closing market price of the Company’s Common Stock at the end of
      2006. The reported amount does not necessarily reflect the value that may be
      realized by the individual because the award vests over approximately five
      years
      from the date of grant contingent upon continued employment, and the actual
      amount received upon sale of shares will depend upon the fair market value
      of
      the shares at the times they are sold.





4 The
        Company terminated Mr. Adams’ employment without cause as of November 22, 2006.
        The stock options shown represent 153,348 options vested during service plus
        80,000 vested on an accelerated basis pursuant to contractual severance
        arrangements in connection with termination of his employment. The balance
        of
        his stock options were canceled in connection with termination of his
        employment.





5 The
      Company terminated Mr. Rudish’s employment without cause as of January 5, 2006.
      In connection with termination of his employment, all unvested stock options
      were canceled, 35,000 unvested shares of restricted stock were vested on an
      accelerated basis pursuant to contractual severance arrangements, and the
      balance of his restricted stock was repurchased by the Company at $.01 per
      share.




**OPTION
      EXERCISES AND STOCK VESTED TABLE**


**Option
                  Awards**
              
              **Stock
                  Awards****Number of Shares
                  Acquired on Exercise**
                **(#)**
              
              **Value Realized
                  on Exercise****1**
                **($)**
              
              **Number of Shares
                  Acquired on Vesting****2**
                **(#)**
              
              **Value Realized
                  on Vesting****3**
                **($)****Name**R.
                  Andrew Eckert
              
              
              --
              
              
              --
              
              
              30,000
              
              
              629,100Robert
                  J. Colletti
              
              
              ---
              
              
              --
              
              
              1,000
              
              
              19,4401,000
              
              
              20,970John
                  E. Deady
              
              
              --
              
              
              --
              
              
              --
              
              
              --John
                  P. Gomez
              
              
              --
              
              
              --
              
              
              10,000
              
              
              194,40010,000
              
              
              209,700Frank
                  E. Stearns
              
              
              --
              
              
              --
              
              
              --
              
              
              --John
                  A. Adams4
              
              
              --
              
              
              --
              
              
              28,335
              
              
              550,83229,998
              
              
              648,857Russ
                  J. Rudish5
              
              
              147,625
              
              
              1,621,239
              
              
              55,000
              
              
              1,049,700


1 Represents the aggregate of the difference between the market price of the
      Company’s common stock at exercise and the exercise price of the option for each
      share acquired upon exercise.





2 Shares
      shown as “acquired” represent shares vested, and are calculated before and do
      not reflect (i) surrender to the Company of vested shares to reimburse the
      Company for deposits paid by the Company on behalf of the individual to federal
      and state tax authorities, as applicable, in respect of income resulting from
      vesting; or (ii) sale of 10% of vested shares on or about the vesting date
      pursuant to Rule 10b5-1 trading plans to generate funds to pay the incremental
      federal income tax due as a result of vesting in excess of tax deposits paid
      by
      the Company on behalf of the individual at the statutory minimum rate of 25%.
      Vesting dates for the amounts shown are listed in footnote 3 below.





3 In
      accordance with the rules of the Securities and Exchange Commission, the values
      shown as “realized” represent the product of the number of shares vested and the
      fair market value per share on the vesting date. No representation is made
      regarding any sales other than as described in footnote 2 above; actual amounts
      realized by individuals upon sale depend
      upon the fair market value of the shares at the times they are sold .





4  The
      Company terminated Mr. Adams’ employment without cause as of November 22, 2006.
      As part of his severance benefits, as of the date of termination of his
      employment Mr. Adams received accelerated vesting of 9,998 shares of restricted
      stock otherwise scheduled to vest December 1, 2006 and an additional 20,000
      shares of restricted stock otherwise schedule to vest in the future.




5 The
      Company terminated Mr. Rudish’s employment without cause as of January 5, 2006.
      As part of his severance benefits, as of the date of termination of his
      employment, Mr. Rudish received accelerated vesting of 35,000 shares of
      restricted stock otherwise scheduled to vest in the future.





74





**DIRECTOR
      COMPENSATION**





**DIRECTOR
      COMPENSATION TABLE**


**Fees Earned or
                  Paid in Cash****1**
              
              
              
              **Stock
                  Awards****4**
              
              **Option Awards****4**
              
              **Total****Name**
              
              **($)**
              
              
              
              **($)**
              
              **($)**
              
              **($)**Dan
                  L. Crippen
              
              61,000
              
              
              
              
              
              43,748
              
              
              104,256
              
              
              209,004Steven
                  A. Denning
              
              
              49,0002
              
              
              
              
              
              43,748
              
              
              34,553
              
              
              127,301Eugene
                  V. Fife
              
              
              190,750
              
              
              
              
              
              43,748
              
              
              172,763
              
              
              407,261Edward
                  A. Kangas
              
              
              72,500
              
              
              
              
              
              43,748
              
              
              104,256
              
              
              220,504Braden
                  R. Kelly
              
              
              54,2503
              
              
              
              
              
              43,748
              
              
              34,553
              
              
              132,551Jay
                  B. Pieper
              
              
              74,750
              
              
              
              
              
              43,748
              
              
              55,284
              
              
              173,782





1 Consists
      of annual retainers, meeting fees, and additional fees of $115,000 for Eugene
      V.
      Fife as chairman of the board, $15,000 for Jay B. Pieper as chairman of the
      audit committee, $10,000 for Edward A. Kangas as chairman of the compensation
      committee, and $3,750 for Braden R. Kelly as chairman of the nominating &
governance committee.





2 Includes
      $39,250 that Mr. Denning elected to defer and receive in the form of deferred
      stock units rather than cash.





3 Includes
      $42,500 that Mr. Kelly elected to defer and receive in the form of deferred
      stock units rather than cash.





4  In
      accordance with the rules of the Securities and Exchange Commission, these
      amounts are the 2006 expense recognized by the Company in accordance with FAS
      123R for financial statement reporting purposes in connection with stock awards
      or option awards. The reported amount does not necessarily reflect aggregate
      income that may be recognized by the individual for income tax purposes upon
      vesting of awards or sale of shares, or the value that may be realized by the
      individual upon sale of shares, which amounts will depend upon the fair market
      value of the shares at the times awards vest and shares are sold and may be
      more
      or less than the amount shown. Stock Awards amounts c onsist
      of
      the pro-rata portion of each director’s annual grant of $75,000 in deferred
      stock units recognized as expense in 2006. The Stock Awards amount for Mr.
      Fife
      excludes expense recognized in 2006 in connection with a grant of 100,000 shares
      of restricted stock made to him in April 2005 in connection with his service
      as
      interim Chief Executive Officer of the Company.




***Narrative
      Disclosure Related to Director Compensation Table***





Each
      non-employee director of the Company is compensated for service on the Company’s
      board through a combination of cash fees and equity.





Cash
      fees
      include an annual retainer of $35,000, attendance fees of $2,000 per board
      meeting and $1,500 per committee meeting (with those amounts halved for
      telephonic participation), and additional annual fees of $115,000 for the
      chairman of the board, $15,000 for the audit committee chairman, $10,000 for
      the
      compensation committee chairman, and $5,000 for the nominating and governance
      committee chairman.





