UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30~~March 31, ~~2009~~ 2010

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-50839

Phase Forward Incorporated

(Exact name of registrant as specified in its charter)

Delaware		04-3386549
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

77 Fourth Avenue
Waltham, Massachusetts		02451
(Address of principal executive offices)		(Zip Code)

(888) 703-1122

(Registrant’s telephone number, including area code)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of ~~November 1~~April 26, ~~2009~~2010, the registrant had 43,~~292~~744,~~866~~864 shares of common stock outstanding.

Table of Contents

PHASE FORWARD INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended ~~September 30~~March 31, ~~2009~~2010

Table of Contents

		Page Number
Part I—Financial Information
Item 1.	Condensed Consolidated Balance Sheets as of December 31, ~~2008~~2009 (unaudited) and ~~September~~March 3031, ~~2009~~2010 (unaudited)	3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2008 (unaudited) and September 30, 2009 (unaudited)	4
	Condensed Consolidated Statements of Income for the three months ended March 31, 2009 (unaudited) and March 31, 2010 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 (unaudited) and September 30, 2009 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 (unaudited) and March 31, 2010 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2519
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4733
Item 4.	Controls and Procedures	4835
Part II—Other Information
Item 1.	Legal Proceedings	4936
Item 1A.	Risk Factors	4936
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	4936
Item 5.	Other Information	4937
Item 6.	Exhibits	5038
Signatures		5139
Exhibit Index		5240

Table of Contents

Part I—Financial Information

Item 1. Condensed Consolidated Financial Statements

Phase Forward Incorporated

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands, except ~~share and~~ per share amounts)

	December 31, 2008			September 30, 2009
	December 31, 2009			March 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	~~131~~41,~~550~~862		$	53,~~011~~290
Restricted cash, current portion	500			—
Short-term investments	67,241			76,449
Short-term investments	27,893			59,490
Securities settlement agreement	4,345			3,280
Accounts receivable, net of allowance of $578 and $856, respectively	39,999			60,366
Accounts receivable, net of allowance of $781 and $769, respectively	56,034			44,660
Acquired future billings, current portion	1,129			516
Deferred income taxes	9,521			9,521
Deferred set up costs, current portion	2,393			3,142
Other current assets	14,694			15,564
Prepaid commissions and royalties, current portion	4,524			5,613
Total current assets	193,697			202,764
Prepaid expenses and other current assets	4,773			6,429
Property and equipment, net	52,840			52,015
Deferred income taxes, current portion	12,895			12,973
Intangible assets, net of accumulated amortization of $7,332 and $8,782, respectively	41,661			40,211
Securities settlement agreement	—			4,838
Goodwill	59,027			59,027
Total current assets	225,656			206,378
Deferred income taxes	5,465			5,465
Acquired future billings, net of current portion	962			415
Restricted cash	962			982
Property and equipment, net	36,615			43,829
Long-term investments	26,439			—
Deferred set up costs, net of current portion	1,630			2,039
Other assets	9,865			9,213
Prepaid commissions and royalties, net of current portion	4,277			5,786
Total assets	$	389,956		$	369,677
Intangible assets, net of accumulated amortization of $3,624 and $6,157, respectively	27,586			45,118
Goodwill	39,125			59,441
Deferred income taxes, net of current portion	7,107			1,693
Restricted cash, non-current portion	962			962
Long-term investments	18,022			34,725
Securities settlement agreement	5,322			—
Other assets	626			879
Total assets	$	367,890		$	401,265
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	85,~~895~~909		$	73,~~047~~649
Accrued expenses	22,686			23,969
Accrued expenses and other current liabilities	28,006			19,136
Leasehold incentive obligation, current portion	791			791
Deferred revenues	85,896			95,394
Deferred revenues, current portion	79,918			92,469
Total current liabilities	119,811			118,179
Total current liabilities	112,290			124,276
Deferred rent, net of current portion	2,115			2,489
Deferred rent, net of current portion	564			1,741
Deferred revenue, net of current portion	12,478			15,055
Leasehold incentive obligation, net of current portion	7,248			6,655
Other long-term liabilities	10,224			10,177
Deferred revenue, net of current portion	8,600			11,177
Total liabilities	144,628			145,900
Other long-term liabilities	1,515			1,614
Commitments and contingencies (Note 10)
Total liabilities	130,217			145,463
Commitments and contingencies (Note 12)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued	—			—
Preferred stock, $0.01 par value; 5,000 shares authorized, none issued	—			—
Common stock, $0.01 par value; 100,000,000 shares authorized: 42,986,235 and 43,329,866, respectively	430			433
Common stock, $0.01 par value; 100,000 shares authorized: 43,577 and 43,732 issued, respectively	436			438
Additional paid-in capital	~~283~~296,~~676~~572			~~292~~299,~~849~~478
Treasury stock, 37,000 shares at cost	(111		)	(111		)
Treasury stock, 980 and 2,915 shares at cost, respectively	(14,147		)	(40,111		)
Accumulated other comprehensive loss	(672		)	167
Accumulated other comprehensive income (loss)	71			(357		)
Accumulated deficit	(4537,~~650~~604		)	(3735,~~536~~671		)
Total stockholders’ equity	~~237~~245,~~673~~328			~~255~~223,~~802~~777
Total liabilities and stockholders’ equity	$	~~367~~389,~~890~~956		$	~~401~~369,~~265~~677

See accompanying notes.

Table of Contents

Phase Forward Incorporated

Condensed Consolidated Statements of Income

(unaudited)

(in thousands, except per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2008

2009

2008

2009

2010

Revenues:

License

1214,~~974~~116

15,~~159~~141

~~38,675~~

~~43,970~~

Service

3034,~~017~~700

3742,~~960~~059

~~83,187~~

~~110,466~~

Total revenues

4248,~~991~~816

5357,~~119~~200

~~121,862~~

~~154,436~~

Costs of revenues:

License (2)

~~838~~566

~~559~~566

~~2,119~~

~~1,910~~

Service (1), (2)

1719,~~686~~899

2325,~~076~~716

~~50,405~~

~~64,220~~

Total cost of revenues

1820,~~524~~465

2326,~~635~~282

~~52,524~~

~~66,130~~

Gross margin:

License

1213,~~136~~550

14,~~600~~575

~~36,556~~

~~42,060~~

Service

1214,~~331~~801

1416,~~884~~343

~~32,782~~

~~46,246~~

Total gross margin

2428,~~467~~351

2930,~~484~~918

~~69,338~~

~~88,306~~

Operating expenses:

Sales and marketing (1), (2)

7,~~024~~206

8,~~678~~986

~~19,958~~

~~24,100~~

Research and development (1)

68,~~424~~180

9,~~639~~698

~~18,003~~

~~27,244~~

General and administrative (1), (2)

67,~~629~~804

89,~~796~~184

~~18,374~~

~~26,315~~

Total operating expenses

2023,~~077~~190

27,~~113~~868

~~56,335~~

~~77,659~~

Income from operations

45,~~390~~161

23,~~371~~050

~~13,003~~

~~10,647~~

Other income:

Interest income

~~1,483~~640

~~331~~316

~~4,770~~

~~1,473~~

Other income

(478

)

120

(229

)

585

Other income (expense), net

409

(184

)

Total other income

1,~~005~~049

~~451~~132

~~4,541~~

~~2,058~~

Income before provision for income taxes

56,~~395~~210

23,~~822~~182

~~17,544~~

~~12,705~~

Provision for income taxes

12,~~954~~132

1,~~013~~249

~~6,407~~

~~4,591~~

Net income

34,~~441~~078

1,~~809~~933

~~11,137~~

~~8,114~~

Net income per share applicable to common stockholders:

Basic

0.0810

0.0405

~~0.27~~

~~0.19~~

Diluted

0.0809

0.0405

~~0.25~~

~~0.18~~

Weighted average number of common shares used in net income per share calculations:

Basic

42,~~194~~430

4241,~~853~~085

~~42,020~~

~~42,637~~

Diluted

4443,~~065~~998

4442,~~517~~764

~~43,879~~

~~44,338~~

(1) Amounts include stock-based compensation expense, as follows:

Costs of service revenues

~~437~~476

~~317~~636

~~1,278~~

~~1,282~~

Sales and marketing

~~393~~415

~~426~~468

~~1,075~~

~~1,303~~

Research and development

~~329~~621

1,~~139~~036

~~931~~

~~2,465~~

General and administrative

1,~~133~~057

1,~~114~~361

~~2,746~~

~~4,140~~

(2) Amounts include amortization expense of acquired intangible assets, as follows:

Costs of license revenues

~~327~~155

~~208~~237

~~637~~

~~557~~

Cost of service revenues

—261

~~282~~447

—

~~804~~

Sales and marketing

23320

~~421~~740

~~431~~

~~1,095~~

General and administrative

725

See accompanying notes.

