**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, 2005**
                  
                  **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:**
 **None**
 **Securities
          registered pursuant to Section 12(g) of the Act:**
 **Common
          Stock, $.01 par value, and Preferred Stock Purchase
          Rights**
  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
          [ü]    No
          [
          ]
  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 [  ]Accelerated filer [ ü ]   Non-accelerated
          filer [ ]
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).
 Yes
          [
          ]    No
          [ü]
 The
          aggregate market value of the common stock held by non-affiliates of the
          registrant as of June 30, 2005 based upon the closing price of the Common
          Stock on the NASDAQ National Market for such date was $462,601,410
  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 February 15, 2006**Common
                    Stock, $.01 par value
                
                50,334,221
 
 **DOCUMENTS
          INCORPORATED BY REFERENCE**
 Certain portions of the Company’s definitive Proxy Statement to be used in
          connection with the 2006 annual meeting of stockholders will be incorporated
          by
          reference into Part III of this Form 10-K.
 *Table
            of Contents*




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




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




Item
      1.    Business




Overview




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




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




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




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




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




Recent
      Developments




In
      October 2005, we named R. Andrew Eckert president and
      chief executive officer. He assumed these roles on November 14, 2005 from our
      chairman, Eugene V. Fife, who had served in an interim capacity for the previous
      six months.




In
      March 2005, we announced the release of Sunrise
      Clinical Manager 4.0XA, which contained numerous new features and enhancements,
      particularly in the ambulatory, emergency department, and medications management
      parts of our software, extending the usability, depth and reach of Eclipsys
      clinical solutions. SCM 4.0XA was installed at 38 client sites in 2005, and
      approximately 18 additional client sites are expected to begin using SCM 4.0XA
      in 2006.




Following
      the launch of SCM 4.0XA, we released Sunrise
      Clinical Manager 4.5XA 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 ManagerTM,Sunrise ED ManagerTMand
      Sunrise Medication Management solutions.  Sunrise 4.5 XA also builds upon
      recent enhancements to our Sunrise Patient Financial Manager and Sunrise
      Decision Support Manager solutions. These industry-leading business process
      solutions help save healthcare enterprises significant time and costs by
      streamlining workflows and optimizing best practices across the organization.
      Sunrise Clinical Manager 4.5XA is already being installed at initial client
      sites.




1
 *Table
          of Contents*


Client
      input has played an important role in the
      development of the software we released this year.  Our solutions utilize
      the same architecture and share the same Health Data Repository (HDR), while
      being customized 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.




In
      February 2005,
      we introduced Remote Access Services (RAS) 4.0 XATM and Pocket
      SunriseTM 4.0 XA, at the Annual Healthcare Information and Management
      Systems Society Conference and Exhibition (HIMSS) in Dallas.




In
      March 2005, we were recognized as a leading provider
      of computerized physician order entry (CPOE) solutions based on physician usage
      in the KLAS CPOE Digest 2005. Eclipsys CPOE solutions include its award-winning
      SunriseTM Clinical Manager and Eclipsys 7000 offerings. The survey found that
      when software functionality is the key decision-making criteria, healthcare
      organizations selected Eclipsys more often than any other vendor.




In
      April 2005, we released Sunrise Access
      Manager/Patient Financial Manager 11.5, the latest major milestone in our proven
      revenue cycle management solution. The new release added new and enhanced
      capabilities for maximizing revenue capture, improving cash flow, decreasing
      administrative costs, and enhancing patient satisfaction.




In
      November 2005, we announced the latest release of
      Sunrise RIS, the Eclipsys advanced radiology information system. Sunrise RIS
      supports a paperless workflow, including document generation, document
      management, scanner support, and the ability to markup diagrams and capture
      key
      images. All components, including speech recognition, are Web-based, simplifying
      deployment and providing today's increasingly mobile radiology personnel the
      flexibility to work from virtually any location.




Also
      in November 2005, our Sunrise Pocket XA wireless
      solution was recognized as among the most innovative uses of enterprise
      technology in healthcare in this year's InfoWorld 100. The annual awards honor
      Information Technology (IT) products that demonstrate the most creative use
      of
      cutting-edge technologies. Pocket XA is a wireless companion to our advanced
      clinical solutions. Running on a pocket personal computer, it provides wireless
      access to clinical information. As a result, physicians can place orders for
      medications and additional lab work, access patient records including current
      lab and other diagnostic results, make positive patient identification using
      barcode technology and perform other functions directly from the device, both
      at
      the point of care and at wireless locations inside and outside the hospital
      or
      clinic.




In
      the second quarter of 2005, we contracted for
      Oracle’s Enterprise Resource Planning (ERP) system, Oracle’s E-Business Suite
      11i, which will provide Eclipsys with a web-based, integrated set of business
      applications.  This is a significant infrastructure investment that should
      facilitate better communication and increased efficiency and productivity across
      our organization.




Healthcare
      Industry
      Factors




Hospitals
      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 HIT software and services like 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, or HHS. The post, filled by David J. Brailer, MD, PhD, 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 and 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 or EHRs for Americans.
      This report was a response to the call by President Bush in 2004 to achieve
      EHRs
      for most Americans within a decade.




**CCHIT.**The HHS inititatives 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 intends to develop a set of private sector determined
      criteria for EHR functionality, interoperability, reliability and security,
      and
      will inspect EHR software to determine its performance against these criteria.




**Institute****of
      Medicine****.** In 1999, the Institute of Medicine, or IOM,
      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 IOM concluded that more people were
      injured from preventable mistakes than from many other common illnesses or
      accidents. The IOM report identified medication and pharmacy errors as
      significant causes of deaths and adverse events. In 2003, the IOM 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.




2
 *Table
          of Contents*


**The
      Leapfrog Group.** Following the
      release of the initial IOM report, the Leapfrog Group was formed. The Leapfrog
      Group is a consortium of more than 170 companies including large private
      and public healthcare purchasers representing more than 34 million
      healthcare consumers within the United States. Leapfrog Group members and their
      employees spend billions of dollars on healthcare annually. The Leapfrog Group
      is urging its members and their employees to base their healthcare purchases
      on
      principles that encourage hospitals to utilize stringent patient-safety measures
      such as computerized physician order entry systems, or CPOE. The adoption of
      CPOE is a leading Leapfrog Group recommendation for reducing medical
      errors.




The
      IOM and The Leapfrog Group are leveraging their
      influence to encourage hospitals to use advanced clinical software to reduce
      adverse drug events and medical errors. Their influence, coupled with consumer
      demands, are spurring new legislation.




**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 products 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.




**Joint
      Commission on Accreditation of Healthcare
      Organizations.** The Joint Commission on the Accreditation of Healthcare
      Organizations, or JCAHO, is an independent non-profit organization that provides
      voluntary evaluation and accreditation for more than 15,000 healthcare
      organizations in the United States. JCAHO periodically introduces new process
      improvement initiatives, standards and performance measurements that are used
      to
      assess hospitals. JCAHO has also established patient safety standards that
      require hospitals to initiate specific efforts to prevent medical errors and
      inform patients when they have been unknowingly harmed during treatment.
      Additionally, each year since 2002, JCAHO has approved annual National Patient
      Safety Goals that include specific recommendations for improving patient safety.
      Most of our clients seek to comply with JCAHO standards. We believe that our
      software and services aid our clients in meeting JCAHO standards.




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




Our
      Offering




****We provide the following:




- 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.

Our offering is described below:




Software




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




- Provide hospitals 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, and 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 real-time information regarding the cost and
        effectiveness 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.

For
      several years we
      have been committed to building our new 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 hospitals to continue to derive value from their existing
      technology investments, and to add other software as functional needs and
      resources dictate.




SunriseXA
      is built upon a single database model known as
      a Health Data Repository or HDR. The HDR can be used by all components within
      SunriseXA regardless of where in the hospital a physician, nurse or employee
      resides. SunriseXA is designed to prevent the isolation of information and
      duplication of functionality that can occur with other information technology,
      or IT, 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.




3
 *Table
          of Contents*


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. SCM allows
      a
      physician to enter orders quickly and efficiently, and provides evidence-based
      clinical decision support at the time of order entry.  SCM’s core
      capabilities and related modules are designed for use in the ambulatory, acute
      care and Emergency Department 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 provides
                  real-time guidance to physicians by alerting them to possible problems
                  with
                or
                  conflicts between newly entered orders and existing patient information
                  using the system’s rules database. A comprehensive 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
                any
                  other physician-designated event, 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.
 ·
              Sunrise
                  ECA, which enables Meditech clients to integrate Sunrise Clinical
                  Manager
                  with their existing Meditech system. This allows clinicians toimprove
                the
                  way they enter and retrieve patient information andtake advantage of other benefits of our software, while allowing
                  the
                  client to continue touse the
                Meditech
                  system in the usual way for various functions such as lab, radiology,
                  admissions and billing.
 ·
              Remote
                  access services, which provides physicians with Web-based access
                  to
                  patient information from within the healthcare facility orremotely.


**Sunrise
      Access Manager**enables
      healthcare providers to identify the patient at any time within a hospital
      and
      to collect and maintain patient information on an


enterprise-wide
      basis.


·
              Comprehensive
                  admission, discharge and transfer management captures demographic,
                  insurance, referral and primary-care provider information
                and
                  automates visit management.
 ·
              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
                  SAM
                and
                  SCM.
 ·
              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.


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




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




**Sunrise****Discovery**
      builds upon Sunrise Decision Support Manager by using a data warehouse,
      data-extraction techniques, including natural language processing, and business
      intelligence tools to collect useful clinical and financial data and distribute
      it across the enterprise using portal technology.




**Sunrise
      Record Manager**  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.
 ·
              JCAHO-compliant
                  deficiency and chart completion management functions, including
                  HIPAA-compliant electronic signature
                  functions.
 ·
              Medical
                  records abstracting, working with industry-standard
                  encoders.




4
 *Table
          of Contents*




**Knowledge-Based
      Charting**provides
      nurses with evidence-based practice guidelines and patient charting
      tools.




**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, or RIS,
      and


a
      picture archiving and communications system, or PACS
      image-enabled clinical information system, that delivers 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.




**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 regular maintenance releases and software
      updates.




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




**IT
      Outsourcing**. We provide IT
      outsourcing services to our clients. This means that we assume 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 also provide remote
      hosting services to our clients. This means that we assume processing of
      selected applications for our clients using equipment and personnel at our
      facilities. This frees an organization from the capital investment, operating
      expense, and management challenges of maintaining the environment, equipment
      and
      technical staff required to support their 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 several 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 provide our clients with the network performance
      and functionality.




**Sale****s
      and
      Marketing**




Our
      sales and marketing teams target academic medical
      centers, larger multi-entity healthcare systems, community hospitals and small,
      stand-alone hospitals and other healthcare facilities.  We sell our
      software and services primarily in North America exclusively through our direct
      sales force, which works closely with our client services and software
      specialists and experts with extensive experience with each of our specific
      software applications to design client solutions.




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.




Research
      and Development




We
      believe that our future success depends on our
      ability to maintain and enhance our existing software and develop new software.
      We seek to maintain technological competitiveness and respond to market trends
      and our clients’ evolving needs. We are currently developing our software based
      on Microsoft’s .NET Framework and other industry standards. We are also creating
      new functionality for our existing software. Since the announcement of our
      SunriseXA response time issues in October 2003, we have enhanced our staff
      and
      our processes within our research and development function.  Among other
      things, we have decreased 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 new 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.




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




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




5
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          of Contents*




Executive
      Officers of the
      Registrant




Certain
      biographical information concerning the
      Company’s executive officers is presented below.




Name
            Age
            TitleR.
                Andrew Eckert
            44
            President
                and Chief Executive OfficerJohn
                A. Adams
            51
            Executive
                Vice President Business SolutionsJohn
                Gomez
            41
            Executive
                Vice President Chief Technology Strategy OfficerJohn
                E. Deady
            41
            Executive
                Vice President Customer SolutionsRobert
                J. Colletti
            47
            Senior
                Vice President, Chief Financial Officer and Chief Accounting
                OfficerFrank
                E. Stearns, Jr.
            46
            Senior
                Vice President Professional ServicesBrian
                W. Copple
            45
            Chief
                Legal Officer, General Counsel and
                Secretary




**R.
      Andrew****Eckert**  joined Eclipsys Corporation in October 2005 and became President and Chief
      Executive Officer and joined the Board of Directors on November 14, 2005. From
      March 2004 to October 2005, Mr. Eckert was CEO of SumTotal Systems, Inc., a
      provider of learning and business performance technologies and services. From
      2002 to March 2004, he was CEO of Docent, Inc., until it merged with Click2learn
      to form SumTotal Systems. Previously, Mr. Eckert spent 11 years with ADAC
      Laboratories, , a publicly traded provider of healthcare enterprise radiology
      and cardiology information systems and integrated imaging
      solutions, where he served as CEO (1997 to 2001),
      Chairman (1999 until its sale to Philips Medical Systems in December 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 on the Boards of Directors of Connetics Corporation, a specialty
      pharmaceuticals company, and Varian Medical Systems, Inc., a manufacturer of
      integrated cancer therapy systems. He is a Fellow of the College of Nuclear
      Medicine and co-chairman of the Pacific Vascular Research Foundation, a vascular
      disease research and public awareness organization.




**John
      A. Adams**joined Eclipsys as
      our Executive Vice President and Chief Administrative Officer in December 2004
      and became Executive Vice President Business Solutions in January 2006. 
Prior to joining us, Mr. Adams was chief financial officer of Exult, Inc.,
      a
      publicly traded provider of human resources and related business process
      outsourcing services from June 2003 until its acquisition by Hewitt Associates
      late in 2004.  From November 2000 to June 2003, Mr. Adams was vice
      president and chief financial officer of AT&T’s Business Services
      division.  Previously he served in a variety of managerial positions with
      EDS Corporation over 15 years.




**John
      Gomez**has served as our
      Executive Vice President and Chief Technology Strategy Officer since December
      2004. He held the title of Senior Vice President and Chief Technology Officer
      from August 2003, when he first joined our Company, to December 2004. From
      October 2002 to January 2003, Mr. Gomez was a senior vice president and chief
      technology officer at WebMD Corporation. Prior to that, from February 2001
      to
      October 2002 Mr. Gomez served as chief technology officer and senior vice
      president of strategic business development at Brill Media Holdings, an
      e-commerce and media publication company. From April 1998 through January 2001
      Mr. Gomez was employed by Microsoft Corporation.




**John
      E.  Deady**, joined
      Eclipsys in January 2006 as our Executive Vice President of Customer
      Solutions.  Prior to joining Eclipsys, from April 2004 until January 2006,
      Mr. Deady served as vice president, marketing & sales support, at McKesson
      Corporation, a publicly traded provider of healthcare information
      technology.  While at McKesson, Mr. Deady also served as national vice
      president, new business, from October 2002 to April 2004 and national vice
      president, Clinical Sales Group, from August 2001 to October 2002.  From
      October 2000 to August 2001, Mr. Deady served as senior vice president, global
      sales, at TrueSpectra, a provider of dynamic imaging solutions for the retail,
      manufacturing, and entertainment & media industries.  Prior to that,
      from August 1997 to September 2000, Mr. Deady held executive sales and marketing
      positions at ADAC Laboratories, a publicly traded provider of healthcare
      enterprise radiology and cardiology information systems and integrated imaging
      solutions.  Prior to joining ADAC, from June 1992 to July 1997, Mr. Deady
      held sales management positions with Cerner Corporation, a publicly traded
      provider of enterprise healthcare software and services.  From October 1989
      to May 1992, Mr. Deady was Technical Sales Representative at E.I. du Pont de
      Nemours and Company, a manufacturer of medical imaging consumables and capital
      equipment.




**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 Senior
      Vice
      President Finance and Chief Accounting Officer. From January 1997 to June 2001,
      Mr. Colletti served as our vice president of finance. Mr. Colletti joined
      Eclipsys in January 1997 as part of our acquisition of ALLTEL Healthcare
      Information Services, Inc.