Equity
      compensation takes the form of deferred stock units (“DSUs”) granted under the
      Company’s 2005 Stock Incentive Plan as of the date of each annual meeting of the
      Company's stockholders (the "Annual Meeting"). Each individual who is elected
      as
      a non-employee director at the Annual Meeting, or who is a continuing
      non-employee director immediately after such Annual Meeting, will be granted
      a
      number of DSUs equal to the quotient obtained by dividing $75,000 by the fair
      market value of the Company’s Common Stock on the date of the Annual Meeting
      (the "Annual Grant DSUs"). However, if the date of the Annual Meeting is during
      a regular quarterly blackout period under the Company’s Insider Trading Policy,
      then the Annual Grant DSUs are granted upon termination of that regular
      quarterly blackout period, but not earlier than the day after the completion
      of
      two full day trading sessions of the principal exchange or market system upon
      which the Company’s common stock trades following the filing of the SEC report
      on Form 10-Q or Form 10-K that includes financial statements for the most
      recently completed fiscal quarter of the Company. Each DSU represents a notional
      right to receive one share of Common Stock at the time specified below.





75


Each
      Annual Grant DSU vests in four equal increments on each 91-day interval
      following the date of the Annual Meeting with respect to such Annual Grant
      DSU
      is made or, if earlier, upon the non-employee director's death or the occurrence
      of a change in control as defined in the Plan and the appendix to the Plan
      setting forth rules related to the DSUs, or the annual meeting of stockholders
      immediately following the meeting with respect to which the Annual Grant DSU
      was
      granted.





A
      non-employee director may elect to receive DSUs in lieu of all or a portion
      of
      his or her annual retainer fees, committee chair fees, and per-meeting fees.
      Such fees shall be converted to DSUs by dividing (i) the amount of cash by
      (ii)
      the Fair Market Value of the Common Stock as of the date of conversion. All
      DSUs
      issued for deferred cash compensation are fully vested at all times.





Shares
      of
      Common Stock equal to the whole number of vested DSUs credited to a non-employee
      director as of the date the non-employee director ceases to serve as a member of
      the Board (or, if earlier, the date of a change in control) are issued to the
      non-employee director on the earlier of (i) the first business day coincident
      with or next following the date that is six-months following the cessation
      of
      Board service, or (ii) the date of a change in control.





In
      addition to the foregoing, initial equity awards may be made to induce new
      directors to join the Board in the future. The nature and amount of any such
      awards are determined by the Board at the time based upon then-current
      circumstances.





All
      directors are reimbursed for the expenses they incur in the course of Board
      service.





This
      director compensation program was implemented in 2006. Earlier, the Company
      made
      periodic stock option grants to directors but did not have a program of regular
      equity awards and did not compensate directors for meeting attendance or
      committee chair service.




**POTENTIAL
      PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**





**Messrs.
      Eckert and Deady**





***Severance
      Benefits***





Subject
      to the paragraph below regarding reductions, if Eclipsys were to terminate
      the
      employment of Mr. Eckert or Mr. Deady for any reason other than cause,
      disability or death, or if Mr. Eckert or Mr. Deady were to terminate his
      employment with good reason, he would be entitled to (i) continuation of his
      salary and target bonus for 18 months, (ii) 12 months' additional vesting of
      his
      restricted stock, stock options and any other equity-based awards, and (iii)
      payment of his target bonus on a pro-rata basis for the portion of the year
      he
      served until the date of termination without regard to any performance
      requirements. He would also be entitled to reimbursement for the cost of
      continuing his health insurance benefits for 18 months or until he became
      eligible to receive similar benefits from another employer. However, if a change
      in control of Eclipsys were to occur and Eclipsys or its successor were to
      terminate the employment of Mr. Eckert or Mr. Deady for any reason other than
      cause, disability or death, or if Mr. Eckert or Mr. Deady were to terminate
      his
      employment with good reason, within two years following the change in control,
      or within 180 days before and in anticipation of the change in control, then
      he
      would be entitled to (i) continuation of his salary and target bonus for 24
      months, (ii) acceleration of vesting of all of his stock options, restricted
      stock and any other equity-based awards, and (iii) payment of his target bonus
      on a pro-rata basis for the portion of the year he served until the date of
      termination without regard to any performance requirements, as well as gross-up
      payments to offset the effect of any applicable excess parachute payments tax.
      He would also be entitled to reimbursement for the cost of continuing his health
      insurance benefits for 24 months or until he became eligible to receive similar
      benefits from another employer.





In
      case
      of death or disability, he or his survivors would be entitled to payment of
      his
      target bonus on a pro-rata basis for the portion of the year he served until
      the
      date of termination.





In
      addition to the contractual severance rights of the executives, the plans
      pursuant to which all equity awards granted to the named executive officers
      were
      granted provide that in connection with a change in control, all equity awards
      will be assumed by the successor or replaced by equivalent awards of the
      successor, and will vest on an accelerated basis if not so assumed or replaced,
      or if the recipient’s employment is terminated by the company without cause or
      by the recipient with good reason within a year following the change in control.





***Reductions***





If
      Mr.
      Eckert or Mr. Deady becomes entitled to severance benefits (whether or not
      in
      connection with a change in control), then for each Dollar by which the Total
      Equity Value (as described below) exceeds the applicable cap (which is $6
      million for Mr. Eckert and $4 million for Mr. Deady), the amount of cash
      severance otherwise payable to him as part of the severance benefits will be
      reduced by one Dollar, with the total amount of such reductions spread evenly
      over the term that such cash severance would otherwise be payable. In addition,
      if he would be entitled to severance benefits in circumstances other than in
      connection with a change in control, then for each Dollar by which the Vested
      Equity Value (as described below) exceeds the applicable cap, the accelerated
      vesting of stock options, restricted stock or other equity-based awards that
      would otherwise occur as a part of the severance benefits or pursuant to any
      plan or agreement governing such awards will be reduced by one Dollar in value,
      with such reductions coming first from stock options and then from restricted
      stock and then from other awards, and with such reductions measured by the
      gross
      spread on options that would otherwise accelerate and the gross value of shares
      of restricted stock or other awards that would otherwise accelerate. For these
      purposes, “Vested Equity Value” means (i) the value of vested restricted stock
      and other vested awards (other than stock options) owned beneficially by the
      executive, plus (ii) the spread on vested stock options owned beneficially
      by
      the executive, plus (iii) the gross proceeds received by the executive or his
      transferee from sales of restricted stock and payment of other awards (other
      than stock options) in the four-year period ending on the date of termination
      of
      employment, plus (iv) the amount by which gross proceeds from sales by the
      executive or his transferee, in the four-year period ending on the date of
      termination of employment, of shares obtained upon exercise of stock options
      exceeded the exercise price thereof, plus (v) the amount by which the value
      of
      shares obtained upon exercise of stock options and still beneficially owned
      by
      the executive or his transferee exceeds the exercise price paid for those
      shares. “Total Equity Value” means Vested Equity Value plus (i) the value of
      restricted stock and other awards (other than stock options) that would vest
      as
      a part of severance benefits, plus (ii) the spread on stock options that would
      vest as a part of severance benefits, calculated as the aggregate of the amount
      by which the value of a share of stock issuable upon exercise of each stock
      option vesting as part of the severance benefits exceeds the exercise price
      payable therefor. Measures of value of stock options, restricted stock and
      other
      awards will be taken at fair market value on the date of termination of
      employment.