Table of Contents

Phase Forward Incorporated

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2008			2009
	2009			2010
Operating activities
Net income	$	114,~~137~~078		$	81,~~114~~933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	73,~~149~~713			125,~~088~~806
Stock-based compensation expense	62,~~030~~569			93,~~190~~501
Loss on disposal of fixed assets	303			54
Amortization of leasehold incentive obligation	(198		)	(247		)
Amortization of leasehold incentive obligation	—			(593		)
Provision for allowance for doubtful accounts	13			12
Provision for allowance for doubtful accounts	55			386
Deferred income taxes	2,444			—
Deferred income taxes	5,739			2,915
Amortization of premiums or discounts on investments	(3		)	254
Amortization of premiums or discounts on investments	(178		)	(178		)
Change in fair value of investments	(437		)	(1,112		)
Change in fair value of short-term investments	—			(1,005		)
Change in fair value of securities settlement agreement	185			1,065
Change in fair value of securities settlement agreement	—			484
Changes in assets and liabilities:
Accounts receivable	(~~502~~2,210		)	~~(18~~11,~~157~~406		)
Deferred costs	(1,524		)	(3,453		)
Other assets	(1,881		)	(670		)
Prepaid expenses and other current assets	864			(1,395		)
Accounts payable	(4,125		)	(2,254		)
Accounts payable	3,843			(2,141		)
Accrued expenses	(6,715		)	(8,756		)
Accrued expenses	840			(584		)
Deferred revenues	7,465			12,137
Deferred revenues	17,336			11,304
Deferred rent	1,135			374
Deferred rent	(386		)	1,177
Net cash provided by operating activities	6,033			23,449
Net cash provided by operating activities	50,706			18,206
Investing activities
Increase (decrease) in restricted cash	(1,462		)	500
Increase in restricted cash	—			(20		)
Proceeds from maturities of short-term and long-term investments	5012,~~325~~000			3929,~~428~~125
Purchase of short-term and long-term investments	(459,~~901~~536		)	(8610,~~545~~750		)
Purchase of property and equipment	(115,~~108~~174		)	(163,~~353~~049		)
Cash paid for acquisitions, net of cash acquired	(40,869		)	(34,628		)
Net cash (used in) provided by investing activities	(2,710		)	15,306
Net cash used in investing activities	(49,015		)	(97,598		)
Financing activities
Proceeds from issuance of common stock	~~1,795~~342			~~1,860~~134
Withholding taxes in connection with vesting of restricted stock awards	(1,247		)	(1,854		)
Purchase of treasury stock	—			(25,964		)
Net cash provided by (used in) financing activities	548			6
Withholding taxes in connection with vesting of restricted stock awards	(459		)	(727		)
Effect of exchange rate changes on cash and cash equivalents	(1,239		)	847
Net cash used in financing activities	(117		)	(26,557		)
Net increase (decrease) in cash and cash equivalents	1,000			(78,539		)
Effect of exchange rate changes on cash and cash equivalents	(547		)	(770		)
Cash and cash equivalents at beginning of period	133,401			131,550
Net increase in cash and cash equivalents	2,659			11,428
Cash and cash equivalents at end of period	134,401			53,011
Cash and cash equivalents at beginning of period	131,550			41,862
Short-term and long-term investments at end of period	43,719			94,215
Cash and cash equivalents at end of period	134,209			53,290
Total cash, cash equivalents and short-term and long-term investments at end of period	$	178,120		$	147,226
Short-term and long-term investments at end of period	43,891			76,449
Supplemental disclosure of non-cash investing activities
Total cash, cash equivalents and short-term and long-term investments at end of period	$	178,100		$	129,739
Purchase of leasehold improvements directly paid by lessor of new facility	$	6,125		$	—
Supplemental disclosure of cash flows related to acquisitions of businesses (Note 5)
Cash paid for acquisition of Clarix LLC
Fair value of assets acquired	$	4,420		$	—
Liabilities assumed	(3,030		)	—
Acquired intangible assets	22,110			—
Cost in excess of net assets acquired	17,804			—
Cash paid	41,304
Less cash acquired	(435		)	—
Cash paid for Clarix LLC, net of cash acquired	40,869			—
Cash paid for acquisition of Waban Software, Inc
Fair value of assets acquired	$	—		$	990
Liabilities assumed	—			(4,032		)
Acquired intangible assets	—			8,905
Cost in excess of net assets acquired	—			7,797
Cash paid	—			13,660
Less cash acquired	—			(32		)
Cash paid for Waban Software, Inc., net of cash acquired	$	—		$	13,628
Cash paid for acquisition of Maaguzi, LLC
Fair value of assets acquired	$	—		$	387
Liabilities assumed	—			(1,026		)
Acquired intangible assets	—			5,368
Cost in excess of net assets acquired	—			6,271
Cash paid	—			11,000
Less cash acquired	—			—
Cash paid for Maaguzi, LLC, net of cash acquired	$	—		$	11,000
Cash paid for acquisition of Covance IVRS/IWRS
Fair value of assets acquired	$	—		$	1,414
Liabilities assumed	—			(2,762		)
Acquired intangible assets	—			5,570
Cost in excess of net assets acquired	—			5,778
Cash paid	—			10,000
Less cash acquired	—			—
Cash paid for Covance IVRS/IWRS, net of cash acquired	$	—		$	10,000
Total cash paid for acquisitions of businesses, net of cash acquired	$	40,869		$	34,628

See accompanying notes.

Table of Contents

Phase Forward Incorporated

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share amounts)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements ~~included~~ included herein have been prepared by Phase Forward Incorporated (the “Company”) pursuant to the rules and regulations of the Securities and ~~Exchange~~ Exchange Commission (“SEC”). Certain information and footnote disclosures ~~normally~~ normally included in financial statements prepared in accordance with generally ~~accepted~~ accepted accounting principles in the United States have been condensed or ~~omitted~~ omitted pursuant to such SEC rules and regulations. Management of the ~~Company~~ Company believes that the disclosures herein are adequate to make the ~~information~~ information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and reflect all material adjustments (consisting only of those of a normal and recurring nature) which are necessary to present fairly the consolidated financial position of the Company as of ~~September~~March 3031, ~~2009~~ 2010, the results of its operations for the three ~~and nine~~ months ended ~~September~~March 3031, 2009 ~~2008~~ and ~~2009~~ 2010 and its cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2008~~ 2009 and ~~2009~~2010. These unaudited condensed consolidated financial statements and notes ~~thereto~~ thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the year ending December 31, ~~2009~~2010.

As of ~~September~~March 3031, ~~2009~~2010, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009, have not changed except for the adoption or application of the accounting pronouncements applicable for subsequent periods as set forth in Note 1916.

~~On April 22, 2009, the Company acquired all of the outstanding common stock of Waban Software, Inc~~2. Revenue (“Waban”), a provider of platform solutions for the automation and compliance of clinical data analysis and reporting. Waban’s Statistical Computing Environment and Clinical Data Repository (SCE/CDR) solutions provide automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data. The results of Waban have been included in the Company’s unaudited condensed consolidated financial statements since the date of acquisition (see Note 5).Recognition

OnThe Company ~~July 27,~~derives ~~2009,~~revenues ~~the~~from ~~Company~~software ~~acquired~~licenses ~~Maaguzi~~and ~~LLC~~services of its Integrated Clinical Research Suite (“~~Maaguzi~~ICRS”)~~, a privately-held~~ ~~innovative~~products ~~provider~~which ofcan be purchased on a ~~Web~~stand-~~based~~alone ~~product~~basis ~~called~~or bundled ~~OutcomeLogix,~~together. ~~which~~License isrevenues anare ~~electronic~~derived ~~patient~~principally ~~reported~~from the sale of ~~outcomes~~term ~~(ePRO)~~licenses of its software products and ~~late~~service ~~phase~~revenues ~~solution.~~ are derived ~~The~~principally ~~results~~from the Company’s delivery of ~~Maaguzi~~the ~~have~~hosted ~~been~~solutions ~~included~~of inits software products, consulting services and customer support including training, for all of the Company’s ~~unaudited~~products. Revenue arrangements may include one of these ~~condensed~~single ~~consolidated~~elements, ~~financial~~or ~~statements~~may ~~since~~incorporate one or more elements in a single transaction or combination of related transactions. In the ~~date~~first quarter of ~~acquisition~~2010, the Company adopted the guidance of Accounting Standards Update (~~see~~“ASU”) No. 2009-13, ~~Note~~Revenue 5Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements.