**Frank
      E. Stearns, Jr**., has
      served as our Senior Vice President Professional Services since November 2005,
      which includes responsibility for all professional services including
      implementation, integration and consulting services.  Previously, Mr.
      Stearns led the Eclipsys Consulting Group from January 2003.  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.  Previously, Mr. Stearns served
      as a Partner with APM Management Consultants in the information resources and
      clinical effectiveness consulting practice, and in a leadership role at MediQual
      Systems, Inc., a leading supplier of severity of illness and outcomes
      measurement tools.


***Brian
      W. Copple*** joind Eclipsys as our Chief Legal Office, General
      Counsel and Secretary in May 2005.  Before joining Eclipsys, Mr. Copple
      served as Executive Vice President, General Counsel and Secretary of Exult,
      Inc., a publicly traded provider of human resources and related business process
      outsourcing services, from February 2000 until its acquisition by Hewitt
      Associates late in 2004.  Previously, Mr. Copple practiced corporate and
      securities law as a partner with the law firm of Gibson, Dunn & Crutcher
      LLP.




Employees




As
      of December 31, 2005, we had 2020 employees. Our
      success depends 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.


6
 *Table
            of Contents*




Financial
      Information About Geographic
      Areas




Revenues
      from U.S. operations totaled $359.3 million in
      2005, $293.1 million in 2004 and $244.3 million in 2003. Revenues from outside
      the United States totaled $24.0 million in 2005, $16.0 million in 2004 and
      $10.4
      million in 2003. Long-lived assets totaled $108.5 million in the United States
      in 2005, $89.8 million in 2004 and $73.6 million in 2003. Long-lived assets
      totaled $2.9 million in other countries in 2005, $2.1 million in 2004 and
      $100,000 in 2003.





Item
      1A.*Risk
      Factors*




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




Risks relating to
      development and operation of our software




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




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




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




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




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




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




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




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




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




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


7
 *Table
            of Contents*


**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,
      unanticipated development expenses and harm to our reputation, and would cause
      our financial results and business to suffer.




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




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




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




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




Risks
      related to sales and implementation of our
      software




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




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




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




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




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




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




Risks
      related to our outsourcing services




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




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


8
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          of Contents*




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






**Recruiting
        challenges and higher than anticipated costs in 
outsourcing our client’s IT operations may adversely affect our
        profitability.**
  We
        provide outsourcing services that involve operating
        clients’ IT departments using our employees.  At the initiation of these
        relationships, clients often require us to hire, at substantially the same
        compensation, the entire IT staff that had been performing the services we
        take
        on.  In these circumstances our costs may be higher than we target unless
        and until we are able to transition the workforce, methods and systems to
        a more
        scalable model.  Various factors can make this difficult, including
        geographic dispersion of client facilities and variation in client needs,
        IT
        environments, and system configurations.  Also, under some circumstances we
        may incur unanticipated costs as a successor employer by inheriting unforeseen
        liabilities that the client had to these employees.  Further, facilities
        management contracts require us to provide the IT services specified by
        contract, and in some places it can be difficult to recruit qualified IT
        personnel.  Changes in circumstances or failure to assess the client’s
        environment and scope our services accurately can mean we must hire more
        staff
        than we anticipated in order to meet our responsibilities.  If we have to
        increase salaries or relocate personnel, or hire more people than we
        anticipated, our costs may increase under fixed fee contracts.
  **Inability
        to obtain consents needed from third parties could
        impair our ability to provide remote outsourcing
        services.**
  We
        and our clients need consent from some third-party
        software providers as a condition to running their software in our data center,
        or to allowing our employees who work in client locations under facilities
        management arrangements to have access to their software.  Vendors’ refusal
        to give such consents, or insistence upon unreasonable conditions to such
        consents, could reduce our revenue opportunities and make our outsourcing
        services less viable for some clients.




Risks
      related to the healthcare IT industry and
      market




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




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




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




Clients
      that use our legacy software are vulnerable to
      competition.




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




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




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




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




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




9
 *Table
              of Contents*


**Potential changes
        in
        standards applicable to our software could require us to incur substantial
        additional development costs.**
  Integration
        and interoperability of the software and systems provided by various vendors
        are
        important issues in the healthcare industry.  Market forces or regulatory
        authorities could cause emergence of software standards applicable to us,
        and if
        our software is not consistent with those standards we could be forced to
        incur
        substantial additional development costs to conform.  If our software is
        not consistent with emerging standards, our market position and sales could
        be
        impaired.




Risks
      related to our operating results, accounting controls and
      finances




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




We
      had a profit of $485,000 in 2005 although we had a
      loss from operations of $2.6 million. We had a net loss of $32.6 million for
      the
      year ended December 31, 2004. We also had net losses of $56.0 million
      in 2003, $29.8 million in 2002, $34.0 million in 2000,
      $9.4 million in 1999, and $35.3 million in 1998. In 2001, we had net
      income of $4.4 million, although we had a loss from operations of
      $1.6 million.  It is not certain that we will remain profitable, or
      that our profitability will increase.  We may incur net losses in the
      future.




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




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


·
              the
                  performance of our software and our ability to promptly and efficiently
                  address software performance shortcomings or warranty
                  issues;
 ·
              the
                  cost, timeliness and outcomes of our software development and
                  implementation efforts;
 ·
              the
                  timing, size and complexity of our software sales and
                  implementations;
 ·
              overall
                  demand for healthcare information
                  technology;
 ·
              the
                  financial condition of our clients and potential
                  clients;
 ·
              market
                  acceptance of new services, software and software enhancements
                  by us and
                  our competitors;
 ·
              client
                  decisions regarding renewal of their respective
                  contracts;
 ·
              software
                  and price competition;
 ·
              the
                  relative proportions of revenues we derive from software, services
                  and
                  hardware;
 ·
              changes
                  in our operating expenses;
 ·
              the
                  timing and size of future
                  acquisitions;
 ·
              personnel
                  changes;
 ·
              significant
                  judgments and estimates made by management in the application of
                  generally
                  accepted accounting principles;
 ·
              healthcare
                  reform measures and healthcare regulation in general;
                  and
 ·
              fluctuations
                  in general economic and financial market conditions, including
                  interest
                  rates.




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




Early
      termination of client contracts could adversely affect results of
      operations.




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




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




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




**Payment
      defaults by large
      customers could have significant negative impact on our liquidity and overall
      financial condition.**




During
      the fiscal
      year ended December 31, 2005, approximately 40.2 % of our revenues were
      attributable to our 20 largest clients.  In addition, approximately 51.7%
      of our accounts receivable as of December 31, 2005 were attributable to 20
      clients.  Significant payment defaults by these clients could have a
      significant negative impact on our liquidity and overall financial
      condition.


10
 *Table
              of Contents*


Impairment of
      intangible assets could increase our expenses.




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




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




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


**Ado****ption
        of FAS 123R will increase our
        expenses and have a significant effect on our reported
        profit.**




In
      2006 and beyond,
      recorded expenses will increase as a result of our adoption of FAS 123R, which
      requires us to record expense associated with stock options based upon their
      fair value at the date of grant.  If we had adopted this methodology we
      would have recorded stock option related expense of $10.7 million, $9.6 million
      and $16.2 million in 2005, 2004 and 2003, respectively, using the Black-Scholes
      valuation model. Actual amounts recorded in the future will vary depending
      upon
      the number of options actually granted, the fair market value at the date of
      grant, and other variables affecting the calculation.




**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 methodolgies, 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.


11
 *Table
            of Contents*


Risks
      related to our strategic relationships and
      initiatives




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




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


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




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




**If
      we undertake additional acquisitions, they may be disruptive to our
      business and could have an adverse effect on our future operations and the
      market price of our common stock.**




An
      important element of our business strategy has been
      expansion through acquisitions. Since 1997, we have completed ten
      acquisitions.  While there is no assurance that we will complete any future
      acquisitions, any future acquisitions would involve a number of risks, including
      the following:


·
              The
                  anticipated benefits from any acquisition may not be achieved.
                  The
                  integration of acquired businesses requires substantial attention
                  from
                  management. The diversion of management’s attention and any difficulties
                  encountered in the transition process could hurt our
                  business.
 ·
              In
                  future acquisitions, we could issue additional shares of our capital
                  stock, incur additional indebtedness or pay consideration in excess
                  of
                  book value, which could have a dilutive effect on future net income,
                  if
                  any, per share.
 ·
              New
                  business acquisitions must be accounted for under the purchase
                  method of
                  accounting. These acquisitions may generate significant intangible
                  assets
                  and result in substantial related amortization charges to
                  us.
  Risks related to industry
      regulation




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




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




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


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


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




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




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




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




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


12
 *Table
            of Contents*


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




Risks
      related to our personnel and organization




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




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


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




Our
      success depends, in significant part, upon the
      continued services of our key technical, marketing, sales and management
      personnel, and on our ability to continue to attract, motivate and retain highly
      qualified employees. Competition for these employees is intense and we maintain
      at-will employment terms with our employees, meaning that they are free to
      leave
      at any time.  Further, while we do utilize non-compete agreements with some
      employees, such agreements may not be enforceable, or we may choose for various
      reasons not to attempt to enforce them. In addition, the process of recruiting
      personnel with the combination of skills and attributes required to execute
      our
      business strategy can be difficult, time-consuming and expensive. We believe
      that our ability to implement our strategic goals depends to a considerable
      degree on our senior management team. The loss of any member of that team could
      hurt our business.





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




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




Our
      charter documents contain additional anti-takeover
      devices including:


·
              only
                  one of the three classes of directors is elected each
                  year;
 ·
              the
                  ability of our stockholders to remove directors without cause is
                  limited;
 ·
              the
                  right of stockholders to act by written consent has been
                  eliminated;
 ·
              the
                  right of stockholders to call a special meeting of stockholders
                  has been
                  eliminated; and
 ·
              advance
                  notice must be given to nominate directors or submit proposals
                  for
                  consideration at stockholders
                  meetings.




Item
      1B.Unresolved Staff
      Comments




Not
      applicable.




Item
      2.     Properties




Our
      corporate offices are located in Boca Raton, Florida
      under a lease that expires in February 2008. In addition, we maintain leased
      office space in Phoenix, Arizona; Newport Beach, California; San Jose,
      California; Santa Rosa, California; Atlanta, Georgia; Westchester, Illinois;
      Overland Park, Kansas; Rockville, Maryland; Boston, Massachusetts; Grand Rapids,
      Michigan; Mountain Lakes, New Jersey;  Malvern, Pennsylvania; San Antonio,
      Texas; Montreal, Canada, Toronto, Canada and Richmond, Canada. 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 2005.


13
 *Table
              of Contents*


Part
      II




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





**Price****Range****of Common
      Stock**




Our
      common stock has been publicly traded on the NASDAQ
      National 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 National
      Market.




**High**
            
            **Low**2004First
                quarter
            
            $
            15.48
            
            $
            11.27Second
                quarter
            
            $
            15.26
            
            $
            11.25Third
                quarter
            
            $
            16.07
            
            $
            12.75Fourth
                quarter
            
            $
            20.95
            
            $
            14.622005First
                quarter
            
            $
            20.52
            
            $
            14.44Second
                quarter
            
            $
            15.67
            
            $
            11.21Third
                quarter
            
            $
            18.83
            
            $
            12.82Fourth
                quarter
            
            $
            20.20
            
            $
            15.38




Holders
      of Record




On
      February 15, 2006, the last reported sale price of
      our common stock on the NASDAQ National Market was $21.15 per share. Also as
      of
      February 15, 2006, we had approximately 192 stockholders of record.




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 elsewhere in this
      document.


14
 *Table
              of Contents*


Item
      6.  Selected Financial
      Data





You
      should read the following selected financial data in
      conjunction with our consolidated financial statements and the related notes
      thereto, along with Item 7, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”, that is included elsewhere in this
      document. Our statement of operations data for the years ended December 31,
      2005, 2004 and 2003 and the balance sheet data at December 31, 2005 and 2004
      are
      derived from, and are qualified by reference to, our audited consolidated
      financial statements, which appear elsewhere in this document. Our statement
      of
      operations data for the years ended December 31, 2002 and 2001  and the
      balance sheet data at December 31, 2003, 2002 and 2001  set forth below,
      are derived from, and are qualified by reference to, our audited consolidated
      financial statements which are not included in this document. Historical results
      are not necessarily indicative of any future results.





**Consolidated
                  Statements of Operations****(in
                  thousands, except per share data)****Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**Revenues:Systems
                  and services
              
              $
              370,309
              
              $
              282,124
              
              $
              233,971
              
              $
              203,218
              
              $
              223,171Hardware
              
              
              12,962
              
              
              26,951
              
              
              20,708
              
              
              14,850
              
              
              16,505Total
                  revenues
              
              
              383,271
              
              
              309,075
              
              
              254,679
              
              
              218,068
              
              
              239,676Costs
                  and expenses:Costs
                  of systems and services revenues
              
              
              225,080
              
              
              168,393
              
              
              143,276
              
              
              119,044
              
              
              124,255Costs
                  of hardware revenues
              
              
              11,055
              
              
              22,949
              
              
              17,252
              
              
              12,270
              
              
              13,571Sales
                  and marketing
              
              
              64,140
              
              
              65,024
              
              
              70,381
              
              
              53,175
              
              
              42,698Research
                  and development
              
              
              51,789
              
              
              58,095
              
              
              58,144
              
              
              46,228
              
              
              37,034General
                  and administrative
              
              
              19,191
              
              
              15,524
              
              
              13,528
              
              
              12,434
              
              
              10,278Depreciation
                  and amortization
              
              
              14,659
              
              
              13,284
              
              
              10,492
              
              
              8,531
              
              
              13,900Pooling
                  and transaction costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (472
              )Total
                  costs and expenses
              
              
              385,914
              
              
              343,269
              
              
              313,073
              
              
              251,682
              
              
              241,264Loss
                  from operations
              
              
              (2,643
              )
              
              (34,194
              )
              
              (58,394
              )
              
              (33,614
              )
              
              (1,588
              )Interest
                  income, net
              
              
              3,128
              
              
              1,629
              
              
              2,430
              
              
              4,016
              
              
              5,996Income
                  (loss) before income taxes
              
              
              485
              
              
              (32,565
              )
              
              (55,964
              )
              
              (29,598
              )
              
              4,408Provision
                  for income taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              165
              
              
              -Net
                  income (loss)
              
              $
              485
              
              $
              (32,565
              )
              $
              (55,964
              )
              $
              (29,763
              )
              $
              4,408Net
                  income (loss) per common share:Basic
                  net income (loss) per common share
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )
              $
              (0.67
              )
              $
              0.10Diluted
                  net income (loss) per common share
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )
              $
              (0.67
              )
              $
              0.09Basic
                  weighted average common shares outstanding
              
              
              47,947
              
              
              46,587
              
              
              45,405
              
              
              44,711
              
              
              43,244Diluted
                  weighted average common shares outstanding
              
              
              50,644
              
              
              46,587
              
              
              45,405
              
              
              44,711
              
              
              46,795






**Year
                  Ended December 31,****(in
                  thousands)****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****Balance
                  Sheet Data:**Cash
              
              $
              76,693
              
              $
              122,031
              
              $
              151,683
              
              $
              183,500
              
              $
              168,942Marketable
                  Securities
              
              
              37,455
              
              
              -
              
              
              -
              
              
              -
              
              
              -Working
                  Capital
              
              
              52,789
              
              
              47,371
              
              
              79,553
              
              
              140,368
              
              
              174,951Total
                  assets
              
              
              328,789
              
              
              296,043
              
              
              295,783
              
              
              301,197
              
              
              300,494Debt,
                  including current portion
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stockholder's
                  equity
              
              $
              146,191
              
              $
              123,277
              
              $
              143,153
              
              $
              192,597
              
              $
              218,201


15
 *Table
            of Contents*


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




Executive
      Overview




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




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




Background




We
      were founded in December 1995 to commercialize an
      integrated clinical and financial information software system for use by
      hospitals. Historically, hospitals kept records in paper form. This has been
      associated with patient safety concerns, including avoidable medical errors,
      duplicative and unnecessary procedures, inefficient use of limited resources,
      and a limited ability to track, bill and collect for services rendered. Our
      software is designed to address these issues by turning data into information
      that can be easily used, accessed by or provided to the right person, at the
      right time, in the right place. This enables hospital employees to redesign
      business processes, deliver higher quality care at lower cost, and receive
      expedited payment for services rendered. Our software also helps to improve
      collaboration among physicians, nurses and other healthcare workers across
      all
      venues of care.