76


***Additional
      Requirements and Limitations***





If
      the
      successor in any change in control of Eclipsys offers to retain Mr. Eckert
      or
      Mr. Deady in a Comparable Position, then he is not entitled to terminate his
      employment with good reason due to a change in his responsibilities. For these
      purposes, “Comparable Position” for Mr. Eckert means (i) Chief Executive Officer
      of the successor organization, with duties, responsibilities, authority and
      participation in management commensurate with that role; or (ii) Chief Executive
      Officer or President of the portion of the successor organization that succeeds
      to the business of the Company (whether organized as a subsidiary, division,
      or
      otherwise) (the “Successor Business”), if (A) the Successor Business (1) is the
      natural successor to the business of the Company following the Change in Control
      and continues in the same basic business as the Company, and (2) operates with
      a
      significant degree of autonomy; and (B) Mr. Eckert’s role with the Successor
      Business (1) involves operational control of the Successor Business, and (2)
      would not result in a diminution of the substantive operational scope of Mr.
      Eckert’s role from the substantive operational scope of his role with the
      Company. “Comparable Position” for Mr. Deady means (i) Executive Vice President
      of the Successor Business, or if the Successor Business does not use that title,
      then a title within the Successor Business’s organizational structure that is
      comparable to Executive Vice President in the Company’s organizational
      structure, with duties, responsibilities, authority and participation in
      management commensurate with that role, if (A) the Successor Business is the
      natural successor to the business of the Company following the Change in Control
      and continues in the same basic business as the Company; and (B) Mr. Deady’s
      role with the Successor Business would not result in a material diminution
      of
      the substantive operational scope of Mr. Deady’s role from the substantive
      operational scope of his role with the Company.





In
      connection with his employment, each of Mr. Eckert and Mr. Deady has also
      entered into an Agreement re Specified Acts providing for cessation of unpaid
      severance benefits and disgorgement of previously realized severance benefits
      (in excess of $200,000) if at any time during or within two years following
      termination of his employment, he becomes employed by or affiliated with any
      of
      certain specified competitors, or violates in any material respect any material
      contractual obligation or legal duty to the Company.





**Mr.
      Gomez**





The
      severance arrangements applicable to Mr. Gomez are substantially the same as
      those applicable to Messrs. Eckert and Deady, except that (i) Mr. Gomez is
      not
      subject to the “Comparable Position” requirement and is not party to an
      Agreement re Specified Acts, each as described above in the section entitled
      “Additional Requirements and Limitations,” (ii) accelerated vesting in case of
      termination not in connection with a change in control applies only to equity
      awards made after March 15, 2005 (the date of Mr. Gomez’s employment agreement),
      and (iii) required relocation constitutes “Good Reason” for Mr. Gomez even in
      connection with a headquarters establishment. Instead of an Agreement re
      Specified Acts, Mr. Gomez is party to an agreement that restricts certain
      post-employment activities that would be competitive with the Company’s business
      or make inappropriate use of the Company’s confidential information.





**Messrs.
      Colletti and Stearns**





***Severance
      Benefits***





Each
      of
      Messrs. Colletti and Stearns is party to a severance agreement with the Company
      dated July 31, 2006 providing that if the Company or its successor terminates
      his employment under any circumstances other than for cause, death or
      disability, or if he resigns his employment with good reason, then he would
      be
      entitled to (i) continuation of base salary (but not bonus, commissions or
      other
      incentive compensation) for 12 months, (ii) a cash amount equal to 100% of
      his
      target annual bonus in effect on the date of termination without regard to
      any
      performance requirements, and (iii) one year of accelerated vesting of stock
      options, restricted stock or other equity-based awards granted to him after
      the
      date of the severance agreement (unless the Company specifies within 30 days
      before or after the original date of issuance of the award that it is not
      subject to this acceleration provision). He would also be entitled to
      reimbursement for the portion of the cost of continuing his health insurance
      benefits equal to the portion being paid by the Company at the time of
      termination of his employment for 12 months or until he became eligible to
      receive similar benefits from another employer.





***Additional
      Requirements and Limitations***





The
      severance agreement provides that if at any time during or within one year
      following termination of his employment, he becomes employed by or affiliated
      with any competitor, or violates in any material respect any material
      contractual obligation or legal duty to the Company, and fails to cure, then
      Eclipsys may cancel any equity awards that vested pursuant to the severance
      agreement, recover the value he may have realized upon sale during the two
      preceding years of shares underlying equity awards that vested pursuant to
      the
      severance agreement, and cease any severance payments and recover any severance
      already paid in excess of $25,000.





**Quantification
      of Payments Upon Termination or Change in Control**





The
      following table shows severance benefits payable for each named executive
      officer in an ordinary severance situation ( *i.e.* not in
      connection with a change in control), as well as in connection with a change
      in
      control. In accordance with SEC rules, the amounts shown assume that the
      triggering event in question occurred on December 31, 2006, the last day of
      fiscal year 2006, and are based on a price of $20.56 for the Company’s common
      stock, which was the reported closing price of the Company’s common stock on
      December 29, 2006. This table does not reflect the value of reimbursement for
      the cost of continuation of health insurance described above.








77





**SEVERANCE
      BENEFITS TABLE**


Ordinary
                  Severance
              
              Change
                  in Control Severance1Accelerated
                  Vesting
              
              
              
              
              
              Accelerated
                  VestingCash
                  ($)
              
              Stock
                  Options2 ($)
              
              Restricted
                  Stock3 ($)
              
              Total
                  ($)
              
              Cash
                  ($)
              
              Stock
                  Options4($)
              
              Restricted
                  Stock5($)
              
              Total
                  ($)R.
                  Andrew Eckert
              
              
              1,975,000
              
              
              489,300
              
              
              616,800
              
              
              3,081,100
              
              
              2,500,000
              
              
              1,957,200
              
              
              2,467,200
              
              
              6,924,400Robert
                  J. Colletti
              
              
              550,000
              
              
              -
              
              
              -
              
              
              550,000
              
              
              550,000
              
              
              -
              
              
              -
              
              
              550,000John
                  E. Deady
              
              
              1,175,000
              
              
              -
              
              
              411,200
              
              
              1,586,200
              
              
              1,500,000
              
              
              -
              
              
              2,056,000
              
              
              3,556,000John
                  P. Gomez
              
              
              1,175,000
              
              
              -
              
              
              -
              
              
              1,175,000
              
              
              1,500,000
              
              
              678,007
              
              
              1,182,178
              
              
              3,360,185Frank
                  E. Stearns
              
              
              600,000
              
              
              -
              
              
              -
              
              
              600,000
              
              
              600,000
              
              
              -
              
              
              -
              
              
              600,000


1 Messrs.
      Eckert, Deady and Gomez are entitled to income tax gross-ups on severance
      compensation payable in connection with a change in control to offset the
      effects of any 20% excise tax on excess parachute payments under Section 4999
      of
      the Internal Revenue Code. An
      executive is treated as having received excess parachute payments if the
      payments or benefits received are contingent on a change in the ownership or
      control of a corporation, and the aggregate amount of such payments and benefits
      equal or exceeds three times the executive’s base amount compensation (salary
      plus bonus). The value of such gross-ups is not reflected in this table. Based
      on assumptions as of December 31, 2006 and Black-Scholes modeling, the value
      of
      such gross-ups are as follows: Mr. Eckert - $2,256,537; Mr. Deady - $1,548,228;
      and Mr. Gomez - $911,886.