~~On August 20,~~ASU No. 2009,-13 establishes ~~the~~a ~~Company~~selling ~~acquired~~price hierarchy for determining the ~~Interactive~~selling ~~Voice~~price ~~and~~of ~~Web~~a ~~Response~~deliverable ~~Services~~in ~~business~~a sale arrangement. The selling price for each deliverable is based on vendor-specific objective evidence (“~~Covance~~VSOE”) ~~IVRS/IWRS~~if available, third-party evidence (“TPE”) ofif ~~Covance~~VSOE ~~Inc~~is not available, or estimated selling price if neither VSOE or TPE is available. The amendments in this ASU eliminate the ~~results~~residual method of ~~Covance~~allocation ~~IVRS/IWRS~~and ~~have~~require ~~been~~that ~~included~~arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the ~~Company~~arrangement proportionately to each deliverable on the basis of the deliverable’s ~~unaudited condensed~~selling ~~consolidated~~price. ~~financial~~The ~~statements~~Company ~~since~~adopted these standards in the first ~~date~~quarter of ~~acquisition~~2010, ~~(see~~effective as of January 1, 2010 and on a prospective basis thereafter. The adoption of this standard did not materially affect the results of operations for three months ended March 31, 2010. See Note 5)16 for further discussion on the adoption of this standard.

The ~~Company~~components ~~evaluates~~of ~~events~~revenue ~~and~~are ~~transactions that occur after the balance sheet date~~ as ~~potential subsequent events. The Company performed this evaluation through November 6, 2009, the date on which its financial statements were issued (see Note 20).~~follows:

2. Revenue Recognition and Deferred Set Up Costs

	Three Months Ended March 31,
	2009		2010
License	$	14,116	$	15,141
Application hosting services	26,626		33,782
Consulting services	4,861		5,207
Customer support	3,213		3,070
Total	$	48,816	$	57,200

The Company derives revenues from software licenses and services. License revenues are derived principally from the sale of term licenses for the following software products offered by the Company: InForm™, Clintrial™, Empirica™ Study, Empirica™ Trace, Empirica™ Signal, CTSD™, Waban CDR™ and Waban SCE™. Service revenues are derived principally from the Company’s delivery of the hosted solutions of its InForm, Clarix™, Empirica Signal, CTSD, Empirica Study, OutcomeLogix™ and Covance IVRS/IWRS software products, and consulting services and customer support, including training, for all of the Company’s products.

Table of Contents

The components of revenue are as follows:

	Three Months Ended September 30,				Nine months Ended September 30,
	2008		2009		2008		2009
License	$	12,974	$	15,159	$	38,675	$	43,970
Application hosting services	23,553		30,071		63,974		86,509
Consulting services	3,488		4,495		9,703		14,056
Customer support	2,976		3,394		9,510		9,901
Total	$	42,991	$	53,119	$	121,862	$	154,436

Customers generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice. License agreements, multiple element arrangements, including license and service agreements and certain application hosting services can generally be terminated by either party for material breach of obligations not corrected within 30 days after notice of the breach.

The Company recognizes revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

The Company generally enters into software term licenses for its ~~InForm,~~ ~~Clintrial,~~software ~~Empirica Trace, Waban CDR and Waban SCE~~ products with its customers for 31 to 5 year periods. ~~License agreements for other licensed products are generally for annual or multi-year terms.~~ These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees annually in advance for each year of the license term. Payment terms are generally net 30 days.

The Company’s software license revenues are earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to delivery to the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are for trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.

Customer support includes training services, telephone support and software maintenance. The Company generally bundles customer support with the software license for the entire term of the arrangement. As a result, the Company generally recognizes revenues for all elements, including consulting services, ratably over the term of the software license and support arrangement. The Company allocates the revenues recognized for these arrangements to the different elements based on management’s estimate of the relative fair value of each element. For its term-based licenses, the Company allocates to consulting services, the anticipated service effort and value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The value of the Company’s consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The remaining value is allocated to license and support services, with 10% of this amount allocated to support services. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. The Company believes this rate is substantive and represents an amount it believes reasonable to be allocated. The Company has allocated the estimated fair value to its multiple element arrangements to provide meaningful disclosures about each of its revenue streams. The costs associated with the consulting and customer support services are expensed as incurred. There are instances in which the Company sells software licenses based on usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenues are generally recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenues are recognized in the period of use. Revenues from certain follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are recognized as the services are performed.

The Company continues to sell additional perpetual licenses for software products in certain situations to existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. For the Clintrial and Empirica Trace products, the Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. For Clinical Development Center products, vendor specific objective evidence of fair value for the customer support has not been established, and therefore, revenue for the entire agreement is recognized ratably over the term of the underlying support agreement. The Company generates customer support and maintenance revenues from its perpetual license customer base. Training revenues are recognized as earned.

Revenues resulting from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial: the first stage involves application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Phase Forward IRT and Covance IVRS/IWRS application hosting services also consist of three stages for each clinical trial: the first stage involves application set up, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS products for the first and third stages are provided on a fixed-fee basis based upon the complexity of the trial and

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~~The~~system ~~Company~~requirements. ~~continues~~Services ~~to sell additional perpetual licenses~~ for the ~~Clintrial,~~second ~~Empirica~~stage ~~Trace,~~are ~~Waban~~charged ~~CDR~~separately ~~and~~as ~~Waban~~a fixed ~~SCE~~monthly ~~software~~fee. ~~products~~The inCompany ~~certain~~recognizes ~~situations~~revenues tofrom ~~its~~all ~~existing customers~~stages ~~with~~of the ~~option~~InForm, toPhase ~~purchase~~Forward ~~customer~~IRT, ~~support.~~OutcomeLogix and ~~The~~Covance ~~Company~~IVRS/IWRS ~~has~~hosting ~~established~~services ~~vendor~~ratably ~~specific~~over ~~objective~~the ~~evidence~~hosting ofperiod. ~~fair~~Work ~~value~~performed ~~for~~outside the ~~customer~~original ~~support.~~scope ~~Accordingly,~~of ~~license~~work ~~revenues~~is ~~are~~contracted ~~recognized~~for ~~upon~~separately ~~delivery~~as ofan ~~the software~~additional fee and ~~when~~is generally ~~all~~recognized ~~other~~ratably ~~revenue~~over ~~recognition~~the ~~criteria~~remaining ~~are~~term ~~met.~~of ~~Customer support~~the ~~revenues~~hosting ~~are~~period. Fees ~~recognized~~for ~~ratably~~the ~~over~~first ~~the~~and ~~term~~third stages of the ~~underlying~~service ~~support~~are billed based upon ~~arrangement~~milestones. ~~The~~Fees ~~Company~~for ~~generates~~application ~~customer~~hosting ~~support~~ and ~~maintenance~~related ~~revenues~~services in the second ~~from~~stage ~~its~~are ~~perpetual~~generally ~~license~~billed ~~customer~~quarterly ~~base~~in advance. ~~Training~~Bundled ~~revenues~~into this revenue element are ~~recognized~~revenues ~~as earned~~attributable to the software license used by the customer.

~~In addition~~Revenues toresulting ~~making~~from ~~its~~hosting ~~software~~services ~~products~~for ~~available~~the toEmpirica ~~customers through licenses~~Signal, ~~the~~Empirica ~~Company~~Study ~~offers~~and ~~its~~WebSDM ~~InForm,~~products ~~Empirica~~consist ~~Signal~~of installation and server configuration, ~~CTSD~~application hosting and ~~Empirica~~related ~~Study~~support ~~software~~services. ~~solutions~~Services ~~through~~for athis ~~hosted~~offering ~~application~~are ~~solution~~generally ~~delivered~~charged ~~through~~ a ~~standard Web-browser~~monthly fixed fee. ~~The~~ ~~Company’s~~Revenues are ~~Clarix,~~recognized ~~OutcomeLogix~~ratably ~~and Covance~~over ~~IVRS/IWRS~~the ~~solutions~~period ~~are~~of ~~exclusively~~the ~~hosted applications~~service.

~~Revenues resulting~~In ~~from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial:~~ the ~~first~~event ~~stage~~that ~~involves~~an application ~~set up, including design of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application~~ hosting ~~and~~customer ~~related~~cancels ~~support~~its ~~services; and the third stage involves services~~related ~~required~~statement ~~to close out, or lock, the database for the clinical trial. Revenues resulting from Clarix and Covance IVRS/IWRS application hosting services also consist~~ of ~~three stages for each clinical trial: the first stage involves application set up~~work, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided for the InForm, Clarix, OutcomeLogix and Covance IVRS/IWRS products for the first and third stages are provided on a fixed-fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. The Company recognizes revenues from all stages of the InForm, Clarix, OutcomeLogix and Covance IVRS/IWRS hosting services ratably over the hosting period. Fees charged and costs incurred for the trial system design, set up and implementation are deferred ~~until~~revenues ~~the start of the hosting period and~~ are ~~amortized and~~ recognized ~~ratably over the estimated hosting period~~. ~~The~~In ~~deferred~~addition, ~~costs include incremental direct costs with third~~certain ~~parties~~termination ~~and certain internal direct costs~~ related tofees ~~the~~may ~~trial~~be ~~and~~charged ~~application set up. These costs include salary~~ and ~~benefits~~if ~~associated with direct labor costs incurred during trial set up~~so, assuch ~~well as third-party subcontract~~ fees ~~and other~~are ~~contract labor costs. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally~~ recognized ~~ratably~~ ~~over~~ in the ~~remaining term of the hosting~~ period. ~~Fees for the first and third stages~~ of ~~the service are billed based upon milestones~~termination. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Bundled into this revenue element are revenues attributable to the software license used by the customer.