Software Development




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




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




In
      October 2003, we identified and announced certain
      response time issues within components of the version of our next-generation
      clinical software that we were developing at that time. Although some of our
      software components had been implemented in and were working at some client
      sites, we determined that the software did not produce acceptable response
      times
      for complex, high-volume hospital environments. To address the issue, we
      implemented a strategy that was designed to allow SunriseXA clients to continue
      their deployment of SunriseXA, and at the same time allow us to continue the
      development of advanced SunriseXA solutions. This strategy was to replace the
      affected SunriseXA components with certain components from our SCM software,
      which is our prior generation, core clinical software. The response time issue
      resulted in a software delivery delay for some of our advanced SunriseXA
      functionality. The announcement of these issues also impacted the implementation
      schedules for a number of our clients.  This announcement adversely
      affected our sales in 2004 and 2005.


In connection
        with this issue, we recorded a $1.2 million write-down of capitalized software
        development costs to net realizable value for some SunriseXA components in
        the
        third quarter of 2003. The write-down was included in the costs of systems
        and
        services revenues. Also, we believe that the correction of the response time
        issue and related issues is covered by the warranties that we provide to
        our
        clients.  We intend to continue to remediate the problem for our clients.
        Accordingly, we recorded provisions related to warranty costs of $4.6 million
        to
        date.  These provisions reflect our estimate of warranty-related costs that
        includes among other things, implementation and third-party costs for affected
        clients. Warranty costs are charged to costs of systems and services revenues
        when they are probable and reasonably estimable.  Through December 31,
        2005, we had expended approximately $3.5 million in warranty costs related
        to
        remediation of the response time issue and related issues.  As of December
        31, 2005 the warranty reserve balance was $1.1 million.   Professional
        services revenues have been, and we believe will continue to be negatively
        affected as we utilize resources to fulfill these
        obligations.




On June
      30,
      2004, we introduced Sunrise Clinical Manager Release 3.5 XA.  This new
      release contained significant additional functionality for core clinical,
      ambulatory and emergency department settings, as well as enhancements to patient
      management functions.  Additionally, the new release extended support for
      physicians through the inclusion of advanced functionality for clinical decision
      support, structured notes, medical necessity checking, prescription writing
      and
      medical management configuration.


16


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 Release 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 XATM and Pocket SunriseTM 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 Release 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.




The
      general availability of these releases fulfilled key
      deliverables expected by our clients in connection with the 2003 response time
      issue. These releases were consistent with our strategy and contained enhanced
      functionality as planned.




Operational
      Initiatives




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




The
      change in our contracting model has had a material
      affect on our revenues, gross margins, and cash flows. Because the payments
      from
      our clients for software license fees are more evenly distributed over the
      term
      of the contract, our revenues are recognized over a longer period of time
      compared to our historical licensing model, while a significant portion of
      our
      operating expenses remain relatively fixed, resulting in lower margins early
      in
      the contract term.  We believe that this contracting model will provide for
      more predictable revenues on a year over year basis, and that over time, our
      margins will trend back towards historical levels as revenue from contracts
      later in their contract term help to compensate for lower margins earned in
      connection with new contracts.




Competitive
      Environment and Other Challenges for
      2006




During
      the fourth quarter of 2004 and much of 2005, we
      experienced a slow-down in closing new sales transactions related to increasing
      competition, issues associated with our previously discussed software delay
      and
      our CEO transition.  Additionally, we hired a new CEO during the fourth
      quarter of 2005 and implemented a restructuring of senior management and our
      operations during January 2006.   Also, we continue to release
      significant new functionality in our software suite including a major new
      release in January 2006.  In connection with these releases, we continue to
      implement a significant number of clients on this new software.  In the
      event our new software does not continue to achieve market acceptance, we
      experience any significant delays in implementing these new releases or
      experience disruptions in our operations as a result of the restructuring
      activities, our results of operations could be negatively affected, including
      a
      delay or loss in closing future new sales transactions.





Critical
      Accounting
      Policies




We
      believe there are
      several accounting policies that are critical to understanding our historical
      and future performance, as these policies affect the reported amount of revenue
      and other significant areas involving management’s judgments and estimates. On
      an ongoing basis, management evaluates and adjusts its estimates and judgments,
      if necessary. These significant accounting policies relate to revenue
      recognition, allowance for doubtful accounts, capitalized software development
      costs and our warranty reserve. Please refer to Note 2 of the audited
      consolidated financial statements for further discussion of our accounting
      policies.


17
 *Table
                of
                Contents*


*Revenue
      Recognition*




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


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

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




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




Subscription
      Contracts




Our
      subscription contracts typically include the
      following deliverables:




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

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




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




We
      consider the applicability of EITF 00-3,
“Application of AICPA 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.


18
 *Table
              of Contents*
  Traditional Software
            Contracts




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




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




Revenue
      for each of the elements is recognized as follows:




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




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




Software
      Contracts Requiring Contract Accounting




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




Stand-Alone
      Software and Service




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




- Outsourcing;
- Software license;
- Maintenance;
- Professional services;
- Hardware;
- Network services;
- 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 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.


19
 *Table
            of Contents*


We
      record reimbursable out-of-pocket expenses in both
      systems and services revenues and as a direct cost of systems and services
      revenues in accordance with EITF Issue No. 01-14, Income Statement
      Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
      Incurred(“EITF 01-14”). EITF 01-14 requires reimbursable
      out-of-pocket expenses incurred to be characterized as revenue in the statement
      of operations. For 2005, 2004, and 2003 reimbursable out-of-pocket expenses
      were
      $9.2 million, $5.7 million, and $4.5 million, respectively.




In
      accordance with EITF Issue No. 00-10, Accounting
      for Shipping and Handling Fees,we have classified the re-imbursement by
      clients of shipping and handling costs as revenue and the associated cost as
      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.




Allowance
      for Doubtful Accounts




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




Capitalized
      Software Development Costs




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




On
      October 20,
      2003, we announced response time issues with some components of the version
      of
      our next-generation core clinical software that we were developing at that
      time.
      To address the issue, we implemented a strategy that was designed to allow
      SunriseXA clients to continue their deployment of SunriseXA, and at the same
      time allow us to continue the development of our advanced SunriseXA solutions.
      Our strategy was to replace the affected SunriseXA components with certain
      components from our SCM software. As a result, in 2003 we recorded a
      $1.2 million write-down of capitalized software development costs for
      certain SunriseXA components to net realizable value. The write-down is included
      in the costs of systems and services revenues.




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 to
      date and expended $3.5 million against the provision through December 31, 2005.
      Warranty costs are charged to costs of systems and services revenues when they
      are probable and reasonably estimable. In determining this warranty reserve,
      we
      used significant judgments and estimates for the additional professional service
      hours and third party costs that will be necessary to remedy this issue on
      a
      client-by-client basis. The timing and amount of our warranty reserve could
      have
      been different if we had used other judgments or assumptions in our evaluation.
      We expect to substantially complete this work by December 31, 2006.




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 generally sold to clients
      under
      contracts that range in duration from 3 to 10 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 are the
      amortization of capitalized software development costs and acquired technology
      intangible asset. 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.




During
      the third quarter of 2003, we recorded a
      write-down of capitalized software costs to net realizable value of certain
      components of our SunriseXA software in the amount of $1.2 million. This related
      to the SunriseXA response time issue discussed above. Additionally, to date,
      we
      have recorded a warranty provision of $4.6 million related to anticipated costs
      of our SunriseXA response time issue. This warranty provision reflects an
      estimate of implementation and third party costs for certain clients. The
      warranty provision was included in the costs of systems and services
      revenues.




20
 *Table
          of Contents*




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 costs of systems and services
      revenues.




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, and may reach 10 years for outsourcing
      contracts. Acquisition-related intangible assets, which primarily consisted
      of
      the value of ongoing client relationships, acquired technology and goodwill,
      have been amortized based upon their estimated economic lives at the time of
      the
      acquisition, and vary among acquisitions. In accordance with Statement of
      Financial Accounting Standards, or SFAS, No. 142, our amortization of goodwill
      ceased as of January 1, 2002, leaving a recorded balance of $454,000 for
      goodwill as of December 31, 2001. On at least an annual basis, we conduct an
      impairment review of our goodwill balance. As of December 31, 2005, there was
      no
      impairment of the goodwill balance.




Taxes




As
      of December 31, 2005, we had U.S. net operating loss
      carryforwards for federal income tax purposes of $306.5 million. Of this amount,
      $6.0 million expires in 2012 with the balance expiring in varying amounts
      annually through 2025.   Of the $306.5 million total, $63.3 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 foreign net operating loss carryovers of $19.1 million
      that
      expire in varying amounts through 2012.  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.







21
 *Table
          of Contents*


**Statement
                  of Operations****(in
                  thousands, except per share data)****2005**
              
              
              
              **2004****%
                  of Total**
              
              
              
              **%
                  of Total****2005**
              
              **Revenue**
              
              **2004**
              
              **Revenue**
              
              **Change
                  $**
              
              **Change
                  %**Revenues:Systems
                  and services
              
              
              
              
              $
              370,309
              
              
              96.6
              %
              $
              282,124
              
              
              91.3
              %
              $
              88,185
              
              
              31.26
              %Hardware
              
              
              
              
              
              12,962
              
              
              3.4
              %
              
              26,951
              
              
              8.7
              %
              
              (13,989
              )
              
              -51.91
              %Total
                  revenues
              
              
              
              
              
              383,271
              
              
              100.0
              %
              
              309,075
              
              
              100.0
              %
              
              74,196
              
              
              24.01
              %Costs
                  and expenses:Costs
                  of systems and services revenues
              
              
              
              
              
              225,080
              
              
              58.7
              %
              
              168,393
              
              
              54.5
              %
              
              56,687
              
              
              33.66
              %Costs
                  of hardware revenues
              
              
              
              
              
              11,055
              
              
              2.9
              %
              
              22,949
              
              
              7.4
              %
              
              (11,894
              )
              
              -51.83
              %Sales
                  and marketing
              
              
              
              
              
              64,140
              
              
              16.7
              %
              
              65,024
              
              
              21.0
              %
              
              (884
              )
              
              -1.36
              %Research
                  and development
              
              
              
              
              
              51,789
              
              
              13.5
              %
              
              58,095
              
              
              18.8
              %
              
              (6,306
              )
              
              -10.85
              %General
                  and administrative
              
              
              
              
              
              19,191
              
              
              5.0
              %
              
              15,524
              
              
              5.0
              %
              
              3,667
              
              
              23.62
              %Depreciation
                  and amortization
              
              
              
              
              
              14,659
              
              
              3.8
              %
              
              13,284
              
              
              4.3
              %
              
              1,375
              
              
              10.35
              %Total
                  costs and expenses
              
              
              
              
              
              385,914
              
              
              100.7
              %
              
              343,269
              
              
              111.1
              %
              
              42,645
              
              
              12.42
              %Loss
                  from operations
              
              
              
              
              
              (2,643
              )
              
              -0.7
              %
              
              (34,194
              )
              
              -11.1
              %
              
              31,551
              
              
              92.27
              %Interest
                  income, net
              
              
              
              
              
              3,128
              
              
              0.8
              %
              
              1,629
              
              
              0.5
              %
              
              1,499
              
              
              92.02
              %Income
                  (loss) before income taxes
              
              
              
              
              
              485
              
              
              
              
              
              (32,565
              )
              
              
              
              
              33,050
              
              
              101.49
              %Provision
                  for income taxes
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              -Net
                  income (loss)
              
              
              
              
              $
              485
              
              
              
              
              $
              (32,565
              )
              
              
              
              $
              33,050
              
              
              101.49
              %Basic
                  net income (loss) per common share
              
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.70
              )
              
              
              
              $
              0.71
              
              
              101.43
              %Diluted
                  net income (loss) per common share
              
              
              
              
              $
              0.01
              
              
              
              
              $
              (0.70
              )
              
              
              
              $
              0.71
              
              
              101.43
              %





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




Total
      revenues for the year ended December 31, 2005
      increased $74.2 million or 24.0 % to $383.3 million, from $309.1 million in
      2004.




Systems
      and services revenues increased $88.2 million or
      31.3% to $370.3 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 ratable generated revenues related to software,
      maintenance, outsourcing and remote hosting. These revenues increased $50.7
      million or 25.6% to $248.7 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 ratable generated revenues were primarily
      driven by increases in outsourcing, remote hosting and subscription revenues
      which include software maintenance.  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.  In the event
      that we are not successful in achieving comparable levels of software related
      revenues in 2006, our operating results could be negatively
      impacted.




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.




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.




22
 *Table
          of Contents*




Revenue
      increases in any period are attributable, to a
      significant degree, to sales contracts entered into in prior-years. 
Because 2005 software sales bookings have fallen short of our expectations,
      the
      percentage revenue increases experienced in 2005 may not be repeated in
      2006.




Cost
      of systems and services revenues “exclusive of
      depreciation shown below”, increased approximately $56.7 million or 33.7% to
      $225.1 million, for the year ended December 31, 2005 compared to $168.4 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
        2004 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 ;
- 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.  We expect these initiatives to improve our
      results in this area over the next 12 – 24 months.




Cost
      of hardware revenues decreased $11.9 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 $58.1 million in 2004. Gross research and development spending
      which consists of research and development expense plus capitalized software
      development costs decreased $1.4 million to $71.9 million in 2005 compared
      to
      $73.3 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
              
              $
              51,789
              
              $
              58,095
              
              $
              (6,306
              )
              
              -10.9
              %Capitalized
                  software development costs
              
              
              20,144
              
              
              15,194
              
              
              4,950
              
              
              32.6
              %Gross
                  research and development expenses
              
              
              71,933
              
              
              73,289
              
              
              (1,356
              )
              
              -1.9
              %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 costs of systems and services revenues.
        We expect capitalization of software development costs to reduce in
      2006 from 2005 levels.  Sunrise Clinical Manager 4.0XA and 4.5XA, which
      accounted for a significant part of our software development expense in 2005,
      have been released, and software development in 2006 is expected to focus more
      on enhancement and maintenance of existing software than on new software
      development.  The anticipated reduction in software development
      capitalization will result in a commensurate increase in research and
      development expense recognized in 2006.




General
      and administrative expenses increased
      approximately $3.7 million or 23.6% to $19.2 million in 2005 compared to $15.5
      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.




In 2006
      and
      beyond, recorded expenses will increase as a result of our adoption of FAS
      123R,
      which requires us to record expense associated with stock options based upon
      their fair value at the date of grant.  If we had adopted this methodology
      we would have recorded stock option related expense of $10.7 million, $9.6
      million and $16.2 million in 2005, 2004 and 2003, respectively using the
      Black-Scholes valuation model. Actual amounts recorded in the future will vary
      depending upon the number of options actually granted, the fair market value
      at
      the date of grant, and other variables affecting the calculation.




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.




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, we had a net income of
      $485,000 for the year ended December 31, 2005, compared to a net loss of $32.6
      million for the year ended December 31, 2004.