2 Reflects
      accelerated vesting of 105,000 shares for Mr. Eckert. Mr. Deady’s options are
      out-of-the money at $20.56. Messrs. Gomez, Colletti, and Stearns had no options
      that qualified for acceleration in an ordinary severance situation as of
      December 31, 2006.





3 Reflects
      accelerated vesting of 30,000 shares for Mr. Eckert and 20,000 shares for Mr.
      Deady. Messrs. Gomez, Colletti, and Stearns had no restricted stock that
      qualified for acceleration in an ordinary severance situation as of December
      31,
      2006.





4 Reflects
      accelerated vesting of 420,000 shares for Mr. Eckert and 164,333 shares for
      Mr.
      Gomez. Mr. Deady’s options are out-of-the money at $20.56. Messrs. Colletti and
      Stearns had no options that qualified for acceleration in a change in control
      severance situation as of December 31, 2006.





5 Reflects
      accelerated vesting of 120,000 shares for Mr. Eckert, 100,000 shares for Mr.
      Deady, and 57,499 shares for Mr. Gomez. Messrs. Colletti and Stearns had no
      restricted stock that qualified for acceleration in a change in control
      severance situation as of December 31, 2006.





**COMPENSATION
      COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**





Messrs. Crippen,
      Denning, and Kangas served during 2006 as members of the Compensation Committee.
      None of Messrs. Crippen, Denning or Kangas was at any time during 2006, or
      at any other time, an officer or employee of the Company. No interlocking
      relationships exist between the Board of Directors or the Compensation Committee
      and the board of directors or the compensation committee of any other company,
      nor has any interlocking relationship existed in the past. See “Certain
      Relationships and Related Transactions, and Director Independence” in Item 13
      below for a description of certain related party transactions between the
      Company and affiliates of Mr. Denning and Mr. Fi fe.





78





**Item
      12.** **** **** ***Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters***




**EQUITY
      COMPENSATION PLANS**





The
      following table provides information about the Common Stock that may be issued
      under our existing equity compensation plans as of December 31, 2006.


**Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights**
              
              **Weighted-average
                  exercise price of outstanding options, warrants and
                  rights**
              
              **Number
                  of securities remaining available for future issuance under equity
                  plans**Equity
                  compensation plans approved by security holders (1)
              
              
              4,589,492
              
              $
              14.40
              
              
              2,301,423ESPP
                  Plan
              
              
              13,214
              
              $
              19.53
              
              
              949,514Equity
                  compensation plans not approved by security holders (2)
              
              
              925,000
              
              $
              18.12
              
              
              --Total
              
              
              5,527,706
              
              
              
              
              
              3,250,937




(1)
      This
      table excluded an aggregate of 117,092 options issuable upon the exercise of
      outstanding options assumed by Eclipsys in connection with various
      acquisitions.  The weighted average price of the excluded options is
      $33.20.


(2)
      Represents options which are granted in 2004 and 2005 without stockholder
      approval as an inducement


grant
      in
      accordance with NASDAQ rules related to the hiring of Mr. Adams as our Executive
      Vice President and
      Chief
      Administrative Officer and Mr. Eckert as our President and Chief Executive
      Officer. Eclipsys
      terminated the employment of Mr. Adams without cause as of November 22,
      2006.





79





**BENEFICIAL
      OWNERSHIP OF VOTING COMMON STOCK**





The
      following table sets forth certain information regarding the beneficial
      ownership of our Voting Common Stock and Voting Common Stock equivalents as
      of
      May 1, 2007 by (i) each person or entity who is known by us to
      beneficially own more than 5% of the outstanding shares of Voting Common Stock;
      (ii) each director or nominee for director; (iii) each of the
      executive officers named in the Summary Compensation Table set forth under
      the
      caption “Executive Compensation” below; and (iv) all directors and
      executive officers as a group. Unless otherwise indicated, each person or entity
      named in the table has sole voting power and investment power (or shares such
      power with his or her spouse) with respect to all shares of capital stock listed
      as owned by such person or entity. We have no outstanding shares of Non-Voting
      Common Stock.





As
      compensation for Board service, our non-employee directors receive a portion
      of
      their total fees in the form of deferred stock units (“DSUs”). Under the rules
      of the Securities and Exchange Commission, DSUs are not included in calculating
      beneficial ownership of our Voting Common Stock because the holder of a DSU
      does
      not have voting or investment power with respect to the DSU or the underlying
      shares. Nonetheless, we consider the disclosure of DSU ownership to be relevant
      to investors because the value of the payment ultimately received by the holder
      of a DSU is directly tied to the performance of our Voting Common Stock.
      Accordingly, the following table includes a column reflecting the number of
      DSUs
      owned by each person named in the table even though the underlying shares are
      not included in the shares reported as beneficially owned or the related
      percentage ownership calculations.





Except
      as
      set forth herein, the business address of the named beneficial owner is
      c/o Eclipsys Corporation, 1750 Clint Moore Road, Boca Raton, Florida
      33487.




**Name
                  and Address of Beneficial Owner**
              
              **Number
                  of Shares Beneficially Owned(1)**
              
              **Number
                  of Deferred Stock Units(2)**
              
              **Percentage
                  Owned (%)(3)****5%
                  Stockholders:**Thornburg
                  Investment Management, Inc.(4)
              
              
              7,897,341
              
              
              
              
              
              14.9
              %119
                  East Marcy StreetSanta
                  Fe, New Mexico 87501Investment
                  entities affliliated with General Atlantic LLC(5)
              
              
              4,744,556
              
              
              
              
              
              8.9
              %c/o
                  General Atlantic Service Company, LLC3
                  Pickwick PlazaGreenwich,
                  Connecticut 06830FMR
                  Corp.(6)
              
              
              2,855,600
              
              
              
              
              
              5.3
              %82
                  Devonshire StreetBoston,
                  Massachusetts 02109Tremblant
                  Capital Group(7)
              
              
              2,830,667
              
              
              
              
              
              5.4
              %767
                  Fifth AvenueNew
                  York, New York 10153**Directors
                  and Executive Officers:**Robert
                  J. Colletti
              
              
              323,013(8
              )
              
              
              
              
              *Dan
                  L. Crippen
              
              
              30,000(9
              )
              
              3,910
              
              
              *John
                  E. Deady
              
              
              213,457(10
              )
              