Revenues resulting from hosting services for the Empirica Signal, CTSD and Empirica Study products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged a monthly fixed fee. Revenues are recognized ratably over the period of the service.

In the event that an application hosting customer cancels its related statement of work, all deferred revenues are recognized and all deferred set up costs are expensed. In addition, certain termination related fees may be charged and if so, such fees are recognized in the period of termination.

Provisions for estimated losses on uncompleted contracts are made on a contract-by-contract basis and are recognized in the period in which such losses become probable and can be reasonably estimated. To date, the Company has not experienced any material losses on uncompleted application hosting or consulting contracts.

~~One~~In ~~customer, GlaxoSmithKline, accounted for approximately 12% of~~ the ~~Company’s total revenues in the~~ three months ended ~~September~~March ~~30, 2008 and 12% of the Company’s total revenues in the nine months ended September 30, 2008. The same customer accounted for $863 or 2% of accounts receivable outstanding as of December~~ 31, ~~2008. In~~2009 ~~the three~~ and ~~nine~~ ~~months ended September 30~~2010, ~~2009,~~ no customer accounted for 10% or more of the Company’s total revenues for the period.

The Company deferred $1,318 and $1,355 of set up costs and amortized $858 and $885 of set up costs in the three months ended September 30, 2008 and 2009, respectively, and deferred $3,597 and $3,945 of set up costs and amortized $2,541 and $2,787 of set up costs in the nine months ended September 30, 2008 and 2009, respectively. The amortization of deferred set up costs is a component of cost of service revenues.

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The Company may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on either a time-and-materials basis or using the proportional performance method. If the Company is not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.

Deferred revenue represents amounts billed or cash received in advance of revenue recognition.

The Company included $304 and $191 of out-of-pocket expenses in service revenues and cost of service revenues in the three months ended September 30, 2008 and 2009, respectively, and included $647 and $569 of out-of-pocket expenses in service revenues and cost of service revenues in the nine months ended September 30, 2008 and 2009, respectively.

Internal Use Software and Website Development Costs

The Company capitalizes qualifying computer software costs which are incurred during the application development stage, and amortizes them over the software’s estimated useful life. The Company capitalized $~~141~~206 and $~~555~~191 during the three months ended ~~September~~March 3031, ~~2008 and~~ 2009, ~~respectively,~~ and ~~$337 and $933 during the nine months ended September 30~~2010, ~~2008 and 2009~~ respectively, related to Company-wide financial systems, ~~which became operational in September 2009,~~ and outside software development costs associated with the Company’s hosting operation, of which both had certain portions that became operational in ~~March~~ 2009 and 2010. Capitalized amounts include software and direct external implementation costs and are classified as “Property and Equipment, net” in the accompanying unaudited condensed consolidated ~~financial~~ ~~statements~~balance sheets. The Company-wide financial system is being amortized over five years while the outside software development costs associated with the Company’s hosting operation is being amortized over three years. Amortization expense was $179 and $4880 during the three months ended ~~September~~March 3031, ~~2008 and 2009,~~ ~~respectively,~~2009 and ~~$65 and $86 during the nine months ended September 30~~2010, ~~2008~~ ~~and 2009,~~ respectively.

Computer Software Development Costs and Research and Development Expenses

The Company sells products in a market that is subject to rapid technological change, new product development and changing customer needs. Accordingly, the Company has evaluated the establishment of technological feasibility of its products and concluded that technological feasibility is not established until the development stage of the product is nearly complete. The Company defines technological feasibility as the completion of a working model. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release, is very short, and consequently, the amounts that could be capitalized are not material to the Company’s financial position or results of operations. Therefore, the Company has charged all such costs to research and development expense in the period incurred.

3. Prepaid Sales Commissions, Royalties and ~~Royalties~~Deferred Set Up Costs

Prepaid Sales Commissions. For arrangements where revenues are recognized over the relevant contract period, the Company defers related commissions paid to its direct sales force and ~~software license royalties paid to third parties, and~~ amortizes ~~these~~them ~~expenses~~ over the period in which the related revenues are recognized.

~~Commission~~Royalty ~~payments~~Obligations. For ~~are nonrefundable unless the sales~~arrangements ~~representatives~~where dorevenues ~~not achieve their specific quota, amounts due from a customer~~ are ~~determined~~recognized toover ~~be uncollectible or if~~ the ~~customer~~relevant ~~subsequently changes~~contract ~~or terminates the level of service~~period, ~~in which case commissions paid are recoverable by~~ the Company. defers ~~The~~related ~~Company~~software ~~deferred~~license ~~$1,930~~royalties ~~and~~paid ~~$3,157 of commissions and amortized~~ to ~~sales~~third ~~and marketing expense $2~~parties,~~358~~ and ~~$2,231 in~~amortizes ~~the~~them ~~three~~over ~~months~~the ~~ended~~period ~~September 30, 2008 and 2009, respectively, and deferred $6,301 and $8,264 of commissions and amortized to sales and marketing expense $6,167 and $5,940~~ in which the ~~nine~~related ~~months~~revenues ~~ended September 30, 2008 and 2009, respectively.~~are

The Company’s royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. The Company has the right to recover the royalties in the event the arrangement is cancelled. The Company deferred $605 and $564 of royalties and amortized to cost of revenues $672 and $537 in the three months ended September 30, 2008 and 2009, respectively, and deferred $2,174 and $2,291 of royalties and amortized to cost of revenues $2,012 and $2,017 in the nine months ended September 30, 2008 and 2009, respectively.8

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recognized. The Company’s royalty obligation is based upon the license and customer support revenues earned for certain products in an arrangement. The Company has the right to recover the royalties in the event the arrangement is cancelled.

Deferred Set Up Costs. Costs incurred for the trial system design, set up and implementation are deferred until the start of the hosting period and are amortized and recognized ratably over the estimated hosting period. The deferred costs include incremental direct costs with third parties and certain internal direct costs related to the trial and application set up. These costs include salary and benefits associated with direct labor costs incurred during trial set up, as well as third-party subcontract fees and other contract labor costs. In the event that an application hosting customer cancels its related statement of work, all deferred set up costs are expensed.

Prepaid sales commissions, royalty obligations and deferred set up costs are included in “other current assets” and “other assets” in the accompanying unaudited condensed consolidated balance sheets. Commissions, royalty obligations and deferred set up costs are amortized to sales and marketing, cost of revenues and cost of services, respectively.

The Company deferred and amortized the following amounts for the three months ended March 31, 2009 and 2010:

	Deferred				Amortized
Description	2009		2010		2009		2010
Prepaid Sales Commissions	$	1,984	$	2,325	$	1,744	$	2,173
Royalty Obligations	1,089		535		661		367
Deferred Set Up Costs	1,295		2,054		917		1,292
Total	$	4,368	$	4,914	$	3,322	$	3,832

4. Warranties and Indemnification

The Company’s software license arrangements and hosting services are typically warranted to perform in a manner consistent with general industry standards that are reasonably applicable and substantially in accordance with the Company’s product documentation under normal use and circumstances. The Company’s arrangements also include certain provisions for indemnifying customers against liabilities if its products or services infringe a third party’s intellectual property rights.

The Company has entered into service level agreements with some of its hosted application customers warranting certain levels of uptime reliability and permitting those customers to receive credits against monthly hosting fees or terminate their agreements in the event that the Company fails to meet those levels.

To date, the Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the accompanying unaudited condensed consolidated financial statements.

5. Acquisitions

From time to time the Company has expanded its product and service offerings through the acquisition of other businesses or technologies. The most recent transactions include the 2009 acquisitions of Waban Software, Inc. (“Waban”), Maaguzi LLC (“Maaguzi”), and the Interactive Voice and Web Response Services business (“Covance IVRS/IWRS”) of Covance Inc., all of which are further described below.