23
 *Table
          of Contents*


**Statement
                  of Operations****(in
                  thousands, except per share data)****2004
                  % of Total**
              
              
              
              **2003
                  % of Total****2004**
              
              **Revenue**
              
              **2003**
              
              **Revenue**
              
              **Change
                  $**
              
              **Change
                  %**Revenues:Systems
                  and services
              
              
              
              
              $
              282,124
              
              
              91.3
              %
              $
              233,971
              
              
              91.9
              %
              $
              48,153
              
              
              20.58
              %Hardware
              
              
              
              
              
              26,951
              
              
              8.7
              %
              
              20,708
              
              
              8.1
              %
              
              6,243
              
              
              30.15
              %Total
                  revenues
              
              
              
              
              
              309,075
              
              
              100.0
              %
              
              254,679
              
              
              100.0
              %
              
              54,396
              
              
              21.36
              %Costs
                  and expenses:Costs
                  of systems and services revenues
              
              
              
              
              
              168,393
              
              
              54.5
              %
              
              143,276
              
              
              56.3
              %
              
              25,117
              
              
              17.53
              %Costs
                  of hardware revenues
              
              
              
              
              
              22,949
              
              
              7.4
              %
              
              17,252
              
              
              6.8
              %
              
              5,697
              
              
              33.02
              %Sales
                  and marketing
              
              
              
              
              
              65,024
              
              
              21.0
              %
              
              70,381
              
              
              27.6
              %
              
              (5,357
              )
              
              -7.61
              %Research
                  and development
              
              
              
              
              
              58,095
              
              
              18.8
              %
              
              58,144
              
              
              22.8
              %
              
              (49
              )
              
              -0.08
              %General
                  and administrative
              
              
              
              
              
              15,524
              
              
              5.0
              %
              
              13,528
              
              
              5.3
              %
              
              1,996
              
              
              14.75
              %Depreciation
                  and amortization
              
              
              
              
              
              13,284
              
              
              4.3
              %
              
              10,492
              
              
              4.1
              %
              
              2,792
              
              
              26.61
              %Total
                  costs and expenses
              
              
              
              
              
              343,269
              
              
              111.1
              %
              
              313,073
              
              
              122.9
              %
              
              30,196
              
              
              9.65
              %Loss
                  from operations
              
              
              
              
              
              (34,194
              )
              
              -11.1
              %
              
              (58,394
              )
              
              -22.9
              %
              
              24,200
              
              
              41.44
              %Interest
                  income, net
              
              
              
              
              
              1,629
              
              
              0.5
              %
              
              2,430
              
              
              1.0
              %
              
              (801
              )
              
              -32.96
              %Loss
                  before income taxes
              
              
              
              
              
              (32,565
              )
              
              
              
              
              (55,964
              )
              
              
              
              
              23,399
              
              
              41.81
              %Provision
                  for income taxes
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              
              
              
              -
              
              
              -Net
                  loss
              
              
              
              
              $
              (32,565
              )
              
              
              
              $
              (55,964
              )
              
              
              
              $
              23,399
              
              
              41.81
              %Basic
                  net (loss) income per common share
              
              
              
              
              $
              (0.70
              )
              
              
              
              $
              (1.23
              )
              
              
              
              $
              0.53
              
              
              43.09
              %Diluted
                  net (loss) income per common share
              
              
              
              
              $
              (0.70
              )
              
              
              
              $
              (1.23
              )
              
              
              
              $
              0.53
              
              
              43.09
              %




Year
      Ended December 31, 2004 compared to December 31,
      2003




Total
      revenues for the year ended December 31, 2004
      increased $54.4 million or 21.4% to $309.1 million, from
      $254.7 million in 2003.




Systems
      and services revenues increased
      $48.2 million or 20.6% to $282.1 million for the year ended
      December 31, 2004 compared to $234.0 million in 2003. The increase in
      systems and services revenues was primarily a result of an increase in monthly
      generated revenues related to software, maintenance, outsourcing and remote
      hosting. These revenues increased $31.0 million to $198.0 million in
      2004. Additionally, professional services revenues which include implementation
      and consulting services increased $8.4 million or 17.8% from
      $47.1 million in 2003 to $55.5 million in 2004. Also, revenue related
      to software and networking services increased $8.7 million or 43.9% to
      $28.6 million in 2004 compared to $19.9 million in 2003.




The
      increase in monthly generated revenues related to
      software, maintenance, outsourcing and remote hosting and professional services
      was primarily driven by higher sales volume in 2003 and 2004. The higher sales
      volume was related to an ongoing initiative in which we expanded our sales
      and
      marketing functions. The higher sales volume was related to success in the
      market place in connection with sales of our advanced clinical systems and
      combined software and outsourcing transactions. The sales of advanced clinical
      systems were related to ongoing industry wide initiatives to adopt and implement
      these systems. In connection with the higher sales volume, we began to market
      multiple element arrangements that are recognized on a monthly basis. This
      initiative which was implemented in 2002, has resulted in lower cash flows
      during the past two years as these contracts provide for payment terms that
      provide for lower cash flows during the early portion of the respective
      contracts. The growth in professional services was a result of significant
      incremental activity in 2004 tied to client implementations. Activities
      increased in 2004 as numerous clients went live on one or more software
      applications. This activity is expected to continue at these heightened levels
      in 2005 as numerous clients are scheduled to activate or upgrade their software
      applications. The increase in software license revenues and network services
      revenues was primarily a result of higher network services revenues which
      increased by $6.3 million in 2004. Network services revenues increased from
      $8.9 million in 2003 to $15.2 million in 2004. This increase was a
      result of an initiative we implemented to expand our network services offering
      to our client base.




As
      part of our future growth and continued expansion of
      our solutions offering, we implemented a strategy to market combined outsourcing
      and software contracts. We signed several large contracts in this area in 2004
      and continued this program in 2005. In the event that we experience a change
      in
      revenue mix whereby a higher portion of contracts are combined outsourcing
      and
      software contracts, our overall gross margin percentage would likely decline.
      However, given the significantly larger size of typical combined outsourcing
      and
      software contracts, we expect the overall contribution of these contracts to
      our
      profitability would be positive.




Hardware
      revenues increased approximately
      $6.2 million, or 30.2% to $27.0 million for the year ended
      December 31, 2004 compared to $20.7 million in 2003. Hardware
      increased as a significant number of clients made purchases as they progressed
      on their respective installations in 2004 following our release of Sunrise
      Clinical Manager 3.5 XA in June 2004.




Cost
      of systems and services exclusive of “depreciation
      as shown below”, increased approximately $25.1 million or 17.5% to
      $168.4 million, for the year ended December 31, 2004 compared to
      $143.3 million in 2003. The increase in costs of systems and services
      revenues in 2004 was related to the following:




24
 *Table
          of Contents*


- higher payroll and related costs associated with an increase
        in outsourcing and remote hosting revenues;
- higher amortization of capitalized software development
        costs
        associated with the release of Sunrise Clinical Manager 3.5 XA in June
        2004;
- higher costs associated with a higher volume networking
        services revenues;
- higher third party costs including royalties and consulting
        due to the higher sales of third party software and increased usage of
        external consultants ;
- higher implementation costs associated with an expanded
        implementation team in connection with higher professional services
        volumes;
- partially offset by a decrease in warranty related costs
        in
        2004.

Cost
      of
      hardware revenues increased $5.7 million to $22.9 million or 33.0% in
      2004 compared to $17.3 million in 2003. The increase in these costs was
      directly related to the higher hardware volumes discussed above. The gross
      margin percentage on hardware revenue decreased to 14.8% in 2004 compared to
      16.7% in 2003. The decrease was a result of pricing pressures in 2004 in the
      hardware sector of our business. It is expected that fluctuations in revenue
      and
      margin will continue to occur in future
      periods.




Research
      and
      development expenses were $58.1 million in 2004 compared to
      $58.1 million in 2003. Gross research and development spending which
      consists of research and development expense and capitalized software
      development costs decreased $3.1 million to $73.3 million in 2004
      compared to $76.4 million in 2003. 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 expenses were as
      follows:




**(in
                  thousands)****2004**
              
              **2003**
              
              **Change**
              
              **%
                  Change**Research
                  and development expenses
              
              $
              58,095
              
              $
              58,144
              
              $
              (49
              )
              
              -0.1
              %Capitalized
                  software development costs
              
              
              15,194
              
              
              18,249
              
              
              (3,055
              )
              
              -16.7
              %Gross
                  research and development expenses
              
              
              73,289
              
              
              76,393
              
              
              (3,104
              )
              
              -4.1
              %Amortization
                  of capitalized software development costs
              
              $
              10,634
              
              $
              8,164
              
              $
              2,470
              
              
              30.3
              %




The
      decrease in capitalized software development costs
      was primarily related to the decrease in costs associated with a shift from
      third party resources to internal resources in 2004. 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. These costs are
      included as a component of the costs of systems and services
      revenues.




General
      and administrative expenses increased
      approximately $2.0 million or 14.8% to $15.5 million in 2004 compared
      to $13.5 million in 2003. The increase was primarily related to higher
      legal costs, higher accounting and professional fees associated with the
      implementation of Section 404 of the Sarbanes-Oxley Act and expense
      associated with a stock option repurchase which was executed in the fourth
      quarter of 2004.




Depreciation
      and amortization increased
      $2.8 million or 26.6% to $13.3 million in 2004 compared to
      $10.5 million in 2003. The increase was a result of on-going investment to
      improve our infrastructure in our research and development area and continued
      investments in our TechnologySolutionsCenter related to higher volumes of remote
      hosting services. As a result of these initiatives, we expect depreciation
      and
      amortization to continue to increase in future periods.




Interest
      income decreased $801,000 to $1.6 million
      in 2004 compared to $2.4 million in 2003. The decrease was primarily
      related to lower cash and cash equivalent balances in 2004.




As
      a result of these factors, we had a net loss of
      $32.6 million for the year ended December 31, 2004, compared to a net
      loss of $56.0 million for the year ended December 31,
      2003.





Liquidity
      and Capital Resources




During
      2005, operating activities provided
      $14.4 million of cash. Operating activities were favorably impacted in 2005
      as a result of improvements in operations related to 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.   The timing and amount
      of cash provided by future stock option exercises is uncertain.




As
      of December 31, 2005, our principal source of
      liquidity was our cash and cash equivalents and marketable-securities balances
      of  $114.1 million.




Our
      future capital and liquidity requirements will
      depend upon a number of factors, including the rate of growth of our sales
      and
      the timing and level of research and development activities. As of
      December 31, 2005, we have a commitment for capital expenditures related to
      our ERP system of $1.2 million. We believe that our available cash and cash
      equivalents and anticipated cash generated from our future operations will
      be
      sufficient to meet our operating requirements at least through 2006.


25
 *Table
            of Contents*


Contracts
      and Commitments




The
      following table provides information related to our contractual cash
      obligations under various financial and commercial agreements as of December
      31,
      2005:





**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
              
              $
              26,252
              
              $
              9,373
              
              $
              10,811
              
              $
              3,409
              
              $
              2,659Unconditional
                  Purchase Obligations
              
              
              48,424
              
              
              37,699
              
              
              10,582
              
              
              143
              
              
              -Total
                  Contractual Cash Obligations
              
              $
              74,676
              
              $
              47,072
              
              $
              21,393
              
              $
              3,552
              
              $
              2,659


The
      unconditional purchase obligations consist of minimum purchase
      commitments for telecommunication services, computer equipment, maintenance,
      consulting, airplane charters and other commitments. The contract for airplane
      charters is discussed in further detail in Note 10 to the consolidated financial
      statements, “Related Party Transactions” included herein.




Item
      7A.  Quantitative and
      Qualitative Disclosures About Market Risk




We
      do not currently use derivative financial
      instruments. We generally invest in high quality debt instruments with
      relatively short maturities. Based upon the nature of our investments, we do
      not
      expect any material loss from our investments.




Investments
      in both fixed rate and floating rate
      interest earning instruments carry a degree of interest rate risk. Fixed rate
      securities may have their fair market value adversely impacted due to a rise
      in
      interest rates, while floating rate securities may produce less income than
      expected if interest rates fall. Due in part to these factors, our future
      investment income may fall short of expectations due to changes in interest
      rates or we may suffer losses in principal if forced to sell securities that
      have seen a decline in market value due to changes in interest rates. A
      hypothetical 10% increase or decrease in interest rates, however, would not
      have
      a material adverse effect on our financial condition.




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





Annualized
                  interest income based upon hypothetical values for cash
                  andmarketable
                  securities combined balances and interest rates:*Combined
                  cash and cash equivalents andHypothetical
              
              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




*
      This sensitivity analysis is not a forecast of future
      interest income.




We
      account for cash equivalents and marketable
      securities in accordance with SFAS No. 115. “Accounting for Certain Investments
      in Debt and Equity Securities.” Cash equivalents are short-term highly liquid
      investments with original maturity dates of three months or less. Cash
      equivalents are carried at cost, which approximates fair market
      value.




We
      do not currently enter into foreign currency hedge
      transactions. Through December 31, 2005, foreign currency fluctuations have
      not
      had a material impact on our financial position or results of
      operations.




26
 *Table
          of Contents*








Item
      8.    Financial Statements
      and Supplementary Data





Index
      to Consolidated Financial
      Statements:




*Financial
              Statements:*
            
            ****
            
            **Page**Report
                of Independent Registered Public Certified Accounting
                Firm
            
            
            28Consolidated
                Balance Sheets as of December 31, 2005 and
                2004
            
            
            29Consolidated
                Statements of Operations for the years ended
                December 31, 2005, 2004 and 2003
            
            
            30Consolidated
                Statements of Cash Flows for the years ended
                December 31, 2005, 2004 and 2003
            
            
            31Consolidated
                Statement of Changes in Stockholders’
                Equity for the years ended December 31, 2005, 2004 and
                2003
            
            
            32Notes
                to the Consolidated Financial
                Statements
            
            
            33*Financial
                Statement Schedules:*Schedule
                II — Valuation of Qualifying Accounts for each
                of the three years in the period ended December 31,
                2005
            
            
            49All other
                schedules
                are omitted as they are not applicable or the required information
                is
                shown in the financial statements or notes thereto.Signatures
            
            
            54




27
 *Table
          of Contents*





*Report
      of IndependentRegistered Public Certified Accounting Firm*




To the Board
      of
      Directors and Stockholders of Eclipsys Corporation:




We
      have completed integrated audits of Eclipsys Corporation’s 2005 and
      2004 consolidated financial statements and of its internal control over
      financial reporting as of December 31, 2005, and an audit of its 2003
      consolidated financial statements 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, 2005
      and
      2004, and the results of their operations and their cash flows for each of
      the
      three years in the period ended December 31, 2005 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 schedulebased 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.




Internal
      control over financial reporting




Also,
      in our opinion, management’s assessment, included in “Report of
      Management on Eclipsys Corporation’s Internal Control over Financial Reporting”
appearing under Item 9A, that the Company maintained effective internal control
      over financial reporting as of December 31, 2005 based on criteria established
      in Internal Control - Integrated Framework issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,
      in
      all material respects, based on those criteria. Furthermore, in our opinion,
      the
      Company maintained, in all material respects, effective internal control over
      financial reporting as of December 31, 2005, based on criteria established
      in
Internal Control - Integrated Framework issued by the 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.