              
              
              
              *Steven
                  A. Denning
              
              
              4,799,722(11
              )
              
              5,318
              
              
              9.0
              %R.
                  Andrew Eckert
              
              
              293,775(12
              )
              
              
              
              
              *Eugene
                  V. Fife
              
              
              323,566(13
              )
              
              3,910
              
              
              *John
                  P. Gomez
              
              
              229,205(14
              )
              
              
              
              
              *Edward
                  A. Kangas
              
              
              40,000(15
              )
              
              3,910
              
              
              *Braden
                  R. Kelly
              
              
              45,833(16
              )
              
              5,501
              
              
              *Jay
                  B. Pieper
              
              
              900,956(17
              )
              
              3,910
              
              
              1.7
              %Frank
                  E. Stearns
              
              
              171,473(18
              )**Former
                  Executive Officers:**John
                  A. Adams(19)
              
              
              13,553
              
              
              
              
              
              *Russ
                  J. Rudish(20)
              
              
              -
              
              
              
              
              
              -**All
                  executive officers and directors as a group****(13
                  Persons)(21)**
              
              
              7,471,098
              
              
              
              
              
              13.8
              %


*
      Less
      than 1%







80


(1)
            The
                number of shares beneficially owned by each stockholder is determined
                under rules promulgated by the Securities and Exchange Commission,
                and the
                information is not necessarily indicative of beneficial ownership
                for any
                other purpose. Under such rules, beneficial ownership includes any
                shares
                as to which the individual or entity has sole or shared voting power
                or
                investment power and any shares as to which the individual or entity
                has
                the right to acquire beneficial ownership within 60 days after
                May 1, 2007 through the exercise of any stock option, warrant or
                other right. The inclusion herein of such shares, however, does not
                constitute an admission that the named stockholder is a direct or
                indirect
                beneficial owner of such shares. The shares reflected in this column
                do
                not include the DSU’s owned by the non-employee directors and described in
                footnote (2) below.(2)
            Indicates
                the number of DSUs (i) granted to our non-employee directors in connection
                with the annual grant to non-employee directors of DSUs having a
                grant
                date value of $75,000, and (ii) credited to those non-employee directors
                who elect to defer all or a portion of cash compensation for Board
                service
                in exchange for DSUs. See “Director Compensation”. Because the DSUs do not
                constitute actual shares of outstanding Voting Common Stock, a DSU
                holder
                does not possess voting or investment authority with respect to any
                voting
                common stock as a result of his or her ownership of a DSU.(3)
            Does
                not include the DSU’s owned by the non-employee directors and described in
                footnote (2) above. The applicable percentage is based on 53,048,369
                shares of voting common stock outstanding at May 1,
                2007.(4)
            Based
                on most recent available information provided by Thornburg Investment
                Management.(5)
            Consists
                of 483,174 shares owned by General Atlantic Partners 74, L.P. (“GAP
                74”), 247,431 shares owned by General Atlantic Partners 48, L.P.
                (“GAP 48”), 309,179 shares owned by General Atlantic Partners 47,
                L.P. (“GAP 47”), 2,272,000 shares owned by General Atlantic Partners
                38, L.P. (“GAP 38”), 644,893 shares owned by General Atlantic
                Partners 28, L.P. (“GAP 28”), 36,758 shares owned by GapStar, LLC
                (“GapStar”), 682,927 shares owned by GAP Coinvestment Partners, L.P.
                (“GAPCO”), 67,300 shares owned by GAP Coinvestment Partners II,
                L.P. (“GAPCO II”) and 894 shares owned by GAPCO GmbH &
                Co. KG (“KG”). Steven A. Denning is the Chairman and a Managing Director
                of General Atlantic LLC (“GA LLC”), and Mr. Denning is a general
                partner of each of GAPCO and GAPCO II. GA LLC is the general partner
                of GAP 28, GAP 38, GAP 47, GAP 48 and GAP 74. GA LLC is also the sole
                member of GapStar. The general partners of GAPCO and GAPCO II are
                Managing Directors of GA LLC. GAPCO Management GmbH (“Management GmbH”) is
                the general partner of KG .The Managing Directors of GA LLC are authorized
                to and empowered to vote and dispose of the securities owned by KG.
                GAP 28, GAP 38, GAP 47, GAP 48, GAP 74 and GapStar, GA LLC, GAPCO,
                GAPCO II, KG and Management GmbH are a “group” within the meaning of
                Rule 13d-5 of the Securities Exchange Act of 1934, as amended.
                Mr. Denning disclaims beneficial ownership of all of such shares of
                common stock except to the extent of his pecuniary interest
                therein.(6)
            This
                information is as of December 31, 2006 and is based on a Schedule
                13G/A
                filed jointly by FMRCorp. (“FMR”), Edward C. Johnson 3d and Fidelity Management & Research
                Company (“Fidelity”) with the Securities and Exchange Commission on
                February 14, 2007. According to the report, Fidelity, a wholly-owned
                subsidiary of FMR, is the beneficial owner of 2,855,567 shares of
                Voting
                Common Stock as a result of acting as an investment advisor to various
                investment companies. Mr. Johnson and FMR have sole dispositive power
                with
                respect to all of these shares. Pyramis Global Advisors Trust Company,
                an
                indirect wholly-owned subsidiary of FMR, is the beneficial owner
                of 33
                shares of Voting Common Stock, of which Mr. Johnson and FMR have
                sole
                dispositive and voting power. Mr. Johnson is Chairman of
                FMR.(7)
            This
                information was derived from the Schedule 13G/A filed by Tremblant
                Capital Group with the Securities and Exchange Commission on
                February 14, 2007.(8)
            Includes
                304,416 shares issuable upon the exercise of stock options that are
                exercisable within 60 days of May 1, 2007.(9 )
            Consists
                entirely of 30,000 shares issuable upon the exercise of stock options
                that
                are exercisable within 60 days of May 1,
                2007.(10)
            Includes
                113,333 shares issuable upon the exercise of stock options that are
                exercisable within 60 days of May 1, 2007.(11)
            Consists
                of (i) 55,166 shares issuable upon the exercise of stock options that
                are exercisable within 60 days of May 1, 2007 and (ii)
                4,744,556 shares of Voting Common Stock described in footnote
                (5) above. Mr. Denning disclaims beneficial ownership of the
                shares described in footnote (5) above except to the extent of his
                pecuniary interest therein and their inclusion herein shall not be
                deemed
                an admission of beneficial
                ownership.