OnCovance IVRS/IWRS. In August ~~20,~~ 2009, the Company acquired the Interactive Voice and Web Response Services business of Covance Inc. (“Covance IVRS/IWRS”). The aggregate purchase price was $10,000 in cash, of of which $5,~~778~~280 ~~has~~and ~~been~~$5,610 was recorded as goodwill~~. The acquisition~~ ofand ~~Covance~~intangible ~~IVRS/IWRS~~assets, respectively, ~~has~~with ~~been~~all ~~accounted~~of ~~for~~the asintangible aassets ~~purchase,~~consisting ~~and accordingly,~~of ~~all~~customer relationships. All of the ~~assets~~goodwill ~~acquired~~is ~~and~~expected ~~liabilities~~to ~~assumed~~be indeductible ~~the~~for ~~transaction~~income ~~are~~tax ~~recognized~~purposes. atWhile ~~their~~the ~~acquisition-date~~Company ~~fair~~has ~~values,~~existing ~~while~~trials ~~transaction~~running ~~costs~~on ~~associated~~the ~~with~~Covance ~~the~~IVRS/IWRS ~~transaction~~system, ~~are~~no ~~expensed~~new astrials ~~incurred~~or offerings will be sold or implemented.

~~Preliminary Allocations of Assets and Liabilities~~Maaguzi. ~~For~~ In July 2009 the Company ~~purposes~~acquired all of the ~~unaudited~~outstanding ~~condensed~~membership ~~consolidated~~interests ~~balance~~of ~~sheets,~~Maaguzi ~~the~~LLC ~~Company~~(“Maaguzi”), ~~has~~a ~~made~~privately-held ~~preliminary~~innovative ~~allocations~~provider of ~~the~~a ~~purchase~~Web-based ~~price~~product ~~for~~called ~~Covance~~OutcomeLogix, ~~IVRS/IWRS~~which tois an electronic ~~the~~patient ~~net~~reported ~~tangible~~outcomes ~~assets~~(“ePRO”) and ~~intangible~~late ~~assets,~~phase ~~goodwill~~solution. ~~and~~The ~~deferred~~acquisition ~~revenue.~~of ~~However,~~Maaguzi extends the Company’s isICRS inand marks the ~~process~~Company’s ofentry ~~completing~~into ~~its~~the ~~valuations of certain~~ePRO ~~intangible assets~~ and ~~deferred~~observational ~~revenue~~studies markets. The ~~difference between the~~ aggregate purchase price ~~and~~was ~~the~~$11,000 ~~fair~~in cash, ~~value~~ of ~~assets~~which ~~acquired and liabilities assumed~~$6, if301and ~~any~~$5,338 iswas ~~allocated~~recorded toas goodwill. ~~The~~and ~~final allocations of the purchase price to~~ intangible assets, ~~goodwill and deferred revenue may differ materially from the information presented in these unaudited condensed consolidated financial statements~~respectively. ~~The~~All ~~following~~of ~~table summarizes~~ the ~~preliminary estimated fair~~ ~~values~~goodwill ofis ~~the~~expected ~~assets~~to ~~acquired~~be ~~and~~deductible ~~liabilities~~for ~~assumed~~income attax ~~the acquisition date:~~purposes.

	Preliminary Estimated Fair Values as of September 30, 2009
Current Assets	$	1,414
Intangible assets	5,570
Goodwill	5,778
Current liabilities	(2,762		)
Net assets acquired	$	10,000

Waban. In April 2009 the Company acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”), a privately-held provider of platform solutions for the automation and compliance of clinical data analysis and reporting. Waban’s software, which the Company has branded as Clinical Development Center product, provides automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data. The Company acquired the technology of

Based on preliminary allocations, $5,570 of the intangible assets acquired from Covance IVRS/IWRS relate to customer relationships which will be amortized over a period of 15 years. The acquired intangible assets were valued using the discounted cash flows and relief-from royalty approaches. If an allocated asset becomes impaired or is abandoned, the carrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period in which the impairment occurs. The acquired intangible assets are subject to review for impairment as indicators of impairment develop and, otherwise, at least annually.9

Covance IVRS/IWRS Financial Information. The results of operations of Covance IVRS/IWRS have been included in the unaudited condensed consolidated financial statements since the acquisition date. Covance IVRS/IWRS had $1,113 in revenues in the period from the acquisition date (August 20, 2009) to September 30, 2009, and Covance IVRS/IWRS’s net operating loss in the period from the acquisition date to September 30, 2009 was immaterial to the Company’s unaudited condensed consolidated financial results.

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~~Maaguzi~~Waban to allow it to penetrate the market for statistical computing and clinical data repository solutions. The aggregate purchase price was $13,764 ~~LLC~~in cash, of which $7,850 and $8,905 was recorded as goodwill and intangible assets, respectively. None of the goodwill is expected to be deductible for income tax purposes.

OnAll ~~July 27,~~of ~~2009,~~ the ~~Company~~assets acquired ~~Maaguzi LLC~~and ~~(“Maaguzi”),~~liabilities aassumed ~~privately-held~~in ~~innovative~~the ~~provider~~above acquisitions ofare arecognized ~~Web~~at their acquisition-~~based~~date ~~product called~~fair ~~OutcomeLogix~~values, ~~which is an electronic~~while ~~patient~~transaction ~~reported~~costs ~~outcomes~~were ~~(ePRO)~~expensed ~~and~~as ~~late phase solution~~incurred. The difference between the aggregate purchase price ~~was~~and ~~$11,000~~the infair ~~cash, of~~value ~~which~~of $6assets acquired and liabilities assumed,~~271~~ ~~has~~if ~~been~~any, ~~recorded~~was asallocated to goodwill. ~~The~~Acquired ~~acquisition~~intangible ofassets ~~Maaguzi~~were ~~extends~~valued using the ~~Company’s~~discounted ~~integrated~~cash ~~clinical research~~flows ~~suite~~ and relief-from ~~marks~~royalty ~~the~~approaches. ~~Company’s~~If ~~entry~~an ~~into~~allocated ~~the~~asset ~~ePRO~~becomes ~~and~~impaired ~~observational~~or is ~~studies~~abandoned, ~~markets. The~~the ~~acquisition~~carrying value of ~~Maaguzi~~the ~~has~~related ~~been~~intangible asset will be written ~~accounted~~down ~~for~~to asits afair ~~purchase,~~value and ~~accordingly,~~an ~~all~~impairment ofcharge ~~the~~will ~~assets~~be ~~acquired~~taken ~~and liabilities~~in ~~assumed~~the period in which the ~~transaction~~impairment ~~are~~occurs. ~~recognized~~The atacquired ~~their~~intangible ~~acquisition-date~~assets are subject to ~~fair~~review ~~values~~for impairment as indicators of impairment develop and, ~~while~~otherwise, ~~transaction~~at least ~~costs~~annually. ~~associated~~The ~~with~~results of each acquisition have been included in the unaudited ~~transaction~~condensed ~~are~~consolidated financial statements since the respective ~~expensed~~dates asof ~~incurred~~acquisition.

Preliminary Allocations of Assets and Liabilities. For the purposes of the unaudited condensed consolidated balance sheets, the Company has made preliminary allocations of the purchase price for Maaguzi to the net tangible assets and intangible assets, goodwill and deferred revenue. However, the Company is in the process of completing its valuations of certain intangible assets and deferred revenue. The difference between the aggregate purchase price and the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The final allocations of the purchase price to intangible assets, goodwill and deferred revenue may differ materially from the information presented in these unaudited condensed consolidated financial statements. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

	Preliminary Estimated Fair Values as of September 30, 2009
Current Assets	$	190
Property, plant and equipment	197
Intangible assets	5,368
Goodwill	6,271
Current liabilities	(339		)
Deferred revenues	(687		)
Net assets acquired	$	11,000

Based on preliminary allocations, $1,229, $2,002, $2,087 and $50 of the intangible assets acquired from Maaguzi relate to developed technology, customer relationships, in-process research and development, and tradenames, respectively. The acquired intangible assets were valued using the discounted cash flows and relief-from royalty approaches. Developed technology, customer relationships and tradenames will be amortized over a period of 8 years, 20 years and 1 year, respectively. If an allocated asset becomes impaired or is abandoned, the carrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period in which the impairment occurs. The acquired intangible assets are subject to review for impairment as indicators of impairment develop and, otherwise, at least annually.

Maaguzi Financial Information. The results of operations of Maaguzi have been included in the unaudited condensed consolidated financial statements since the acquisition date. Maaguzi had $344 in revenues in the period from the acquisition date (July 27, 2009) to September 30, 2009, and Maaguzi’s net operating loss in the period from the acquisition date to September 30, 2009 was immaterial to the Company’s unaudited condensed consolidated financial results.

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Waban Software, Inc.

On April 22, 2009, the Company acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”), a provider of platform solutions for the automation and compliance of clinical data analysis and reporting. Waban’s Statistical Computing Environment and Clinical Data Repository (SCE/CDR) solutions provide automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data. The aggregate purchase price was $13,764 in cash, of which $7,797 has been recorded as goodwill. The Company acquired the technology of Waban to allow it to penetrate the market for statistical computing and clinical data repository solutions. The acquisition of Waban has been accounted for as a purchase, and accordingly, all of the assets acquired and liabilities assumed in the transaction are recognized at their acquisition-date fair values, while transaction costs and restructuring costs associated with the transaction are expensed as incurred.