PricewaterhouseCoopers
      LLP


Atlanta,
      Georgia


March 6,
      2006






28
 *Table
          of Contents*


**Consolidated
                  BalanceSheets****(in
                  thousands, except share and per share data)****December
                  31,**
              
              **December
                  31,****2005**
              
              **2004****Assets**Current
                  assets:Cash
              
              $
              76,693
              
              $
              122,031Marketable
                  Securities
              
              
              37,455
              
              
              -Accounts
                  receivable, net of allowance for doubtful accounts of $5,676 and
                  $4,952 at
                  December 31, 2005 and 2004, respectively
              
              
              80,833
              
              
              64,862Inventory
              
              
              2,289
              
              
              1,644Prepaid
                  expenses
              
              
              17,909
              
              
              14,495Other
                  current assets
              
              
              2,184
              
              
              1,091Total
                  current assets
              
              
              217,363
              
              
              204,123Property
                  and equipment, net
              
              
              40,500
              
              
              35,002Capitalized
                  software development costs, net
              
              
              35,690
              
              
              29,819Acquired
                  technology, net
              
              
              584
              
              
              886Intangible
                  assets, net
              
              
              2,940
              
              
              3,804Goodwill,
                  net
              
              
              6,624
              
              
              2,863Deferred
                  tax asset
              
              
              4,124
              
              
              4,623Other
                  assets
              
              
              20,964
              
              
              14,923Total
                  assets
              
              $
              328,789
              
              $
              296,043**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Deferred
                  revenue
              
              $
              107,960
              
              $
              106,804Accounts
                  payable
              
              
              26,103
              
              
              21,945Accrued
                  compensation costs
              
              
              15,974
              
              
              12,738Deferred
                  tax liability
              
              
              4,124
              
              
              4,623Other
                  current liabilities
              
              
              10,413
              
              
              10,642Total
                  current liabilities
              
              
              164,574
              
              
              156,752Deferred
                  revenue
              
              
              16,772
              
              
              15,892Other
                  long-term liabilities
              
              
              1,252
              
              
              122Total
                  long-term liabilities
              
              
              18,024
              
              
              16,014Commitments
                  and contingencies (See Note 7)Stockholders’
                  Equity:Common
                  stock, $0.01 par value, 200,000,000 shares authorized; issued and
                  outstanding, 49,903,325 and 47,496,142
              
              
              499
              
              
              472Additional
                  paid-in capital
              
              
              454,941
              
              
              429,001Unearned
                  stock compensation
              
              
              (9,551
              )
              
              (5,641
              )Accumulated
                  deficit
              
              
              (299,858
              )
              
              (300,343
              )Accumulated
                  other comprehensive income
              
              
              160
              
              
              (212
              )Total
                  stockholders’ equity
              
              
              146,191
              
              
              123,277Total
                  liabilities and stockholders’ equity
              
              $
              328,789
              
              $
              296,043


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


29
 *Table
              of Contents*
 **Consolidated
                    Statementsof
                    Operations****(in
                    thousands, except per share data)****Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**Revenues:Systems
                    and services
                
                $
                370,309
                
                $
                282,124
                
                $
                233,971Hardware
                
                
                12,962
                
                
                26,951
                
                
                20,708Total
                    revenues
                
                
                383,271
                
                
                309,075
                
                
                254,679Costs
                    and expenses:Costs
                    of systems and services revenues
                
                
                225,080
                
                
                168,393
                
                
                143,276Costs
                    of hardware revenues
                
                
                11,055
                
                
                22,949
                
                
                17,252Sales
                    and marketing
                
                
                64,140
                
                
                65,024
                
                
                70,381Research
                    and development
                
                
                51,789
                
                
                58,095
                
                
                58,144General
                    and administrative
                
                
                19,191
                
                
                15,524
                
                
                13,528Depreciation
                    and amortization
                
                
                14,659
                
                
                13,284
                
                
                10,492Total
                    costs and expenses
                
                
                385,914
                
                
                343,269
                
                
                313,073Loss
                    from operations
                
                
                (2,643
                )
                
                (34,194
                )
                
                (58,394
                )Interest
                    income, net
                
                
                3,128
                
                
                1,629
                
                
                2,430Income
                    (loss) before income taxes
                
                
                485
                
                
                (32,565
                )
                
                (55,964
                )Provision
                    for income taxes
                
                
                -
                
                
                -
                
                
                -Net
                    income (loss)
                
                $
                485
                
                $
                (32,565
                )
                $
                (55,964
                )Net
                    income (loss) per share:Basic
                    net income (loss) per common share
                
                $
                0.01
                
                $
                (0.70
                )
                $
                (1.23
                )Diluted
                    net income (loss) per common share
                
                $
                0.01
                
                $
                (0.70
                )
                $
                (1.23
                )Basic
                    weighted average common shares outstanding
                
                
                47,947
                
                
                46,587
                
                
                45,405Diluted
                    weighted average common shares outstanding
                
                
                50,644
                
                
                46,587
                
                
                45,405
  The
        accompanying notes are an integral part of these
        consolidated financial statements.
  30
 *Table
            of Contents*
 **Consolidated
                    Statementsof Cash
                    Flows****(in
                    thousands)****Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**Operating
                    activities:Net
                    income (loss)
                
                $
                485
                
                $
                (32,565
                )
                $
                (55,964
                )Adjustments
                    to reconcile net income (loss) to net cash provided by (used
                    in) operating
                    activities:Depreciation
                    and amortization
                
                
                32,472
                
                
                27,410
                
                
                21,902Write-off
                    of capitalized software development costs
                
                
                -
                
                
                -
                
                
                1,200Provision
                    for bad debts
                
                
                3,011
                
                
                1,800
                
                
                2,625Loss
                    on sale of marketable securities
                
                
                -
                
                
                131
                
                
                424Stock
                    compensation expense
                
                
                2,353
                
                
                477
                
                
                226Changes
                    in operating assets and liabilities:Increase
                    in accounts receivable
                
                
                (18,966
                )
                
                (11,520
                )
                
                (10,706
                )(Increase)
                    / Decrease in other current assets
                
                
                (1,092
                )
                
                (28
                )
                
                1,255(Increase)
                    / Decrease in prepaid expenses
                
                
                (3,415
                )
                
                (506
                )
                
                673(Increase)
                    / Decrease in inventory
                
                
                (645
                )
                
                (1,079
                )
                
                126Increase
                    in other assets
                
                
                (9,283
                )
                
                (2,724
                )
                
                (9,232
                )Increase
                    in deferred revenue
                
                
                2,036
                
                
                21,403
                
                
                21,094Increase
                    / (Decrease) in accrued compensation
                
                
                2,441
                
                
                (4,486
                )
                
                7,397Increase
                    in accounts payable
                
                
                6,493
                
                
                3,637
                
                
                13,825(Decrease)
                    / Increase in other current liabilities
                
                
                (2,563
                )
                
                (4,635
                )
                
                1,255Increase
                    / (Decrease) in other long-term liabilities
                
                
                1,130
                
                
                (562
                )
                
                458Total
                    adjustments
                
                
                13,972
                
                
                29,318
                
                
                52,522Net
                    cash provided by (used in) operating activities
                
                
                14,457
                
                
                (3,247
                )
                
                (3,442
                )Investing
                    activities:Purchases
                    of property and equipment
                
                
                (19,288
                )
                
                (15,333
                )
                
                (15,997
                )Purchase
                    of marketable securities
                
                
                (501,717
                )
                
                (164,074
                )
                
                (73,785
                )Proceeds
                    from sale of marketable securities
                
                
                464,262
                
                
                163,943
                
                
                73,361Capitalized
                    software development costs
                
                
                (20,144
                )
                
                (15,194
                )
                
                (18,249
                )Cash
                    paid for acquisitions
                
                
                (312
                )
                
                (5,458
                )
                
                -Net
                    cash used in investing activities
                
                
                (77,199
                )
                
                (36,116
                )
                
                (34,670
                )Financing
                    activities:Proceeds
                    from stock options exercised
                
                
                16,853
                
                
                7,892
                
                
                3,554Proceeds
                    from issuance of common stock in stock purchase plan
                
                
                195
                
                
                1,664
                
                
                2,709Net
                    cash provided by financing activities
                
                
                17,048
                
                
                9,556
                
                
                6,263Effect
                    of exchange rates on cash and cash equivalents
                
                
                356
                
                
                155
                
                
                32Net
                    decrease in cash and cash equivalents
                
                
                (45,338
                )
                
                (29,652
                )
                
                (31,817
                )Cash
                    and cash equivalents — beginning of year
                
                
                122,031
                
                
                151,683
                
                
                183,500Cash
                    and cash equivalents — end of year
                
                $
                76,693
                
                $
                122,031
                
                $
                151,683Cash
                    paid for income taxes
                
                $
                -
                
                $
                133
                
                $
                155Non-cash
                    investing activities:Issuance
                    of shares for acquisition (NOTE 8)
                
                $
                2,660
                
                $
                2,500
                
                $
                -
 The
        accompanying notes are an integral part of these consolidated
        financial statements.
  31
 *Table
            of Contents*
 **Consolidated
                        Statementof Changes in Stockholders’
                        Equity****(in
                        thousands, except share data)****Voting
                        and Non-Voting Common Stock**
                    
                    **Additional
                        Paid-in**
                    
                    **Unearned
                        Stock**
                    
                    **Accumulated**
                    
                    **Comprehensive
                        Income**
                    
                    **Accumulated
                        Other Comprehensive****Shares**
                    
                    **Amount**
                    
                    **Capital**
                    
                    **Compensation**
                    
                    **Deficit**
                    
                    **(Loss)**
                    
                    **Income
                        (Loss)**
                    
                    **Total****Balance
                        at December 31, 2002**
                    
                    45,088,872
                    
                    $  451
                    
                    $
                        405,380
                    
                    $
                        (1,021)
                    
                    $
                        (211,814)
                    
                    
                    
                    $
                        (399)
                    
                    $
                        192,597Exercise
                        of stock options
                    
                    
                    430,132
                    
                    
                    4
                    
                    
                    3,550
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,554Employee
                        stock purchase plan
                    
                    
                    457,651
                    
                    
                    5
                    
                    
                    2,704
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,709Compensation
                        expense recognized
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    226
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    226Comprehensive
                        income:Net
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (55,964
                    )
                    
                    (55,964
                    )
                    
                    
                    
                    
                    (55,964
                    )Foreign
                        currency translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32
                    
                    
                    32
                    
                    
                    32Other
                        comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    32Comprehensive
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (55,932
                    )**Balance
                        at December 31, 2003**
                    
                    
                    45,976,655
                    
                    
                    460
                    
                    
                    411,634
                    
                    
                    (795
                    )
                    
                    (267,778
                    )
                    
                    
                    
                    
                    (367
                    )
                    
                    143,154Exercise
                        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
                    
                    
                    5,272
                    
                    
                    (5,274
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Stock
                        compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    49
                    
                    
                    428
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    477Stock
                        issued for Acquisition
                    
                    
                    184,202
                    
                    
                    1
                    
                    
                    2,499
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,500Comprehensive
                        income:Net
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (32,565
                    )
                    
                    (32,565
                    )
                    
                    
                    
                    
                    (32,565
                    )Foreign
                        currency translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    155
                    
                    
                    155
                    
                    
                    155Other
                        comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    155
                    
                    
                    
                    
                    
                    -Comprehensive
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (32,410
                    )
                    
                    
                    
                    
                    -**Balance
                        at December 31, 2004**
                    
                    
                    47,496,142
                    
                    
                    472
                    
                    
                    429,001
                    
                    
                    (5,641
                    )
                    
                    (300,343
                    )
                    
                    
                    
                    
                    (212
                    )
                    
                    123,277Exercise
                        of stock options
                    
                    
                    1,957,912
                    
                    
                    21
                    
                    
                    16,827
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    16,848Employee
                        stock purchase plan
                    
                    
                    10,848
                    
                    
                    0
                    
                    
                    195
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    195Issuance
                        of restricted stock
                    
                    
                    372,500
                    
                    
                    5
                    
                    
                    6,258
                    
                    
                    (6,263
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Stock
                        compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,353
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,353Stock
                        issued or to be issued for acquisitions
                    
                    
                    65,923
                    
                    
                    1
                    
                    
                    2,660
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,661Comprehensive
                        income:Net
                        income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    485
                    
                    
                    485
                    
                    
                    
                    
                    
                    485Foreign
                        currency translation adjustment
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    372
                    
                    
                    372
                    
                    
                    372Other
                        comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    372
                    
                    
                    
                    
                    
                    -Comprehensive
                        income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    857
                    
                    
                    
                    
                    
                    -**Balance
                        at December 31, 2005**
                    
                    
                    49,903,325
                    
                    $
                    499
                    
                    $
                    454,941
                    
                    $
                    (9,551
                    )
                    $
                    (299,858
                    )
                    
                    
                    
                    $
                    160
                    
                    $
                    146,191The
                      accompanying notes are an integral part of these consolidated
                      financial
                      statements.
 32
 *Table
              of Contents*
  1.            
          Organization andDescription of Business
  Eclipsys
          Corporation (“Eclipsys” or the “Company”, “We”,
“Us” or “Our”) is a healthcare information technology company and a leading
          provider of advanced clinical, financial and management information software
          and
          service solutions.  The Company develops and licenses proprietary software
          and content that is designed to help automate many of the key clinical,
          administrative and financial functions that hospitals and other healthcare
          organizations require.  The Company’s software is designed to enable
          clients to improve patient care and patient satisfaction, reduce operating
          costs, and enhance revenues. Among other things, the software enables
          physicians, nurses and other clinicians to check on a patient’s condition, order
          patient tests, review test results, monitor a patient’s medications, and provide
          alerts to changes in a patient’s condition. The software also facilitates
          hospitals’ patient admissions, scheduling, records maintenance, invoicing,
          inventory control, cost accounting, and helps clients determine the
          profitability of physicians and physician groups, understand the profitability
          of specific medical procedures, and perform numerous other functions.  The
          Company’s content, which is integrated with our software, provides treatment
          guidelines in context at the point of care for use by physicians, nurses
          and
          other clinicians.
  2.            
          Summary of Significant Accounting Policies
  Principles
          of
          Consolidation
  The
          consolidated financial statements include the
          accounts of Eclipsys Corporation and its wholly owned subsidiaries. All
          intercompany transactions have been eliminated in consolidation. Eclipsys
          manages its business as one 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,
          amortization periods, the warranty reserve and the valuation allowance
          for
          deferred tax assets.
  Reclassifications
  Certain
          prior period amounts have been reclassified to
          conform to the 2005 presentation. These reclassifications have had no impact
          on
          the statement of operations, net income or the statement of cash
          flows.
  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 10 years. We evaluate revenue recognition
          on a
          contract-by-contract basis as the terms of each arrangement vary. The evaluation
          of our contractual arrangements often requires judgments and estimates
          that
          affect the timing of revenue recognized in our statements of operations.
          Specifically, we may be required to make judgments about:
 whether
              the fees associated with our software and
              services are fixed or determinable;
          whether
              collection of our fees is reasonably assured;
          whether
              professional services are essential to the
              functionality of the related software;
          whether
              we have the ability to make reasonably
              dependable estimates in the application of the percentage-of-completion
              method; and
          whether
              we have verifiable objective evidence of fair
              value for our software and services. We
          recognize
          revenues in accordance with the provisions of Statement of Position (SOP)
          No.
          97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, Staff
          Accounting Bulletin (SAB) 104, “Revenue Recognition” and Emerging Issues Task
          Force (EITF) 00-21, “Revenue Arrangements with Multiple Deliverables.” SOP 97-2
          and SAB 104 require among other matters, that there be a signed contract
          evidencing an arrangement exists, delivery has occurred, the fee is fixed
          or
          determinable, and collectibility is probable.
  Many
          of our
          contracts with our clients are multiple element arrangements which may
          provide
          for multiple software modules including the rights to future versions and
          releases we may offer within the software suites the client purchases or
          rights
          to software versions that support different hardware or operating platforms,
          and
          that do not qualify as exchange rights.  We refer to these arrangements as
          subscription contracts.  Additionally, we sometimes enter into multiple
          element arrangements that do not include these rights to future software
          or
          platform protection rights.  We refer to these arrangements as traditional
          software contracts.  Finally, we offer much of our software and services on
          a stand-alone basis. Revenue under each of these arrangements is recognized
          as
          follows:
  33
 *Table
              of Contents*
  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;
          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.
  34
 *Table
              of Contents*
  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:
  Outsourcing;
          Software license;
          Maintenance;
          Professional services;
          Hardware;
          Network services;
          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 systems and
          services revenues in accordance with EITF Issue No. 01-14, Income Statement
          Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
          Incurred(“EITF 01-14”). EITF 01-14 requires reimbursable
          out-of-pocket expenses incurred to be characterized as revenue in the income
          statement. For 2005, 2004, and 2003 reimbursable out-of-pocket expenses
          were
          $9.2 million, $5.7 million, and $4.5 million, respectively.
  In
          accordance with EITF Issue No. 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.
  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.
  35
 *Table
              of Contents*
  Warranty
          Reserve
  The
          license agreements for our software generally
          include a limited warranty providing that our software, in its unaltered
          form,
          will perform substantially in accordance with the related documentation.
          Through
          September 30, 2003, we had not incurred any material warranty costs related
          to
          our software. As a result of the response time issues identified during
          the
          fourth quarter of 2003, we recorded a warranty reserve of $4.6 million
          through
          December 31, 2004. No additional warranty reserve was recorded during the
          year
          ended December 31, 2005, as management considers the warranty reserve previously
          recorded to be adequate to cover all potential claims as currently foreseen.
          Warranty costs are charged to costs of systems and services revenues when
          they
          are probable and reasonably estimable. A summary of the activity in our
          warranty
          reserve was as follows:
  (in
                    thousands)December
                    31,2005
                