81


.(12)
            Includes
                157,500 shares issuable upon the exercise of stock options that are
                exercisable within 60 days of May 1, 2007.(13)
            Includes
                (i) 155,166 shares issuable upon the exercise of stock options that
                are exercisable within 60 days of May 1, 2007, (ii)
                65,000 shares held by a revocable trust of which Mr. Fife is the
                settler and trustee, (iii) 1,700 shares owned by Mr. Fife’s son
                and (iv) 1,700 shares owned by Mr. Fife’s
                daughter.(14)
            Includes
                139,667 shares issuable upon the exercise of stock options that are
                exercisable within 60 days of May 1, 2007.(15)
            Includes 30,000
                shares issuable upon the exercise of stock options that are exercisable
                within 60 days of May 1, 2007.(16)
            Consists
                entirely of 45,833 shares issuable upon the exercise of stock options
                that are exercisable within 60 days of May 1,
                2007.(17)
            Consists
                of (i) 67,666 shares issuable upon the exercise of stock options that
                are exercisable within 60 days of May 1, 2007 and (ii)
                833,290 shares held by Partners HealthCare System, Inc. (“Partners”).
                Mr. Pieper is a Vice President of Partners. Mr. Pieper disclaims
                beneficial ownership of the shares held by Partners and their inclusion
                herein shall not be deemed an admission of beneficial
                ownership.(18)
            Includes
                70,918 shares issuable upon the exercise of stock options that are
                exercisable within 60 days of May 1, 2007.(19)
            The
                Company terminated the employment of Mr. Adams without cause as ofNovember 22,
                2006.(20)
            The
                Company terminated the employment of Mr. Rudish without cause as
                ofJanuary 5,
                2006.(21)
            Includes
                the amounts described in footnotes (8) through (18) above, 51,765
                shares
                held by other executive officers and 48,333 shares issuable upon
                the
                exercise of stock options that are held by other executive officers
                and
                exercisable within 60 days of May 1, 2007.


82








**Item
      13.** **** **** ***Certain
      Relationships and Related Transactions, and Director
      Independence***





**CERTAIN
      RELATED PARTY TRANSACTIONS**





***License
      Agreement with Partners Healthcare System, Inc.***





We
      have a
      license agreement with Partners HealthCare System, Inc. (“Partners”). Jay
      Pieper, a director of Eclipsys, is Vice President of Corporate Development
      and
      Treasury Affairs for Partners. Under the terms of this license, we may develop,
      commercialize, distribute and support certain technology of Partners (the
“Partners’ Technology”) and license it, as well as sell related services, to
      other healthcare providers and hospitals throughout the world (with the
      exception of the Boston, Massachusetts metropolitan area). No royalties are
      payable by us pursuant to the license with Partners. We are obligated to offer
      to Partners and certain of its affiliates a license for internal use, granted
      on
      most favored customer terms, to all new software applications developed by
      us,
      whether or not derived from the Partners’ Technology, and major architectural
      changes to the Partners’ Technology. Partners and certain of its affiliates are
      also entitled to receive internal use licenses, also granted on most favored
      customer terms, for any changes to any module or application included in the
      Partners’ Technology requiring at least one person-year of technical effort.
      Additionally, as part of the agreement, we have previously provided development
      services to Partners related to commercializing its intellectual property.
      No
      fees were paid to us by Partners for development services in 2006. In 2001,
      Partners entered into a contract with us for the license of a new software
      application and related professional services. This new software application
      consisted of an upgrade to an existing software application that Partners had
      licensed from Transition Systems, Inc. (“Transition”), an entity that we
      acquired in December 1998. Under this new contract, Partners paid us $643,747
      in
      2006. As of December 31, 2006, Partners owed us $207,762 related to this
      new contract. Mr. Pieper was not affiliated with us at the time of the
      negotiation of the original Partners license from Transition.





***Investment
      in Healthvision, Inc.***




During
        July 1999, we invested in Healthvision, Inc. (“Healthvision”), a Dallas-based,
        privately held Internet healthcare company. Mr. Kelly, a member of our
        Board of Directors, served until December 2006 on the board of directors
        of
        Healthvision. We beneficially own common stock of Healthvision representing
        approximately 16% of its outstanding common stock on a fully diluted basis.
  In
        1999,
        we entered into an agreement with Healthvision under which each organization
        agreed to jointly market products and services of the other party to its
        customers. In late 2003, we mutually agreed with Healthvision to terminate
        the
        joint marketing provisions of our agreement. Under the remaining provisions
        of
        this agreement, we paid Healthvision approximately $0.3 million during 2006
        for
        the sale by Healthvision of our products and services. During 2006 we earned
        revenues from Healthvision of approximately $1.1 million for remote hosting
        and other related services and had accounts receivable due from Healthvision
        of
        approximately $0.1 million at December 31, 2006.
 
 For
        the
        year ended December 31, 2006, Healthvision had total revenues of approximately
        $17.4 million and a net loss of approximately $1.9 million with total
        assets of approximately $10.1 million.
 
 We
        account for our investment in Healthvision using the equity method of
        accounting.  Due to losses recognized under the equity method, the recorded
        balance of the investment in Healthvision was $0 as of December 31, 2006.
        We are
        not required to provide funding to Healthvision, and have made no guarantees
        on
        their behalf.


***Lease
      Agreement and Cost-Sharing Arrangement with BG Jet
      Corp.***





Effective
      March 1, 2007, we entered into a Lease Agreement and a Cost Sharing Agreement,
      each with BG Jet Corp., and an Assignment and Consent among Eclipsys, BG Jet
      Corp, NetJets Sales, Inc., NetJets Services, Inc. and NetJets Aviation, Inc.
      BG
      Jet Corp. is 50% owned by Eugene Fife, one of our directors and the Chairman
      of
      our Board. The NetJets entities are affiliated companies that in the aggregate
      provide a fractional aircraft interest and related services to BG Jet
      Corp.





BG
      Jet
      Corp. has agreed to make a portion of its fractional interest available to
      us.
      Pursuant to these agreements, (i) BG Jet Corp. leases its fractional interest
      to
      us from time to time to accommodate our flight needs, (ii) the NetJets entities
      provide directly to us the aircraft management services provided to BG Jet
      Corp.
      as part of the fractional ownership program, and (iii) Eclipsys and BG Jet
      Corp.
      divide the fixed monthly costs and hourly flight time charges according to
      each
      party’s respective usage of the fractional interest. This arrangement is
      structured to comply with applicable rules of the Federal Aviation
      Administration.





Our
      costs
      in connection with this arrangement include (i) fixed lease payments to BG
      Jet
      Corp. of $100 per month, (ii) payments to NetJets of our ratable share, based
      upon our usage, of the fixed monthly costs that BG Jet Corp. is obligated to
      pay
      to NetJets, which equate to $1,989 per hour, and (iii) payments to NetJets
      of
      $2,263 per hour of flight time by Eclipsys, plus federal excise taxes, fuel
      surcharges, and other miscellaneous items such as landing fees. The monthly
      management fee and hourly flight costs are the actual costs to BG Jet Corp.
      pursuant to its arrangements with NetJets, so the transaction is not structured
      to profit BG Jet Corp. In addition, we do not make any payment to BG Jet Corp.
      in respect of BG Jet Corp.’s capital investment in its fractional
      interest.