Purchase Price. The $13,764 purchase price for Waban is based on the acquisition-date fair value of the consideration transferred, which was calculated based on the initial cash paid following post-acquisition working capital adjustments. The purchase price excludes transaction fees which the Company paid on Waban’s behalf on the acquisition date. Working capital adjustments have been classified as “Accrued expenses” in the accompanying unaudited condensed consolidated balance sheet for the period ended September 30, 2009. The acquisition-date fair value of the consideration consisted of the following:

	Preliminary Estimated
	Fair Values as of
	September 30, 2009
Cash paid	$	13,660
Accrued working capital adjustment	104
Total purchase price	$	13,764

Preliminary Allocations of Assets and Liabilities. For the purposes of the condensed unaudited consolidated balance sheets, the Company has made preliminary allocations of the purchase price for Waban to the net tangible assets and intangible assets, goodwill, deferred income taxes and deferred revenue. However, the Company is in the process of completing its valuations of certain intangible assets and deferred revenue. The difference between the aggregate purchase price and the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The final allocations of the purchase price to intangible assets, goodwill, deferred income taxes and deferred revenue may differ materially from the information presented in these unaudited condensed consolidated financial statements. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

	Preliminary Estimated Fair Values as of September 30, 2009
Current Assets	$	825
Property, plant and equipment	135
Other assets	30
Intangible assets	8,905
Goodwill	7,797
Current liabilities	(479		)
Deferred Income Taxes	(2,421		)
Deferred revenues	(1,028		)
Net assets acquired	$	13,764

Based on preliminary allocations, $4,758, $3,174 and $973 of the intangible assets acquired from Waban relate to developed technology, customer relationships and tradenames, respectively. The acquired intangible assets were valued using the discounted cash flows and relief-from royalty approaches. Developed technology, customer relationships and tradenames will be amortized over a period of 15 years, 15 years and 8 years, respectively. If an allocated asset becomes impaired or is abandoned, the carrying value of the related intangible asset will be written down to its fair value and an impairment charge will be taken in the period in which the impairment occurs. The acquired intangible assets are subject to review for impairment as indicators of impairment develop and, otherwise, at least annually.

The difference between the consideration transferred to acquire the business and the fair value of assets acquired and liabilities assumed is allocated to goodwill. None of the goodwill is expected to be deductible for income tax purposes. As of September 30, 2009, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Waban.

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Waban Financial Information. The results of operations of Waban have been included in the unaudited condensed consolidated financial statements since the acquisition date. Waban had $605 in revenues in the period from the acquisition date (April 22, 2009) to September 30, 2009, and Waban’s net operating loss in the period from the acquisition date to September 30, 2009 was immaterial to the Company’s unaudited condensed consolidated financial results.

6. Net Income Per Share

Basic net income per common share for all periods presented was determined by dividing net income applicable to common stockholders by the weighted average number of common shares outstanding during the period. Weighted average shares outstanding exclude unvested restricted common stock. Diluted net income per share includes the effects of all dilutive, potentially issuable common shares using the treasury stock method.

The calculation of basic and diluted net income per share is as follows:

Three Months Ended September 30,

Nine months Ended September 30,

Three Months Ended March 31,

2008

2009

2008

2009

2010

Numerator:

Net income

34,~~441~~078

1,~~809~~933

~~11,137~~

~~8,114~~

Denominator:

Weighted-average common shares outstanding

4243,~~823~~022,~~272~~458

4341,~~235~~459,~~883~~557

~~42,780,615~~

~~43,139,958~~

Less weighted-average unvested restricted common stock awards outstanding

(~~629~~592,~~650~~150

)

(~~383~~374,~~016~~625

)

~~(760,272~~

)

~~(503,099~~

)

Basic weighted-average common shares outstanding

42,~~193~~430,~~622~~308

4241,~~852~~084,~~867~~932

~~42,020,343~~

~~42,636,859~~

Dilutive effect of common stock options

1,~~334~~071,~~814~~713

1917,~~027,927~~886

~~1,314,622~~

~~1,064,590~~

Dilutive effect of unvested restricted common stock awards and units

~~536~~495,~~779~~665

~~636~~760,~~107~~963

~~544,115~~

~~636,747~~

Diluted weighted-average common shares outstanding

4443,~~065~~997,~~215~~686

4442,~~516~~763,~~901~~782

~~43,879,080~~

~~44,338,196~~

Net income per share applicable to common stockholders:

Basic

0.0810

0.0405

~~0.27~~

~~0.19~~

Diluted

0.0809

0.0405

~~0.25~~

~~0.18~~

Diluted weighted average common shares outstanding do not include options, awards and units outstanding to purchase 13350,~~252~~011 and ~~432~~629,~~835~~678 common equivalent shares for the three months ended ~~September~~March 3031, ~~2008 and~~ 2009, ~~respectively,~~ and ~~do not include options~~2010, ~~awards, and units outstanding to purchase 310,299 and 162,813 common equivalent shares for the nine months ended September 30, 2008 and 2009,~~ respectively, as their effect would have been anti-dilutive.

7. ~~Foreign~~ Cash, ~~Currency~~Cash ~~Translation~~Equivalents, Short-term and Long-term Investments

~~The~~Securities ~~financial~~that ~~statements~~the ofCompany has the ~~Company’s~~intent ~~foreign~~and ~~subsidiaries~~ability to hold to maturity are ~~translated~~reported ~~into~~at ~~U.S.~~amortized ~~dollars,~~cost ~~which~~and isare ~~the~~classified ~~Company’s~~as ~~reporting currency~~held-to-maturity. ~~The~~Securities ~~functional~~for which it ~~currency~~is ofnot the Company’s ~~subsidiaries~~intent into ~~Australia,~~hold ~~Belgium,~~to ~~France,~~maturity ~~India,~~are classified as either ~~Japan,~~available-for-sale ~~Romania~~securities ~~and~~or ~~the~~trading ~~United~~securities. ~~Kingdom~~Available-for-sale securities are ~~the~~reported ~~local~~at ~~currencies~~fair ofvalue, ~~those countries.~~with ~~Accordingly,~~temporary ~~the~~unrealized ~~assets~~gains/(losses) excluded from earnings and ~~liabilities~~reported ofas ~~the~~a ~~Company’s~~separate ~~foreign subsidiaries~~component ~~are~~of ~~translated~~stockholders’ equity ~~into~~and ~~U.S.~~other ~~dollars~~than ~~using~~temporary ~~the~~unrealized ~~exchange~~losses ~~rate~~included in ~~effect~~earnings. Trading securities are reported at ~~each~~fair ~~balance~~value, ~~sheet~~with ~~date.~~unrealized ~~Revenue~~gains/(losses) ~~and~~included in ~~expense~~earnings. The ~~accounts~~Company’s ~~are~~cash ~~translated~~equivalents ~~using~~principally consist of anmoney ~~average~~market ~~rate~~funds ofand ~~exchange~~corporate ~~during~~bonds ~~the~~with ~~period.~~maturities ~~Gains~~of ~~and~~90 ~~losses~~days ~~arising~~or ~~from~~less at ~~transactions~~the ~~denominated~~date inof ~~foreign~~purchase. ~~currencies~~Short-term ~~are~~and long-term investments primarily ~~related~~consist toof ~~intercompany~~investment-grade ~~accounts~~corporate ~~that~~bonds, ~~have~~U.S. ~~been~~government ~~determined~~agency tonotes beand ~~temporary~~auction ~~in nature and~~rate ~~cash~~securities ~~accounts~~(“ARS”) ~~and~~with ~~accounts~~original ~~receivable~~maturities ~~denominated~~of ingreater ~~non-functional~~than ~~currencies~~90 days.

1310

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~~The~~During ~~Company~~the ~~recorded~~three-months ~~foreign~~ended ~~currency~~March 31, ~~gains/(losses)~~2010, ofthe ~~$(459)~~Company ~~and~~elected ~~$77~~to insell ~~the three~~certain ~~months~~investments ~~ended~~which ~~September 30,~~were ~~2008~~classified ~~and~~as ~~2009,~~held-to-maturity. As ~~respectively~~a result, ~~and~~the ~~$(444)~~Company ~~and~~determined ~~$50~~that all ininvestments ~~the~~should ~~nine~~now ~~months~~be ~~ended~~classified ~~September 30~~as available-for-sale, ~~2008~~ and ~~2009~~accordingly, the ~~respectively. Such~~Company recorded unrealized gains~~/(losses)~~ ~~are~~of ~~included~~$286 inthrough other comprehensive income in the ~~accompanying~~period ~~unaudited~~ended ~~condensed~~March 31, ~~consolidated~~2010 ~~statements~~to ofproperly record the ~~income~~available-for-sale securities at fair value.