                2004Beginning
                  Balance
                $     
2,057
                
                $     
4,400Provision
                  for warranty
                -
                
                450Provision
                  reduction
                -
                
                (252)Warranty
                  utilized
                (986)
                
                (2,541)Ending
                  Balance
                $     
1,071
                
                $     
2,057
  Marketable
          Securities
  (in
                    thousands)December
                    31,2005
                
                2004Security
                  TypeAuction
                  Rate Securities:Debt
                  securities issued by the U.S. Treasury and
                  other U.S. government corporations and agencies
                
                $   
14,117
                
                $           
                    -Debt
                  securities issued by states of the United
                  States and political subdivisions of the states
                
                17,084
                
                -31,201
                
                -Other
                  Securities:Government
                  Bonds/Agencies
                
                6,206
                
                -Other
                  debt
                  securities
                
                48
                
                -Total
                
                $   
37,455
                
                $           
                    -
  Marketable
          securities consist of funds that are highly
          liquid and are classified as available-for-sale. Marketable securities
          are
          recorded at a fair value, and unrealized gains and losses are recorded
          as a
          component of other comprehensive income.
  As
          of December 31, 2005, all marketable securities,
          except for auction rate securities, have a maturity of less than 2 years.
          Auction rate securities of $31.2 million held at December 31, 2005 have
          an
          underlying maturity of greater than ten years, but typically have an interest
          rate reset feature every 30 days pursuant to which we can sell or reset the
          interest rate on the security. At December 31, 2005, we believe that these
          investments are considered a part our working capital and are appropriately
          classified as current assets.
  In
          an effort to increase our interest income, we moved
          excess cash from money market investment to marketable securities, which
          include
          auction rates securities and government bonds. These funds remain highly
          liquid.
 36
 *Table
                of Contents*
 **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 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
                    31,2005
                
                2004Billed
                  accounts receivable, net
                
                $
                69,772
                
                $
                53,698Total
                  unbilled accounts receivable,
                  net
                
                
                11,061
                
                
                11,164Total
                    accounts
                    receivable, net
                
                $
                80,833
                
                $
                64,862
   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 approximately $20.1 million,
          $15.2 million and $18.2 million for the years ended December 31,
          2005, 2004, and 2003, 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 approximately $14.3 million,
          $10.6 million and $8.2 million for the years ended December 31,
          2005, 2004, and 2003, respectively. Accumulated amortization of capitalized
          software development costs was $19.5 million and $17.6 million as of
          December 31, 2005 and 2004, respectively. In 2005 and 2004 respectively, we
          wrote-off fully amortized capitalized software development costs in the
          amount
          of $12.3 million and $21.6 million.
  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 Statement of Financial
  37
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Accounting Standards , (SFAS) No. 142, “Goodwill and
      Other Intangible Assets”. Testing would be done on a more frequent basis, if
      impairment indicators arise. The test for impairment is based upon a number
      of
      factors, including operating results, business plans and projected future cash
      flows. No impairment has been identified or recorded during fiscal 2005 or
      2004.
      The gross and net amounts for acquired technology, goodwill, and intangible
      assets consist of the following:




(in
                  thousands)December
                  31, 2005
              
              December
                  31, 2004Gross
              
              
              
              Net
              
              Gross
              
              
              
              NetCarrying
              
              Accumulated
              
              Book
              
              Carrying
              
              Accumulated
              
              Book
              
              EstimatedAmount
              
              Amortization
              
              Value
              
              Amount
              
              Amortization
              
              Value
              
              LifeAmounts
                  subject to amortizationAcquired
                  Technology
              
              $
              914
              
              $
              330
              
              $
              584
              
              $
              914
              
              $
              28
              
              $
              886
              
              
              3-5
                  yearsOngoing
                  customer relationships
              
              
              4,335
              
              
              1,395
              
              
              2,940
              
              
              4,335
              
              
              531
              
              
              3,804
              
              
              5-7
                  yearsTotal
              
              $
              5,249
              
              $
              1,725
              
              $
              3,524
              
              $
              5,249
              
              $
              559
              
              $
              4,690Amounts
                  not subject to amortization:Goodwill
              
              
              
              
              
              
              
              $
              6,624
              
              
              
              
              
              
              
              $
              2,863


Amortization
        expense was $1.2 million for the year-ended
        December 31, 2005, comprised of $302,000 for acquired technology and $864,000
        for customer relationships.  Amortization expense was $559,000 for the
        year-ended December 31, 2004, comprised of $28,000 for acquired technology
        and
        $531,000 for customer relationships.  The Company wrote-off fully amortized
        intangible assets in the amount of $112.2 million in 2004.




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


(in
                thousands)2006
            2007
            2008
            2009
            2010
            TotalAcquired
              technology
            $        
305
            $        
279
            $           
                -
            $           
                -
            $           
                -
            $        
584Ongoing
              customer relationships
            851
            851
            851
            340
            47
            2,940Total
              Amortization Expense
            $     
1,156
            $     
1,130
            $        
851
            $        
340
            $          
                47
            $     
3,524




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




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.




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 No. 109, “Accounting
      for Income Taxes” (“SFAS No. 109”). Under SFAS No. 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.


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Stock-Based
      Compensation




For
      all historical periods presented, we account for
      stock-based compensation using the intrinsic value method prescribed in
      Accounting Principles Board Opinion, (“APB”) No. 25, “Accounting for Stock
      Issued to Employees,” and related Interpretations. Under this method,
      compensation costs for stock options is measured as the excess, if any, of
      the
      estimated market price of our stock at the date of the grant over the amount
      an
      employee must pay to acquire the stock. Accordingly, we provide the additional
      disclosures required under SFAS No. 123, “Accounting for Stock-Based
      Compensation” as amended by SFAS No. 148 “Accounting for Stock-Based
      Compensation — Transition and Disclosure.”  We have issued restricted
      common stock to key employees at nominal prices.  We record unearned stock
      compensation for such items and recognize stock compensation expense ratably
      over the vesting period of the restricted common stock agreements.




We
      have adopted the disclosure only provision of SFAS
      123. If compensation costs for our stock option grants described above were
      determined based on the fair value at the grant date for awards in 2005, 2004
      and 2003, consistent with the provisions of SFAS 123, Eclipsys’ net income /
      (loss) and income / (loss) per share would have changed to the pro forma amounts
      indicated below:


(in
                  thousands, except per share data)December
                  31,2005
              
              2004
              
              2003Net
                  income (loss):As
                  reported
              
              $
              485
              
              $
              (32,565
              )
              $
              (55,964
              )Add:
                  Stock-based employee compensation expense included in net income
                  (loss),
                  net of related tax effects
              
              
              2,353
              
              
              477
              
              
              224Deduct:
                  Total stock-based compensation expense determined under fair value
                  based
                  method for all awards, net of related tax effects
              
              
              (10,725
              )
              
              (9,591
              )
              
              (16,162
              )Pro
                  forma
              
              $
              (7,887
              )
              $
              (41,679
              )
              $
              (71,902
              )Basic
                  net income (loss) per common share:As
                  reported
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )Pro
                  forma
              
              $
              (0.16
              )
              $
              (0.90
              )
              $
              (1.58
              )Diluted
                  income (loss) per common share:As
                  reported
              
              $
              0.01
              
              $
              (0.70
              )
              $
              (1.23
              )Pro
                  forma
              
              $
              (0.16
              )
              $
              (0.90
              )
              $
              (1.58
              )




The
      fair value of each option grant is estimated on the
      date of grant using the Black-Scholes option pricing model with the following
      weighted-average assumptions used for grants in 2005, 2004, and 2003: dividend
      yield of 0% for all years, risk-free interest rate of  4.11% for 2005, of
      3.30% for 2004 and 2.63% for 2003; expected life of 6.31 years for 2005, 4.92
      years for 2004 and 4.88 years for 2003, based on the plan and volatility of
      79% for 2005, 84% for 2004 and 92% for 2003.




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 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, 2005, anti-dilutive stock options totaling
      1,299,143 were excluded from the determination of diluted earnings per common
      share.  The computation of the basic and diluted earnings per common share
      were as follows:




(in
                thousands,
                except per share data)December
                31,****
            2005
            
            2004
            
            2003Basic
              Earnings Per
              Common Share:Net
              income (loss)
            $         
485
            
            $   
                (32,565)
            
            $   
                (55,964)Weighted
              average common shares
              outstanding
            47,946,584
            
            46,586,754
            
            45,404,754Basic
              net income (loss) per common
              share
            $        
0.01
            
            $       
                (0.70)
            
            $       
                (1.23)Diluted
              net income (loss) per common
              share :Net
              income (loss)
            $         
485
            
            $   
                (32,565)
            
            $   
                (55,964)Weighted
              average common shares
              outstanding
            47,946,584
            
            46,586,754
            
            45,404,754Dilutive
              effect of:Stock
              options and restricted stock awards
            2,624,072
            
            -
            
            -Contingent
              shares issuable pursuant to earn-out
              agreements
            73,146
            
            -
            
            -Total
              shares
            50,643,802
            
            46,586,754
            
            45,404,754Diluted
              net income (loss) per common
              share
            $        
0.01
            
            $       
                (0.70)
            
            $       
                (1.23)


39
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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.




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, 2005.




Comprehensive
      Income




Statement
      of Financial Accounting Standards (“SFAS”) No.
      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
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS” or “Statement”)
      No. 153, “Exchanges of Nonmonetary Assets—An Amendment of Accounting
      Principles Board (“APB”) Opinion No. 29, Accounting for Nonmonetary
      Transactions” (“SFAS No. 153”). SFAS No. 153 eliminates the exception
      from fair value measurement for nonmonetary exchanges of similar productive
      assets in paragraph 21(b) of APB Opinion No. 29 and replaces it with an
      exception for exchanges that do not have commercial substance. SFAS No. 153
      specifies that a nonmonetary exchange has commercial substance if future cash
      flows of the entity are expected to change significantly as a result of the
      exchange. SFAS No. 153 was effective for the Company beginning on
      July 1, 2005. The adoption of SFAS No. 153 did not have a material impact
      on the Company’s consolidated results of operations or financial position.




In
      April
      2005, the SEC announced that the effective date of SFAS No. 123R,
“Share-Based Payments”, has been deferred for certain public companies. SFAS
      No. 123R, as amended, requires that all share-based payments to employees,
      including grants of employee equity incentives, are to be recognized in the
      consolidated statement of operations based on their fair values. SFAS
      No. 123R will be applicable to the Company beginning January 1, 2006,
      and the Company intends to adopt the standard using the “modified prospective”
method. The “modified prospective” method requires compensation costs to be
      recognized, beginning with the effective date of adoption, for a) all
      share-based payments granted after the effective date and b) awards granted
      to
      employees prior to the effective date of the statement that remain unvested
      on
      the effective date.


As
          permitted
          by SFAS No. 123  we account for share-based payments to employees
          using the intrinsic value method prescribed in APB No. 25 “Accounting for
          Stock Issued to Employees”, and as such, generally recognize no compensation
          cost for employee equity incentives. Accordingly, the adoption of SFAS
          No. 123R will have a significant impact on the Company’s results of
          operations, although it will have no impact on our overall liquidity. The
          impact
          of the adoption of SFAS No. 123R can not be determined at this time because
          it will depend on the levels of share-based payments granted in the future.
          However, had the Company adopted SFAS No. 123R in prior periods, the impact
          of the statement would have approximated the impact of SFAS No. 123 as
          described in the disclosure of pro-forma net income (loss) and earnings
          (loss)
          per share included in the stock-based compensation table in Note 2 - Basic
          and
          Diluted Net Income (Loss) Per Share.




SFAS
      No. 123R also requires the benefits of tax deductions in excess of
      recognized compensation cost to be reported as a financing cash flow, rather
      than as an operating cash flow as required under current requirements. This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods after adoption.




In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Corrections”
which replaces APB Opinion No. 20, “Accounting Changes” and SFAS
      No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. SFAS No. 154 also provides guidance on the accounting
      for and reporting of error corrections. This statement is applicable for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005.


40
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3.            
      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. 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,****
            
            2005
            
            2004Computer
              equipment
            $
            43,287
            $
            41,952Office
              equipment and other
            
            6,723
            
            7,201Purchased
              software
            
            20,722
            
            13,281Leasehold
              improvements
            
            
            12,805
            
            
            11,61183,537
            
            
            74,045Less:
              Accumulated depreciation and amortization
            
            
            (43,037
            )
            
            (39,043
            )$
            40,500
            
            $
            35,002




Included
      in purchased software at December 31, 2005 is approximately $5.3 million in
      capitalized expenses associated with the implementation of our Oracle ERP
      software. In accordance with Statement of Position 98-1 , “Accounting for the
      Costs of Computer Software Developed or Obtained for Internal Use”, amortization
      of these capitalized expenses will commence when the software is ready for
      its
      intended use during 2006.




Depreciation
      expense for property and equipment totaled
      approximately $13.8 million, $12.8 million, and $10.5 million in 2005, 2004
      and
      2003, respectively.




4.            
      Stockholders’ Equity




Restricted
      Stock Grant




From
      time to time the Company has issued restricted
      stock grants to members of senior management.  The Company issued 372,500
      and 295,000 shares in 2005 and 2004, respectively.  Generally, restricted
      stock grants vest over a five-year period.




Stock
      compensation related to all restricted stock
      issued amounted to $2.4 million in 2005, $428,000 in 2004 and $225,000 in 2003.
      As of December 31, 2005 and 2004, respectively, Eclipsys had unearned stock
      compensation of $9.6 million and $5.6 million recorded as a component of
      stockholders’ equity.  Additionally, during 2004, the Company accelerated
      vesting of certain stock options and recorded stock-based compensation expense
      of $49,000.




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.


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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, $.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.




5.            
      Income Taxes




The
      income tax provision (benefit) is calculated as
      follows:





(in
                  thousands)December
                  31,2005
              
              2004
              
              2003Current
                  Tax Provision:Federal
              
              $
              -
              
              $
              -
              
              $
              -State$
              -
              
              $
              -
              
              $
              -Deferred
                  Provision (Benefit):Federal
              
              $
              (4,406
              )
              $
              (10,755
              )
              $
              (18,859
              )State
              
              
              (513
              )
              
              (1,253
              )
              
              (2,197
              )Valuation
                  allowance
              
              
              4,919
              
              
              12,008
              
              
              21,056$
              -
              
              $
              -
              
              $
              -Total
                  Provision
              
              $
              -
              
              $
              -
              
              $
              -


At
      December 31, 2005, the Company has recorded a
      noncurrent deferred tax asset and current deferred tax liability based upon
      the
      pro rata allocation model in accordance with SFAS No. 109.  A similar
      reclassification on the balance sheet has been made at December 31,
      2004.