It
      is
      anticipated that we will use the fractional interest up to approximately 35
      hours per year. Assuming usage at that level, our total cost for this
      arrangement would be approximately $149,920 (excluding federal excise taxes,
      fuel surcharges, and miscellaneous items). Of this amount, the amount that
      can
      be considered to benefit Mr. Fife and therefore represents his interest in
      the
      transaction is $35,358, consisting of 50% (commensurate with his 50% interest
      in
      BG Jet Corp.) of $1,100 in monthly rentals paid to BG Jet Corp. and $69,615
      payable to NetJets for fixed monthly maintenance costs that would otherwise
      be
      paid by BG Jet Corp. The balance, consisting of incremental hourly flight costs,
      would not benefit Mr. Fife. If we use more than 35 hours per year, the benefit
      to Mr. Fife would increase ratably consistent with the foregoing.





This
      arrangement has an initial term of 11 months and can be renewed upon agreement
      of the parties. Either Eclipsys or BG Jet Corp. may terminate the arrangement
      if
      Mr. Fife’s service on our Board ceases, or as a result of a change in control of
      Eclipsys, or upon loss of use of the aircraft that is subject to the fractional
      interest, or upon transfer of the fractional interest in whole or part by BG
      Jet
      Corp.





83


This
      related party transaction was approved by our Audit Committee. In addition,
      pursuant to our related party transactions policy, because the transaction
      involves a director it was also approved by the entire Board, with Mr. Fife
      abstaining.  The Audit Committee and the Board considered the business need
      for periodic access to private aircraft and alternative sources of access to
      private aircraft, and concluded that the transaction with BG Jet Corp. was
      beneficial.





**POLICIES
      AND PROCEDURES FOR APPROVAL OF RELATED PARTY TRANSACTIONS**





In
      recognition of the fact that a transaction between Eclipsys and one of its
      directors, executive officers or significant stockholders (or their immediate
      family members) may present potential, perceived or actual conflicts of
      interest, our Board has adopted a formal, written policy with respect to the
      review and approval of related party transactions. In accordance with this
      policy and our Audit Committee Charter, our Audit Committee is responsible
      for
      reviewing and approving the terms and conditions of all related party
      transactions. In addition, if the related party involved in the transaction
      under review is our Chief Executive Officer or one of our directors or the
      proposed transaction involves more than $2 million per year, the transaction
      is
      subject to further review and approval by our entire Board. Our finance and
      internal audit departments are responsible for establishing and maintaining
      procedures for identifying potential related party transactions while our legal
      department is responsible for preliminary review of such transactions and
      determining whether the transaction under review is subject to Audit Committee
      approval under our related party transactions policy. Our legal department
      is
      also responsible for the preparation of a detailed description of the subject
      transaction for use by the Audit Committee in performing its formal review
      and
      approval process. In the course of its review of a related party transaction,
      the factors considered by our Audit Committee include, but are not limited
      to:





·
            the
                terms of the transaction as compared to terms available for a similar
                transaction with a non-related
                party;





·
            the
                disclosure requirements associated with the
                transaction;





·
            the
                effect of the transaction upon the ability of the related party to
                fulfill
                his or her duties to Eclipsys; and





·
            the
                appearance of the transaction.





The
      Audit
      Committee or the full Board has reviewed and approved or ratified each of the
      related party transactions described above under the heading, “Certain Related
      Party Transactions”.





**DIRECTOR
      INDEPENDENCE**





Under
      applicable NASDAQ rules, a director will only qualify as an “independent
      director” if, in the opinion of our Board of Directors, that person does not
      have a relationship that would interfere with the exercise of independent
      judgment in carrying out the responsibilities of a director. Our Board of
      Directors has determined that none of Messrs. Crippen, Denning, Fife,
      Kangas, Kelly, or Pieper has a relationship which would interfere with the
      exercise of independent judgment in carrying out the responsibilities of a
      director. Accordingly, our Board of Directors has concluded that each of these
      directors is an “independent director” as defined under Rule 4200(a)(15) of
      the NASDAQ Stock Market, Inc. Marketplace Rules.







**Item
      14.** ****** ***Principal
      Accounting Fees and Services***





**INDEPENDENT
      REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM FEES**





The
      aggregate fees billed to the Company for each of the last two fiscal years
      by
      our independent registered certified public accounting firm,
      PricewaterhouseCoopers LLP, are as follows:


Fee
                  Category
              
              2006
              
              2005Audit
                  Fees(1)
              
              $
              1,782,500
              
              $
              1,240,233Audit-Related
                  Fees(2)
              
              
              31,130
              
              
              -Tax
                  Fees(3)
              
              
              21,500
              
              
              30,273All
                  Other Fees(4)
              
              
              1,500
              
              
              1,500Total
              
              $
              1,836,630
              
              $
              1,272,006


(1)
            Audit
                Fees consist of fees for the audit of our financial statements, the
                audit
                of our internal control over financial reporting, the review of the
                interim financial statements included in our quarterly reports on
                Form 10-Q, and other professional services provided in connection
                with statutory and regulatory filings or engagements.(2)
            Audit-Related
                Fees consist of fees for assurance and related services that are
                reasonably related to the performance of the audit and the review
                of our
                financial statements and which are not reported under “Audit Fees.” These
                services relate to compliance with Section 404 of the Sarbanes-Oxley
                Act, due diligence related to mergers and acquisitions, accounting
                consultations and audits in connection with acquisitions, internal
                control
                reviews, attest services that are not required by statute or regulation
                and consultations concerning financial accounting and reporting
                standards.(3)
            Tax
                Fees consist of fees for tax compliance, tax advice and tax planning
                services. Tax compliance services, which relate to the review of
                the
                consolidated federal income tax returns and foreign tax issues, accounted
                for all of the total tax fees billed in 2005 and 2006.(4)
            All
                Other Fees for 2005 and 2006 related to renewal of our accounting
                research
                software.





84


**PRE-APPROVAL
      POLICY AND PROCEDURES**





The
      Audit
      Committee has adopted policies and procedures relating to the approval of all
      audit and non-audit services that are to be performed by our registered public
      accounting firm. This policy generally provides that we will not engage our
      registered public accounting firm to render audit or non-audit services unless
      the service is specifically approved in advance by the Audit Committee or the
      engagement is entered into pursuant to one of the pre-approval procedures
      described below.





From
      time
      to time, the Audit Committee may pre-approve specified types of services that
      are expected to be provided to us by our registered public accounting firm
      during the next 12 months. Any such pre-approval is detailed as to the
      particular service or type of services to be provided and is also generally
      subject to a maximum dollar amount. None of the services described above under
      the captions “Audit-Related Fees”, “Tax Fees” and “All Other Fees” was approved
      by the Audit Committee pursuant to the provisions of paragraph (c)(7)(i)(C)
      of
      Rule 2-01 of SEC Regulation S-X.


