~~Foreign~~Cash, ~~currency~~cash ~~translation~~equivalents, ~~adjustments~~short-term ~~are~~and ~~accumulated~~long-term investments as ~~a component~~ of ~~other~~December 31, ~~comprehensive~~2009 ~~income~~and asMarch 31, a2010 ~~separate~~consist ~~component~~ of ~~stockholders’~~the ~~equity.~~following:

8. Cash, Cash Equivalents, Short-term and Long-term Investments

	December 31, 2009
	Contracted	Amortized		Fair Market		Balance Per
Description	Maturity	Cost		Value		Balance Sheet
Cash and cash equivalents	Demand	$	41,862	$	41,862	$	41,862

U.S. agency notes	138 days	$	22,348	$	22,413	$	22,348
Corporate bonds	177 days	25,523		25,678		25,523
Auction rate securities	181 days	23,800		19,370		19,370
Total short-term investments		$	71,671	$	67,461	$	67,241

U.S. agency notes	499 days	$	13,742	$	14,577	$	13,742
Corporate bonds	460 days	12,697		12,898		12,697
Total long-term investments		$	26,439	$	27,475	$	26,439

Securities that the Company has the intent and ability to hold to maturity are reported at amortized cost, which approximates market value, and are classified as held-to-maturity. Securities for which it is not the Company’s intent to hold to maturity are classified as either available-for-sale securities or trading securities. Available-for-sale securities are reported at fair value, with temporary unrealized gains/(losses) excluded from earnings and reported in a separate component of stockholders’ equity and other than temporary unrealized losses included in earnings. Trading securities are reported at fair value, with unrealized gains/(losses) included in earnings. The Company considers all highly liquid investments with original maturities of 90 days or less at the time of purchase to be cash equivalents and investments with original maturities of between 91 days and one year to be short-term investments. The Company considers investments with maturities greater than one year to be long-term investments. All securities, with the exception of auction rate securities (“ARS”), are classified as held-to-maturity securities. The ARS are debt instruments issued by various municipalities throughout the United States. In prior periods and up through the execution of the signed settlement agreement with UBS AG (“UBS”) in November 2008 as further discussed below, the ARS were classified as available-for-sale because it was the Company’s intent not to hold them to maturity. Upon the execution of the settlement agreement with UBS, the Company elected to make a one-time transfer of the ARS from available-for-sale securities to trading securities. Accordingly, on a prospective basis, all unrealized gains/(losses) for these trading securities have been included in earnings.

	March 31, 2010
	Contracted	Amortized		Fair Market		Balance Per
Description	Maturity	Cost		Value		Balance Sheet
Cash and cash equivalents	Demand	$	53,290	$	53,290	$	53,290

U.S. agency notes	216 days	$	27,694	$	27,724	$	27,724
Corporate bonds	239 days	30,236		30,493		30,493
Auction rate securities	90 days	21,550		18,232		18,232
Total short-term investments		$	79,480	$	76,449	$	76,449

~~Cash,~~As ~~cash~~of ~~equivalents~~March 31, ~~short~~2010 all securities, with the exception of ARS, are classified as available-~~term~~for-sale securities. In prior periods and ~~long-term~~up ~~investments~~through the asexecution of ~~December~~the signed settlement agreement with UBS AG (“UBS”) in November 312008 as further discussed below, the ARS were classified as available-for-sale ~~2008~~because ~~and~~it ~~September 30~~was the Company’s intent not to hold them to maturity. Upon the execution of the settlement agreement with UBS, ~~2009~~the ~~consist~~Company elected to make a one-time transfer of the ~~following:~~ARS from available-for-sale securities to trading securities. Accordingly, on a prospective basis, all unrealized gains/(losses) for these trading securities have been included in earnings. Interest and dividends on all of the Company’s securities are included in interest income in the accompanying unaudited condensed consolidated statement of income.

	December 31, 2008
	Contracted	Amortized		Fair Market		Balance Per
Description	Maturity	Cost		Value		Balance Sheet
Cash	Demand	$	22,487	$	22,487	$	22,487
Money market funds	Demand	109,063		109,063		109,063
Total cash and cash equivalents		$	131,550	$	131,550	$	131,550
U.S. agency notes	236 days	$	2,000	$	2,000	$	2,000
Municipal bonds	1 day	1,000		1,000		1,000
Corporate bonds	127 days	24,893		24,884		24,893
Total short-term investments		$	27,893	$	27,884	$	27,893
Auction rate securities	26 years	$	24,050	$	18,022	$	18,022
Total long-term investments		$	24,050	$	18,022	$	18,022

As of December 31, 2009 and March 31, 2010, the Company held ARS totaling $23,800 and $21,550, respectively, at par value, which are classified as short-term investments in the accompanying unaudited condensed consolidated balance sheets, and which are recorded at fair value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that the Company owns are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all have credit ratings of AAA (or equivalent) from a recognized rating agency. Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, the Company’s ARS have experienced multiple failed auctions. While the Company continues to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.

14In November 2008, the Company accepted an offer from and entered into an agreement (the “Agreement”) with UBS with respect to all of the Company’s ARS held at that time. As a UBS client who holds ARS, the Company will receive certain rights, which will

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	September 30, 2009
	Contracted	Amortized		Fair Market		Balance Per
Description	Maturity	Cost		Value		Balance Sheet
Cash	Demand	$	22,269	$	22,269	$	22,269
Money market funds	Demand	30,742		30,742		30,742
Total cash and cash equivalents		$	53,011	$	53,011	$	53,011
U.S. agency notes	126 days	$	21,979	$	21,982	$	21,979
Corporate bonds	202 days	18,634		18,792		18,634
Auction rate securities	273 days	23,900		18,877		18,877
Total short-term investments		$	64,513	$	59,651	$	59,490
U.S. agency notes	521 days	$	15,827	$	15,945	$	15,827
Corporate bonds	497 days	18,898		19,116		18,898
Total long-term investments		$	34,725	$	35,061	$	34,725

entitle the Company to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In accepting the Agreement, the Company granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of the Agreement and released UBS from any claims relating to the marketing and sale of ARS. UBS obligations under the Agreement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Agreement. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Agreement. If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, the Company may incur further losses on the carrying value of the ARS.

The Company ~~has~~performed ~~had~~a nofair ~~realized~~value ~~gains~~calculation orof ~~losses~~these ~~from~~ARS as of March 31, 2010. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in the ~~sale~~Company continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of ~~cash~~interest ~~equivalents~~paid on the securities, the amount of principal to be orrepaid ~~short~~to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-~~term~~clearing ~~investments~~yield for the securities.

AsBased ofupon ~~December 31~~the valuation performed, ~~2008~~the ~~and~~Company ~~September 30,~~concluded ~~2009,~~that the ~~Company~~fair ~~held~~value ~~ARS~~of ~~totaling~~these ~~$24~~ARS at December 31,~~050~~ ~~and~~2009 was $2319,~~900~~370, ~~respectively,~~a atdecline ~~par~~of ~~value~~$4,430 ~~which~~from ~~were classified~~par asvalue. ~~long-term~~As ~~investments~~of ~~and short-term investments~~March 31, ~~respectively~~2010, in the ~~accompanying~~ ~~unaudited~~Company ~~condensed~~concluded ~~consolidated~~that ~~balance~~the ~~sheets, and which are recorded at~~ fair value~~. These~~ ~~ARS are~~of ~~debt~~these ~~instruments~~ARS ~~issued~~was by$18,232, ~~various~~and ~~states~~therefore, ~~throughout~~recorded the ~~United~~change ~~States~~in ~~to finance~~fair ~~student~~value ~~loans. The types~~ of $1,112 ~~ARS~~in ~~that~~ the ~~Company~~accompanying ~~owns~~unaudited ~~are~~condensed ~~backed by~~consolidated ~~student~~statement ~~loans, 95%~~ of ~~which~~income for ~~are~~the ~~guaranteed~~three ~~under~~months ~~the~~ended ~~Federal~~March 31, ~~Family~~2010. ~~Education~~During ~~Loan~~the ~~Program,~~three ~~and~~months ~~all~~ended ~~have~~March 31, ~~credit~~2010, ~~ratings~~$2,250 of ~~AAA~~the ~~(or equivalent) from~~Company’s aARS ~~recognized~~were ~~rating~~called ~~agency. Historically,~~by the ~~carrying~~respective ~~value~~issuers ofat ~~ARS approximated~~par ~~fair~~ value. As ~~due to the frequent resetting~~ of ~~the~~March 31, ~~interest~~2010, ~~rates. With~~it ~~the~~remained ~~liquidity issues experienced in~~ the ~~global credit and capital markets,~~ ~~the~~ Company’s ~~ARS~~intent ~~have~~to ~~experienced~~sell ~~multiple failed auctions. While~~ the ~~Company continues~~ARS toon ~~earn~~June 30, ~~and~~2010 ~~receive~~in ~~interest~~accordance onwith ~~these~~its rights ~~investments~~under at the ~~maximum contractual rate~~Agreement. Accordingly, the ~~estimated~~ARS ~~fair~~are ~~value~~classified ofas ~~these~~short-term ~~ARS~~investments noin ~~longer~~the ~~approximates~~accompanying unaudited ~~par~~condensed ~~value~~consolidated balance sheets.