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)December
                31,2005
            
            2004
            
            2003Statutory
              federal income tax rate
            
            $        
166
            
            $  
(11,072)
            
            $  
(19,028)State
              income taxes
            
            19
            
            (1,290)
            
            (2,216)Nondeductible
              meals and entertainment
            
            618
            
            594
            
            604Valuation
              allowance, includes effect of
              acquisitions
            
            (803)
            
            11,768
            
            20,640Income
              tax provision
            
            $           
                -
            
            $           
                -
            
            $           
                -


42
 *Table
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The significant components of our net deferred
        tax
        assets (liabilities) were as follows:


(in
                thousands)December
                31,2005
            
            2004**Deferred
              tax
              assets:**Intangible
              assets
            
            $   
24,012
            
            $   
27,734Allowance
              for doubtful accounts
            
            2,795
            
            3,219Accrued
              expenses
            
            1,703
            
            1,544Other
            
            2,351
            
            2,259Net
              operating loss carryforwards
            
            123,617
            
            113,150$ 
154,478
            
            $ 
147,906**Deferred
              tax
              liabilities:**Unbilled
              Receivables
            
            (5,271)
            
            (5,847)Depreciation
            
            (3,412)
            
            (3,411)Capitalization
              of software development costs
            
            (13,548)
            
            (11,320)Net
              deferred tax asset
            
            132,247
            
            127,328Valuation
              allowance
            
            (132,247)
            
            (127,328)$           
              -
            
            $           
              -


Balance
              sheet
              classification:Noncurrent
              deferred tax asset
            
            $     
4,124
            
            $     
4,623Current
              deferred tax liability
            
            (4,124)
            
            (4,623)$          
                -
            
            $           
                -




At
      December 31, 2005, the Company had U.S. net operating
      loss carryforwards for federal income tax purposes of approximately $306.5
      million.  Of this amount, $6.0 million expires in 2012 with the balance
      expiring in varying amounts annually through 2025.  Of the $306.5 million
      total, $63.3 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 $19.1 million that expire in varying amounts through
      2012.




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, 2005,
      net operating loss carryforwards of approximately $4.7 million remain subject
      to
      the annual limitation. As of December 31, 2005, a valuation allowance has been
      established against the deferred tax assets that management does not believe
      are
      more likely than not to be realized.




6.            
      Employee Benefit Plans




**2005
      Stock Incentive
      Pl****an**




At
      our Annual Meeting of Stockholders held June 29,
      2005, our shareholders approved the 2005 Stock Incentive Plan (2005 Plan). 
Under the 2005 Plan, no further awards will be granted under our prior Stock
      Incentive Plans which include our 1996, 1998, 1999 and 2000 plans.  Awards
      may be made under the 2005 Plan for a number of shares (subject to adjustment
      in
      the event of stock splits and other similar events) equal to the sum of
      (1) 2,000,000 shares of our Voting Common Stock, (2) any shares
      reserved for issuance under the Amended and Restated 2000 Stock Incentive Plan
      that remain available for issuance as of the date the 2005 Plan is approved
      by
      our stockholders and (3) any shares subject to outstanding awards under our
      1996 Stock Plan, the Amended and Restated 1998 Stock Incentive Plan, the Amended
      and Restated 1999 Stock Incentive Plan and the Amended and Restated 2000 Stock
      Incentive Plan that expire or are terminated, surrendered or canceled without
      having been fully exercised, are repurchased or forfeited in whole or part
      or
      result in any shares subject to such award not being issued.  As of
      December 31, 2005, there were 2,318,799 shares available for future issuance
      under the 2005 Plan.


43
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We
        issued
        525,000 stock options in 2005 and 400,000 stock options in 2004 and and issued
        150,000 shares of restricted stock and 100,000 shares of restricted stock
        in
        2005 and 2004 respectively as inducement grants in accordance with NASDAQ
        rules.
 
 During
        2005
        and 2004, we issued a total of 410,000 and 295,000 shares of restricted stock
        at
        a weighted-average grant-date fair value of $15.95 and $17.89
        respectively.




A
      summary of stock option transactions is as follows
      during the years ended December 31,




2005
            
            2004
            
            2003Weighted
            
            
            
            Weighted
            
            
            
            WeightedAverage
            
            
            
            Average
            
            
            
            AverageExercise
            
            
            
            Exercise
            
            
            
            ExerciseOptions
            
            Price
            
            Options
            
            Price
            
            Options
            
            PriceOutstanding
              at
              beginning of the year
            
            
            9,138,452
            
            $
            11.50
            
            
            9,268,674
            
            $
            11.05
            
            
            9,020,711
            
            $
            11.24Granted
            
            
            909,000
            
            
            15.56
            
            
            1,530,000
            
            
            16.12
            
            
            1,539,500
            
            
            9.08Exercised
            
            
            (1,959,012
            )
            
            8.61
            
            
            (872,576
            )
            
            9.04
            
            
            (430,132
            )
            
            8.26Forfeited
            
            
            (482,831
            )
            
            10.38
            
            
            (787,646
            )
            
            17.84
            
            
            (861,405
            )
            
            10.90Outstanding
              at
              end of year
            
            
            7,605,609
            
            
            12.80
            
            
            9,138,452
            
            
            11.50
            
            
            9,268,674
            
            
            11.05Exercisable
              at
              end of the year
            
            
            4,678,311
            
            
            
            
            
            5,784,506
            
            
            
            
            
            5,714,566




The
      following table
      summarizes information about stock options outstanding at December
      31,


****
            2005
            
            2004
            
            2003****
            Weighted
            
            Weighted
            
            Weighted
            
            Weighted
            
            Weighted
            
            Weighted****
            Average
            
            Fair
            
            Average
            
            Fair
            
            Average
            
            Fair****
            Exercise
            
            Market
            
            Exercise
            
            Market
            
            Exercise
            
            MarketOption
              Granted During the
              Year
            Price
            
            Value
            
            Price
            
            Value
            
            Price
            
            ValueOption
              price < Fair market
              value
            $           
              -
            
            
            
            $           
              -
            
            
            
            $           
              -Option
              price = Fair market
              value
            15.56
            
            
            
            16.12
            
            
            
            9.08Option
              price > Fair market
              value
            -
            
            
            
            -
            
            
            
            -Weighted
              Fair Market Value
              Options
            
            
            $     
12.80
            
            
            
            $     
11.12
            
            
            
            $       
              6.44




**OPTIONS
                  OUTSTANDING**
              
              **OPTIONS
                  EXERCISABLE**WeightedNumber
              
              
              Average
              
              
              
              
              NumberOutstanding
              
              
              Remaining
              
              
              Weighted
              
              Exercisable
              
              
              WeightedRange
                  of
              
              
              
              
              As
                  of
              
              
              Contractual
                  Life
              
              
              Average
              
              As
                  of
              
              
              AverageExercise
                  Prices
              
              
              
              
              12/31/2005
              
              
              (in
                  years)
              
              
              Exercise
                  Price
              
              12/31/2005
              
              
              Exercise
                  Price$
              0.10
              
              $
              6.50
              
              931,278
              
              $
              4.37
              
              $
              6.12
              
              708,204
              
              $
              6.126.94
              
              
              7.50
              
              27,097
              
              
              2.53
              
              
              7.35
              
              27,097
              
              
              7.358.25
              
              
              8.25
              
              1,259,396
              
              
              4.53
              
              
              8.25
              
              1,227,396
              
              
              8.258.88
              
              
              9.13
              
              798,045
              
              
              7.14
              
              
              8.96
              
              440,987
              
              
              8.979.53
              
              
              13.35
              
              1,271,051
              
              
              6.89
              
              
              12.51
              
              721,293
              
              
              12.1913.50
              
              
              15.00
              
              838,969
              
              
              6.05
              
              
              14.19
              
              554,294
              
              
              14.3715.13
              
              
              15.90
              
              1,192,979
              
              
              7.76
              
              
              15.64
              
              379,896
              
              
              15.1816.00
              
              
              19.96
              
              863,045
              
              
              7.86
              
              
              19.43
              
              207,545
              
              
              18.2320.13
              
              
              35.83
              
              385,950
              
              
              3.12
              
              
              23.48
              
              375,900
              
              
              23.5243.57
              
              
              43.57
              
              37,799
              
              
              1.88
              
              
              43.57
              
              35,699
              
              
              43.57$
              0.10
              
              $
              43.57
              
              7,605,609
              
              $
              6.14
              
              $
              12.80
              
              4,678,311
              
              $
              11.83


44
 *Table
            of Contents*


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, 2005, 2004 and 2003 the Board of Directors
      approved contributions to the Plan of $625,000, $750,000 and $750,000
      respectively.





1998
      Employee Stock Purchase
      Plan




Under
      our 1998 Employee Stock Purchase Plan (the
“Purchase Plan”) that was implemented in April 1998, our employees, including
      directors who are employees, are eligible to participate in quarterly plan
      offerings in which payroll deductions may be used to purchase shares of Common
      Stock. The purchase price of such shares is the lower of 85% of the fair market
      value of the Common Stock on the day the offering commences and 85% of the
      fair
      market value of the Common Stock on the day the offering terminates. 
During the second quarter of 2004, we suspended the Purchase Plan
      indefinitely.


**2005
        Employee St****ock Purchase
        Pl****an**




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.  In aggregate
      1,000,000 shares are available for purchase under the 2005 Purchase Plan. 
In 2005, 10,848 shares were issuable under the plan.




7.            
      Commitments and Contingencies




Non-cancelable
      Operating
      Leases




We
      lease office space and certain equipment under
      non-cancelable operating leases. Rental expense under operating leases was
      approximately $9.4 million, $9.7 million and $12.5 million for the years ended
      December 31, 2005, 2004 and 2003, respectively. Future minimum rental payments
      under non-cancelable operating leases as of December 31, 2005 are as
      follows:




(in
              thousands)Year
              Ending
              December 31,2006
            $9,3732007
            7,4672008
            3,3442009
            2,4262010
            983Thereafter
            2,659$26,252




We
      have unconditional purchase obligations that consist
      of minimum purchase commitments for telecommunication services, computer
      equipment, maintenance, consulting, airplane charters and other commitments.
      In
      aggregate, these obligations total approximately $48.4 million. These
      obligations will require payments of approximately $37.7 million in 2006,
      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 by their
      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, 2005.




8.            
      Acquisitions




In
      March 2004, we acquired CPM Resource Center, Ltd., or
      CPMRC. CPMRC provides consulting services and clinical content designed
      principally to improve and enhance the care process primarily related to the
      workflow of nurses and interdisciplinary healthcare professionals. CPMRC’s
      evidence-based content and practice guidelines has 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.
      We
      did not present unaudited pro forma results of operations of Eclipsys and CPMRC
      for the year ended December 31, 2004 and 2003 because our pro forma results
      for those periods would not be materially different from our actual results
      for
      those periods.


45
 *Table
            of Contents*




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 is 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.  These
      amounts were approximately $1.5 million in 2005 and $700,000 in 2004. All
      consideration paid under the earn out provisions of the agreement will be
      recorded as non amortizable goodwill.  In 2005, for amounts related to the
      2004 earn-out attainment, we issued 25,311 shares of our common stock.


In
        December of 2004, we acquired eSys Medical Inc.
        (eSys). eSys develops and markets radiology information systems (RIS). Using
        our
        solutions, clinicians will be able to view patient medical records, diagnostic
        images and reports in real time. We believe the acquisition will increase
        sales
        opportunities for our Picture Archiving Communications System (PACS) and
        RIS systems through integration with both our and other clinical systems.
        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.
        The
        number of shares of our common stock issued as earn-out consideration will
        be
        based on the average closing prices of our common stock on the NASDAQ National
        Market for the calendar quarter preceding the payment of the earn-out
        consideration.




As
      a result of the eSys acquisition, we recorded
      approximately $2.0 million in amortizable intangible assets. Amortizable
      intangible assets include client relationships of $1.1 million and acquired
      technology of $914,000 and is 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. We did not
      present unaudited pro forma results of operations of Eclipsys and eSys for
      the
      year ended December 31, 2004 and 2003 because our pro forma results for
      those periods would not be materially different from our actual results for
      those periods. The majority of future consideration, if earned, will be recorded
      as non amortizable goodwill.




In
      2005, under the provisions of the earn-out agreement,
      we recorded incremental non amortizable goodwill of approximately $2.2
      million.  In connection with the earn-out agreement, we issued 40,612
      shares of our common stock in 2005 for amounts earned, and paid cash
      consideration totaling approximately $311,000.




With
      respect to the acquisitions of CPMRC and eSys, we
      assigned the total purchase price to the net assets and liabilities of the
      businesses with any remaining amount assigned to goodwill. The value assigned
      to
      the identifiable intangible assets was based on an analysis as of the date
      of
      acquisitions.




9.            
      Litigation




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




10.         
Related
      Party
      Transactions




We
      have certain transactions between us and our
      executive officers, directors and affiliates.




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, 2005,
      2004 and 2003, we paid $631,000, $675,000 and $526,000 respectively, under
      the
      Boston lease.  Under the Michigan lease we paid $72,000 in 2005 and
 $42,000 in 2004. 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 $269,000, $733,000
      and $603,000 in 2005, 2004 and 2003, respectively, for charters using the
      aircraft owned by RMSC. We also paid the charter company $163,000, $74,000
      and
      $50,000 in 2005, 2004 and 2003, respectively, for charters of other aircraft,
      not owned by RMSC. RMSC received $145,000, $408,000 and $275,000 during 2005,
      2004 and 2003, respectively, from the charter company for these transactions.
       In January 2006, the Company entered into an arrangement whereby the
      remaining commitment of $544,000 will be 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 $200,000 in the fourth quarter of 2005.


46
 *Table
            of Contents*


In
      July 1999, we invested in HEALTHvision, Inc.
      (“HEALTHvision”), a Dallas-based, privately held internet healthcare company.
      Other principal investors included VHA, Inc. and investment entities affiliated
      with General Atlantic, LLC. HEALTHvision provides Internet solutions to hospital
      organizations to assist them in improving patient care in the local communities
      they serve. We purchased 3,400,000 shares of common stock in HEALTHvision
      for $34,000, which at the time represented 34% of the outstanding common stock
      on an if-converted basis. As of December 31, 2005, our shares represented
      approximately 28% of the common stock of HEALTHvision on an if-converted basis.
      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, 2005.
      We entered into a joint marketing arrangement with HEALTHvision under which
      both
      organizations agreed to jointly market software and services to their customers.
      Under this agreement, we paid HEALTHvision the sum of $2.2 million during
      2005 for the sale of software and services, and owed HEALTHvision the sum of
      $350,000 as of December 31, 2005. Also, during 2005, we earned revenues
      from HEALTHvision of $986,000 for hosting and other related services and had
      accounts receivable due from HEALTHvision of $245,000 at December 31, 2005.
      For the year ended December 31, 2005, HEALTHvision had total revenues of
      approximately $21.9 million (unaudited) and a net loss of
      approximately $3.3 million (unaudited) with total assets of
      approximately $6.0 million (unaudited). We are not required to provide
      funding to HEALTHvision, and have made no guarantees on their behalf. In late
      2003, we mutually agreed with HEALTHvision to terminate the joint marketing
      arrangement of our agreement.




We
      have a license agreement with Partners HealthCare
      System, Inc. (“Partners”). Under the terms of this license, we may develop,
      commercialize, distribute and support certain technology that we have received
      from Partners throughout the world (with the exception of the Boston,
      Massachusetts metropolitan area). Prior to our initial public offering, no
      sales
      of software incorporating the licensed technology were made and, consequently,
      no royalties were paid by us pursuant to the license with Partners. The royalty
      arrangement under the license terminated upon Eclipsys’ initial public offering.
      After our initial public offering, we sold software incorporating the licensed
      technology. We are obligated to offer to Partners and certain of its affiliates
      a license for internal use, granted on most favored client terms, to all new
      software applications developed by us, whether or not derived from the licensed
      technology and major architectural changes to the licensed technology. Partners
      and certain of its affiliates are also entitled to receive internal use
      licenses, also granted on most favored client terms, for any changes to any
      module or application included in the licensed technology requiring at least
      one
      person-year of technical effort.




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 $916,000, $691,000 and $627,000 in 2005, 2004 and 2003,
      respectively. As of December 31, 2005, Partners owed us the sum of $82,000
      related to this contract. Mr. Jay Pieper, a director of Eclipsys, is Vice
      President of Corporate Development and Treasury Affairs for Partners. Partners
      was not affiliated with Eclipsys at the time of the negotiation of the Partners
      license from Transition Systems, Inc.




11.         
Subsequent
      event




In
      January 2006, we effected a restructuring of our
      operations which included a reduction in headcount of approximately 100
      individuals and the reorganization of our senior management team.  This
      initiative is expected to result in a restructuring charge of approximately
      $7
      million in the first quarter of 2006.  In connection with this initiative,
      we expect to invest a portion of the anticipated cost reductions into
      client-related activities including client support and professional
      services.