85










**Part
      IV**





**Item
      15.** ******  ***Exhibits,
      Financial Statement Schedules.***





**(a)**
            **The
                following documents are filed as part of this
                report:**





1
            Consolidated
                Financial Statements included in Item 8 of this report on Form
                10-K2
            Financial
                Statement Schedules included in Item 8 of this report on Form 10-K
                Schedule II - Valuation of Qualifying Accounts3
            The
                following exhibits are included in this
                report:





3.1
                (1)
            Third
                Amended and Restated Certificate of Incorporation of the
                Registrant3.2
                (2)
            Third
                Amended and Restated Bylaws of the Registrant3.3
                (3)
            Certificate
                of Designation of Series A Junior Participating
                Preferred4.1
                (1)
            Specimen
                certificate for shares of Common Stock4.2
                (3)
            Rights
                Agreement, dated July 26, 2000, by and between the Registrant and
                Fleet
                National Bank, as Rights Agent10.1
                (1)
            Second
                Amended and Restated Registration Rights Agreement10.2
                (1)
            Information
                Systems Technology License Agreement, dated as of May 3, 1996, by
                and
                amount Partners Healthcare System, Inc. and Integrated Healthcare
                Solutions, Inc10.3
                (1)
            1996
                Stock Plan10.4
                (4)*
            Amended
                and Restated 1998 Employee Stock Incentive Plan10.5
                (5)*
            Form
                of Indemnification Agreement between the Registrant and each non-employee
                director10.6
                (4)*
            Amended
                and Restated 1999 Stock Incentive Plan, as amended10.7
                (6)*
            Form
                of Incentive and/or Non-Qualified Stock Option Agreement under the
                Amended
                and Restated 2000 Stock Incentive Plan, as amended10.8
                (7)*
            Employment
                Agreement between the Registrant and John A. Adams, effective December
                20,
                200410.9
                (8)*
            Employment
                Agreement, by and between the Registrant and RussJ.
                Rudish,
                effective as of March 15, 2005.10.10
                (9)*
            Employment
                Agreement, effective as of March 15, 2005, by and between the Registrant
                and John P. Gomez10.11
                (10)*
            Amended
                and Restated 2000 Stock Incentive Plan10.12
                (10)*
            Restricted
                Stock Agreement between the Registrant and Eugene V. Fife dated April
                29,
                200510.13
                (11)*
            2005
                Stock Incentive Plan10.14
                (11)*
            2005
                Employee Stock Purchase Plan10.15
                *
            Form
                of Restricted Stock Agreement to be used in connection with issuance
                of
                restricted stock to executive officers and members of the Registrant’s
                board of directors under the Eclipsys Corporation 2005 Stock Incentive
                Plan10.16
                *
            Form
                of Notice of Grant of Restricted Stock Agreement to be used in connection
                with issuance of restricted stock to executive officers under the
                Eclipsys
                Corporation 2005 Stock Incentive Plan10.17
                *
            Form
                of Notice of Grant of Restricted Stock Agreement to be used in connection
                with issuance of restricted stock to members of the Registrant’s board of
                directors under the Eclipsys Corporation 2005 Stock Incentive
                Plan10.18
                *
            Form
                of Notice of Grant of Stock Option to be used in connection with
                grants of
                stock options to executive officers under the Eclipsys Corporation
                2005
                Stock Incentive Plan10.19
                *
            Form
                of Notice of Grant of Stock Option to be used in connection with
                grants of
                stock options to members of the Registrant’s board of directors under the
                Eclipsys Corporation 2005 Stock Incentive Plan10.20
                (12)*
            2005
                Inducement Grant Stock Incentive Plan10.21
                (12)*
            Employment
                Agreement between the Registrant and R. Andrew Eckert dated as of
                October
                24, 200510.22
                (12)*
            Agreement
                re Specified Acts between the Registrant and R. Andrew Eckert dated
                as of
                October 24, 200510.23
                (13)*
            Employment
                Agreement between the Registrant and John E. Deady dated December
                22,
                200510.24
                (13)*
            Agreement
                re Specified Acts between the Registrant and John E. Deady dated
                December
                22, 200510.25
                (14)
            Non-employee
                Director Deferred Stock Unit Plan10.26
                (15)
            2006
                Bonus Plan for Eligible Employees10.27
                (16)*
            Severance
                Agreement dated July 31, 2006 between the Registrant and Robert J.
                Colletti10.28
                (16)*
            Severance
                Agreement dated July 31, 2006 between the Registrant and Frank E.
                Stearns21
            Subsidiaries
                of the Registrant23
            Consent
                of PricewaterhouseCoopers LLP31.1
            Certification
                of R. Andrew Eckert31.2
            Certification
                of Robert J. Colletti32.1
            Certification
                Pursuant to 18 U.S.C. Section 135032.2
            Certification
                Pursuant to 18 U.S.C. Section 135099.1
            Restatements
                to the previously reported Quarterly Information for 2006 and
                2005


86


(1)
            Incorporated
                by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended June 30, 1998 (File No. 000-24539)(2)
            Incorporated
                by reference to the Registrant’s Registration Statement on Form S-1,
              as
                amended (File No. 333-50781)(3)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K dated August
                8, 2000 (File No. 000-24539)(4)
            Incorporated
                by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                quarter ended June 30, 2002(5)
            Incorporated
                by reference to the Registrant’s Annual Report on Form 10-K filed on
                March, 15 2004 (File No. 000-24539)(6)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on
                December 1, 2004 (File No. 000-24539)(7)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on
                December 23, 2004 (File No. 000-24539)(8)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on April
                7, 2005 (File No. 000-24539)(9)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on April
                7, 2005 (File No.000-24539)(10)
            Incorporated
                by reference to the Registrant’s Quarterly Report on Form 10-Q filed on
                May 10, 2005 (File No.000-24539)(11)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on July
                6, 2005 (File No.000-24539)(12)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on
                October 21, 2005 (File No.000-24539)(13)
            The
                Registrant has requested confidential treatment with respect to certain
                portions of this exhibit. Such portions have been
              omitted
                from this exhibit and have been filed separately with the United
                States
                Securities and Exchange Commission(14)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on May
                17, 2006 (File No.000-24539)(15)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on July
                17, 2006 (File No.000-24539)(16)
            Incorporated
                by reference to the Registrant’s Current Report on Form 8-K filed on
                August 4, 2006 (File No.000-24539)*
            Indicates
                a management contract or compensatory plan or
                arrangement








87


**Signatures**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





**Signature**
              
              **Title**
              
              **Date**/s/
                  R. Andrew Eckert
              
              
              President,
                  Chief Executive Officer and Director (Principal
              May
                  22, 2007R.
                  Andrew Eckert
              
              
              Executive
                  Officer)/s/
                  Robert J. Colletti
              
              
              Senior
                  Vice President, Chief Financial Officer (Principal
              
              May
                  22, 2007Robert
                  J. Colletti
              
              
              Financial
                  and Accounting Officer)/s/
                  Dan L. Crippen
              
              
              Director
              
              
              May
                  22, 2007Dan
                  L. Crippen/s/
                  Steven A. Denning
              
              
              Director
              
              
              May
                  22, 2007Steven
                  A. Denning/s/
                  Eugene V. Fife
              
              
              Director
              
              
              May
                  22, 2007Eugene
                  V. Fife/s/
                  Edward A. Kangas
              
              
              Director
              
              
              May
                  22, 2007Edward
                  A. Kangas/s/
                  Braden R. Kelly
              
              
              Director
              
              
              May
                  22, 2007Braden
                  R. Kelly/s/
                  Jay B. Pieper
              
              
              Director
              
              
              May
                  22, 2007Jay
                  B. Pieper
 88