On
      January 9, 2006, we hired John E. Deady to assume the
      position of Executive Vice President Customer Solutions.  Mr. Deady’s
      responsibilities will include management of sales and marketing.




12.         
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, 2005 and 2004. 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 present fairly the data for such
      periods. Additionally, the data is derived from, and is qualified by reference
      to, our audited financial statements, which appear elsewhere in this
      document.




****


For
                  the Year Ended December 31, 2005(in
                  thousands, except per share data)First
              
              Second
              
              Third
              
              FourthQuarter
              
              Quarter
              
              Quarter
              
              Quarter
              
              YearRevenues
              
              $
              84,435
              
              $
              95,865
              
              $
              97,852
              
              $
              105,119
              
              $
              383,271Income
                  (loss) from operations
              
              
              (7,722
              )
              
              (3,204
              )
              
              4,234
              
              
              4,049
              
              
              (2,643
              )Net
                  income (loss)
              
              
              (7,161
              )
              
              (2,485
              )
              
              5,099
              
              
              5,032
              
              
              485Basic
                  net income (loss) per common share
              
              
              (0.15
              )
              
              (0.05
              )
              
              0.11
              
              
              0.10
              
              
              0.01Diluted
                  net income (loss) per common share
              
              $
              (0.15
              )
              $
              (0.05
              )
              $
              0.10
              
              $
              0.10
              
              $
              0.01
 47
 *Table
              of Contents*
 For
                    the Year Ended December 31, 2004(in
                    thousands, except per share data)First
                
                Second
                
                Third
                
                FourthQuarter
                
                Quarter
                
                Quarter
                
                Quarter
                
                YearRevenues
                
                $
                68,384
                
                $
                73,643
                
                $
                79,815
                
                $
                87,233
                
                $
                309,075Loss
                    from operations
                
                
                (13,516
                )
                
                (10,185
                )
                
                (7,065
                )
                
                (3,428
                )
                
                (34,194
                )Net
                    loss
                
                
                (13,063
                )
                
                (9,961
                )
                
                (6,650
                )
                
                (2,891
                )
                
                (32,565
                )Basic
                    net loss per common share
                
                
                (0.28
                )
                
                (0.21
                )
                
                (0.14
                )
                
                (0.06
                )
                
                (0.70
                )Diluted
                    net loss per common share
                
                $
                (0.28
                )
                $
                (0.21
                )
                $
                (0.14
                )
                $
                (0.06
                )
                $
                (0.70
                )
 
 **13.**         
        **Geographic Information**
  A
        summary of the Company's revenues by geographic area
        is summarized below (in thousands):
  Year
                    ended December 31,2005
                
                2004
                
                2003United
                    States
                
                $
                359,331
                
                $
                293,120
                
                $
                244,292Canada
                
                
                21,268
                
                
                13,029
                
                
                7,894Rest
                    of world
                
                
                2,672
                
                
                2,926
                
                
                2,493Total
                
                $
                383,271
                
                $
                309,075
                
                $
                254,679
  Revenues
          are attributed to countries based on location of customers.
  A summary of the Company's long-lived assets is summarized
          below (in thousands):
  Year
                      ended December 31,2005
                  
                  2004
                  
                  2003United
                      States
                  
                  $
                  108,524
                  
                  $
                  89,808
                  
                  $
                  73,574Canada
                  
                  
                  2,902
                  
                  
                  2,112
                  
                  
                  100Rest
                      of world
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Total
                  
                  $
                  111,426
                  
                  $
                  91,920
                  
                  $
                  73,674
  48
 *Table
            of Contents*


SCHEDULE
        II— VALUATION
        OF QUALIFYING ACCOUNTS
 For
        Each of the Three Years in the Period
        Ended December 31, 2005
 (in
        thousands)
   Balance
                    at Beginning of Period
                
                Additions
                
                Write-offs
                
                Balance
                    at End of PeriodDecember
                    31, 2005Allowance
                    for doubtful accounts
                
                $
                4,952
                
                $
                3,998
                
                $
                (3,274
                )
                $
                5,676Valuation
                    allowance for deferred tax asset
                
                
                127,328
                
                
                4,919
                
                
                
                
                
                132,247December
                    31, 2004Allowance
                    for doubtful accounts
                
                
                4,807
                
                
                4,117
                
                
                (3,972
                )
                
                4,952Valuation
                    allowance for deferred tax asset
                
                
                115,320
                
                
                12,008
                
                
                
                
                
                127,328December
                    31, 2003Allowance
                    for doubtful accounts
                
                
                3,412
                
                
                4,492
                
                
                (3,097
                )
                
                4,807Valuation
                    allowance for deferred tax asset
                
                
                94,264
                
                
                21,056
                
                
                
                
                
                115,320
  Item
        9.    Changes in and
        Disagreements with Accountants on Accounting and Financial
        Disclosure
  Not
        applicable.
  Item
        9A. Controls and
        Procedures
  Our
        management, with the participation of our chief
        executive officer and chief financial officer, evaluated the effectiveness
        of
        our disclosure controls and procedures as defined in Rule 13a-15(e) under
        the
        Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31,
        2005.  Our disclosure controls and procedures are designed to provide
        reasonable assurance of achieving their objectives of ensuring that information
        we are required to disclose in the reports we file or submit under the Exchange
        Act is recorded, processed, summarized and reported, within the time periods
        specified in the SEC’s rules and forms.  There is no assurance that our
        disclosure controls and procedures will operate effectively under all
        circumstances.  Based upon the evaluation described above our chief
        executive officer and chief financial officer concluded that, as of December
        31,
        2005, our disclosure controls and procedures were effective at the reasonable
        assurance level.
  No
        change in our internal control over financial
        reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
        Act)
        occurred during the fiscal quarter-ended December 31, 2005 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting.
  **Report
        of Management on Eclipsys Corporation's 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, 2005. In making this
        assessment, we used the criteria set forth by the Committee of Sponsoring
        Organizations of the Treadway Commission inInternal Control —
Integrated Framework. Based on our assessment using those criteria, we
        concluded that our internal control over financial reporting was effective
        as of
        December 31, 2005.
  Our
        management’s assessment of the effectiveness of our
        internal control over financial reporting as of December 31, 2005 has been
        audited by PricewaterhouseCoopers LLP, an independent registered public
        accounting firm, as stated in their report which is included herein.
  49
 *Table
            of Contents*
   Part
        III
  Certain
        information required by Part III of Form 10-K
        will be contained in the definitive Proxy Statement to be used in connection
        with our 2006 annual meeting of stockholders, and is incorporated herein
        by
        reference to this Form 10-K Annual Report.
  **Item
        9B.****Other
        Information**
  ****Not applicable
  Item
        10. Directors and
        Executive Officers of the Registrant
  Information
        regarding directors and our code of ethics
        will be set forth in the proxy statement for our 2006 annual meeting of
        stockholders and is incorporated herein by reference. Information regarding
        our
        executive officers is set forth under the caption “Executive Officers of the
        Registrant” in Item 1.
  Item
        11.Executive
        Compensation
  Information
        regarding executive compensation will be set
        forth in the proxy statement for the annual meeting of stockholders for the
        year
        2006 and is incorporated herein by reference.
  Item
        12. Security Ownership
        of Certain Beneficial Owners and Management and Related Stockholder
        Matters
  Information
        regarding security ownership of certain
        beneficial owners and management will be set forth in the proxy statement
        for
        our 2006 annual stockholders’ meeting, and is incorporated herein by
        reference.
  The
        following table provides information about the
        Common Stock that may be issued under our existing equity compensation plans
        as
        of December 31, 2005.
  Number
                    of securities to be
                
                Weighted-average
                    exercise
                
                Number
                    of securitiesissued
                    upon exercise of
                
                price
                    of outstanding
                
                remaining
                    available foroutstanding
                    options,
                
                options,
                    warrants and rights
                
                future
                    issuance underwarrants
                    and rights
                
                
                
                equity
                    compensation plansEquity
                    compensation plans approved by security holders (1)
                8,173,403
                
                $12.51
                
                2,318,799ESPP
                    Plan
                1,000,000
                
                
                
                989,152Equity
                    compensation plans not approved by security holders (2)
                925,000
                
                
                
                -Total
                10,098,403
                
                
                
                3,307,951
  (1)
        This tabe excluded an aggregate of 137,206 options
        issuable upon the exercise of outstanding options assumbed by Eclipsys
        in
 connection
        with various acquisitions.  The weighted
        average price of the excluded options is $34.83.
  (2)
        This 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.
  On
        November 14, 2005, in connection with hiring Mr.
        Eckert as our president and chief executive officer, we granted Mr. Eckert
        150,000 restricted shares of Eclipsys common stock and non-qualified options
        to
        purchase up to 525,000 shares of Eclipsys common stock.  The restricted
        stock has a purchase price of $.01 per share, is subject to contractual
        restrictions on transfer until vested, and vests over five years, with the
        first
        20 percent vesting on December 1, 2006, and an additional 10 percent vesting
        each June 1 and December 1 thereafter for the following four years.  The
        stock options have a 10-year term, an exercise price per share equal to the
        fair
        market value of Eclipsys common stock on the date of grant, and vest over
        five
        years, with the first 20 percent vesting on December 1, 2006, and the remaining
        80 percent vesting in 48 equal consecutive monthly installments
        thereafter.  Vesting of the restricted stock and stock options is
        contingent upon continued employment and is subject to acceleration under
        certain circumstances.  The restricted stock and stock options are being
        awarded as inducement grants under Section 4350(i)(1)(A)(iv) of the NASD
        Marketplace Rules.
  50
 *Table
            of Contents*
  Under
        Mr. Eckert's employment agreement, if Eclipsys
        were to terminate his employment without cause, or if he were to terminate
        his
        employment with good reason (as cause and good reason are defined in the
        employment agreement), he would be entitled to 12 months' additional vesting
        of
        his restricted stock and stock options, among other benefits.  If a change
        in control of Eclipsys (as defined in the employment agreement) were to occur,
        and Eclipsys or its successor were to terminate Mr. Eckert's employment without
        cause, or if he 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 Mr. Eckert would be entitled
        to
        acceleration of vesting of all of his stock options and restricted
        stock.
 
 Item
        13. Certain
        Relationships and Related Transactions
  Information
        regarding certain relationships and related
        transactions will be set forth in the proxy statement for our 2006 annual
        meeting of stockholders and is incorporated herein by reference.
  Item
        14.Principal Accountant
        Fees and Services
  Information
        regarding principal accountant fees and
        services will be set forth in the proxy statement for the our 2006 annual
        meeting of stockholders and is incorporated herein by reference.
   51
 *Table
            of Contents*


**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
                  (2)
              Third
                  Amended and Restated Certificate of Incorporation of the
                  Registrant3.2
                  (1)
              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 Eclipsys Corporation
                  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
                  (8)
              Form
                  of Indemnification Agreement between Eclipsys Corporation and each
                  non-employee directors10.6
                  (4)*
              Amended
                  and Restated 1999 Stock Incentive Plan, as amended10.7
                  (9)*
              Amended
                  and Restated Employment Agreement, effective as of March 15, 2005,
                  between
                  the Registrant and Paul L. Ruflin10.8
                  (5)*
              Agreement
                  between the Registrant and Mr. John S. Cooper, dated February 2,
                  200210.9
                  (6)*
              Restricted
                  Stock Agreement between the Registrant and John A. Adams, dated
                  December
                  20, 200410.10
                  (6)*
              Non-Qualified
                  Stock Option Agreement between the Registrant and John A. Adams,
                  dated
                  December 20, 200410.11
                  (6)*
              Employment
                  Agreement between the Registrant and John A. Adams, dated December
                  20,
                  200410.12
                  (7)*
              Form
                  of Incentive and/or Non-Qualified Stock Option Agreement under
                  the Amended
                  and Restated 2000 Stock Incentive Plan,
                as
                  amended10.13
                  (9)*
              Template
                  2005 Bonus Program Individual Summary Sheet for Non-Sales
                  Executives10.14
                  (9)*
              Template
                  2005 Bonus Program Individual Summary Sheet for Senior Sales
                  Executives10.15
                  (9)*
              Employment
                  Agreement, effective as of March 15, 2005, by and between the Registrant
                  and John P. Gomez10.16
                  (9)*
              Employment
                  Agreement, effective as of March 15, 2005, by and between the Registrant
                  and Russ Rudish10.17
                  (10)*
              Amended
                  and Restated 2000 Stock Incentive Plan10.18
                  (10)*
              Employment
                  Agreement between the Registrant and Eugene V. Fife dated April
                  29,
                  200510.19
                  (10)*
              Restricted
                  Stock Agreement between the Registrant and Eugene V. Fife dated
                  April 29,
                  200510.20
                  (11)*
              Separation
                  Agreement, effective May 20, 2005, by and between the Registrant
                  and Paul
                  L. Ruflin10.21
                  (12)*
              2005
                  Stock Incentive Plan10.22
                  (12)*
              2005
                  Employee Stock Purchase Plan10.23
                  (13)*
              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
                  Plan10.24
                  (13)*
              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
                  Plan10.25
                  (13)*
              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 Plan10.26
                  (13)*
              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 Plan10.27
                  (13)*
              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
                  Plan10.28
                  (14)*
              2005
                  Inducement Grant Stock Incentive Plan10.29
                  (14)*
              Employment
                  Agreement between the Registrant and R. Andrew Eckert dated as
                  of October
                  24, 200510.30
                  (14)*
              Agreement
                  re Specified Acts between the Registrant and R. Andrew Eckert dated
                  as of
                  October 24, 200510.31
                  (15)*
              Employment
                  Agreement between the Registrant and
                  John E. Deady dated December 22, 200510.32
                  (15)*
              Agreement
                  re Specified Acts between the Registrant
                  and John E. Deady dated December 22, 200521
                  (16)
              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
                  1350
 
 
 52
 *Table
            of Contents*
 (1)
              Incorporated
                  by reference to the Registrant’s Registration Statement on Form S-1,
                as
                  amended (File No. 333-50781)(2)
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q for the
                  q
                uarter
                  ended June 30, 1998(File No. 000-24539)(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 Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 2003
                (File
                  No. 000-24539)(6)
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K filed on
                  December 23, 2004
                (File
                  No. 000-24539)(7)
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K filed on
                  December 1, 2004
                (File
                  No. 000-24539)(8)
              Incorporated
                  by reference to the Registrant’s Annual Report on Form 10-K filed on
                  March, 15 2004(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 May
                  25, 2005 (File No.000-24539)(12)
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K filed on July
                  6, 2005 (File No.000-24539)(13)
              Incorporated
                  by reference to the Registrant’s Quarterly Report on Form 10-Q filed on
                  August 5, 2005 (File No.000-24539)(14)
              Incorporated
                  by reference to the Registrant’s Current Report on Form 8-K filed on
                  October 21, 2005 (File No.000-24539)(15)
              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(16)
              Incorporated
                  by reference to Exhibit 21 of the Registrant’s Annual Report on Form 10-K
                  filed March 25, 2002*
              Indicates
                  a management contract or compensatory plan or
                  arrangement


53
 *Table
            of Contents*





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 Executive
                  Officer)
              
              March
                  6, 2006R.
                  Andrew Eckert/s/
                  Robert J. Colletti
              
              Senior
                  Vice President, Chief Financial Officer (Principal Financial and
                  Accounting Officer)
              
              March
                  6, 2006Robert
                  J. Colletti/s/
                  Steven A. Denning
              
              Director
              
              March
                  6, 2006Steven
                  A. Denning/s/
                  Dan L. Crippen
              
              Director
              
              
              March
                6, 2006Dan
                  L. Crippen/s/
                  Eugene V. Fife
              
              Director
              
              
              March
                6, 2006Eugene
                  V. Fife/s/
                  Braden Kelly
              
              Director
              
              
              March
                6, 2006Braden
                  Kelly/s/
                  Jay B. Pieper
              
              Director
              
              
              March
                6, 2006Jay
                  B. Pieper/s/
                  Edward A. Kangas
              
              Director
              
              
              March
                6, 2006Edward
                  A. Kangas


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