InFair ~~November 2008,~~value ~~the Company accepted an offer from and entered into an agreement (the “Agreement”) with UBS with respect to all~~ of the Company’s ~~ARS held~~put atoption ~~that~~was ~~time. As~~determined using a ~~UBS~~discounted ~~client~~cash ~~who holds ARS, the Company will~~flow ~~receive certain rights~~method, which ~~will~~considered ~~entitle~~ the ~~Company~~following tofactors: ~~sell~~term ~~ARS~~of ~~to UBS affiliates during~~ the ~~period from June 30~~agreement, ~~2010 to July 2, 2012 for a~~the ~~price~~availability ~~equal~~ to ~~par~~borrow ~~value. In~~against ~~accepting~~ the ~~Agreement~~ARS, the ~~Company~~creditworthiness ~~granted~~ of UBS ~~the~~and ~~authority~~current market tointerest ~~sell~~rates. orBased ~~auction~~on the ~~ARS~~valuation atperformed, ~~par~~the atCompany ~~any~~concluded ~~time up until the~~that ~~expiration~~the ~~date~~fair value of the ~~Agreement~~put ~~and~~option ~~released~~as ~~UBS~~of ~~from~~December 31, ~~any~~2009 ~~claims~~and ~~relating to~~March 31, ~~the~~2010 ~~marketing~~was $4,345 and ~~sale~~$3,280, ~~of ARS~~respectively. ~~UBS~~Accordingly, ~~obligations under~~ the ~~Agreement~~decrease ~~are~~in ~~not~~fair ~~secured~~value byof ~~its~~$1,065 ~~assets~~for ~~and~~the dothree ~~not~~months ~~require~~ended ~~UBS~~March 31, to2010 ~~obtain~~was recorded ~~any~~in ~~financing~~the ~~to support~~Company’s ~~its~~accompanying ~~performance~~unaudited ~~obligations~~condensed ~~under~~consolidated statements ~~the~~of ~~Agreement~~income. ~~UBS~~ ~~has disclaimed~~As ~~any~~of ~~assurance~~March 31, ~~that~~2010, it ~~will~~remained ~~have~~the ~~sufficient~~Company’s intent ~~financial resources~~ to ~~satisfy~~ ~~its~~sell ~~obligations~~the ~~under~~ARS ~~the~~on ~~Agreement. If~~June 30, ~~UBS~~2010 ~~has~~in ~~insufficient funding~~accordance towith ~~buy~~its ~~back~~rights under the ~~ARS~~settlement agreement and, accordingly, the ~~auction~~Company ~~process~~classifies ~~continues~~the fair tovalue ~~fail,~~of the ~~Company~~ ~~may~~“securities ~~incur~~settlement ~~further~~agreement” ~~losses~~as oncurrent assets in the accompanying ~~carrying~~unaudited ~~value~~condensed ofconsolidated ~~the~~balance ~~ARS~~sheets.

~~The~~Refer Company performed a fair value calculation of these ARS as of December 31, 2008 and September 30, 2009. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in the Company continuing to ~~hold~~Note ~~these~~15 securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for ~~the~~further ~~securities.~~discussion Based upon the valuation performed, the Company concluded that the fair value of these ARS at December 31, 2008 was $18,022, a decline of $6,028 from par value. Since the Company’s signed Agreement with UBS indicates that the Company intends to sell the ARS to UBS affiliates before their stated maturity dates under the terms of the ARS, the decline in fair value is deemed other-than-temporary. Accordingly, the Company recorded a loss on ~~these~~Fair ~~securities~~Value ~~of $6,028 in the condensed consolidated statement of income for the year ended December 31, 2008 as it was deemed to be other-than-temporary~~Measurements.

158. Goodwill and Intangible Assets

Intangible assets that have indefinite lives are not amortized while intangible assets that have finite lives are amortized over their useful lives. Both goodwill and intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable.

The goodwill resulting from acquisitions is reviewed for impairment on an annual basis. Consistent with prior years, the Company will conduct its annual impairment test of goodwill during the fourth quarter of 2010. For the three months ended March 31, 2010, there have been no changes to the goodwill balance and there have been no impairment indicators that would lead the Company to write down an asset.

Intangible assets consist of the following:

		As of December 31, 2009				As of March 31, 2010
Description	Estimated Useful Life	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Developed technology and know-how	5-15 years	$	21,447	$	3,604	$	21,447	$	4,288
Customer relationships	5-18 years	22,190		2,574		22,190		3,087
Non-compete agreements	2-3 years	610		438		610		464
Trade name	1-8 years	3,140		396		3,140		563
In process research and development	8 years	886		—		886		—
Customer backlog	3 years	720		320		720		380
Total		$	48,993	$	7,332	$	48,993	$	8,782

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AsAmortization ofexpense ~~September 30,~~related ~~2009, the Company concluded that the fair value of these ARS increased~~ to ~~$18,877,~~intangible ~~and~~assets ~~therefore, recorded the change in fair value of these securities from December 31, 2008 of $855 in the accompanying unaudited condensed consolidated statement of income~~ for the ~~nine months ended September 30, 2009. During the~~ three months ended ~~September~~March 3031, 2009 ~~the~~and ~~fair~~2010 ~~value~~was ~~of these ARS increased~~ $~~441~~761 and therefore, the Company recorded the change in fair value of these securities in the accompanying unaudited condensed consolidated statement of income for the three months ended September 30, 2009. During the nine months ended September 30, 2009, $~~150 of the Company’s ARS were called by the respective issuers at par value. As of September 30~~1, ~~2009~~450, ~~it remained the Company’s intent to sell the ARS on June 30, 2010 in accordance with its rights under the Agreement~~respectively. ~~Accordingly, the ARS were reclassified from long-term investments to short-term investments in the accompanying unaudited condensed consolidated balance sheets.~~

Fair value of the Company’s put option was determined using a discounted cash flow method, which considered the following factors: term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, the Company concluded that the fair value of the put option was $5,322 as of December 31, 2008. Accordingly, a gain of $5,322 was recorded in the consolidated statement of income for the year ended December 31, 2008 with a corresponding long term asset, “securities settlement agreement”, in the consolidated balance sheet at December 31, 2008. Based on the valuation performed as of September 30, 2009 the Company concluded that the fair market value of the securities settlement agreement was $4,838, resulting in a decrease in fair value of $498 and $484 in the Company’s accompanying unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2009, respectively. As of September 30, 2009, it remained the Company’s intent to sell the ARS on June 30, 2010 in accordance with its rights under the settlement agreement and, accordingly, the Company reclassified the fair value of the “securities settlement agreement” from long-term-assets to current assets in the accompanying unaudited condensed consolidated balance sheets.

Refer to Note 18 for further discussion on the adoption of accounting pronouncements surrounding Fair Value Measurements.

9. Goodwill and Intangible Assets

Goodwill and intangible assets that have indefinite lives are not amortized but are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Intangible assets that have finite lives are amortized over their useful lives.

The goodwill resulting from acquisitions is reviewed for impairment on an annual basis. Consistent with prior years, the Company will conduct its annual impairment test of goodwill during the fourth quarter of 2009. For the nine months ended September 30, 2009, there have been no impairment indicators that would lead the Company to write down an asset.

A rollforward of the net carrying amount of goodwill is as follows:

	Amount
Balance as of December 31, 2008	$	39,125
Purchase price adjustments associated with the acquisition of Clarix	470
Increase associated with the acquisition of Waban (Note 5)	7,797
Increase associated with the acquisition of Maaguzi (Note 5)	6,271
Increase associated with the acquisition of Covance IVRS/IWRS (Note 5)	5,778
Balance as of September 30, 2009	$	59,441

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Finite-lived intangible assets consist of the following:

		As of December 31, 2008				As of September 30, 2009
Description	Estimated Useful Life	Gross Carrying Value		Accumulated Amortization		Gross Carrying Value		Accumulated Amortization
Developed technology and know-how	5-15 years	$	15,460	$	1,743	$	21,447	$	3,103
Customer relationships	5-20 years	10,010		1,309		20,978		2,143
Non-compete agreements	2-3 years	610		335		610		412
Tradename (1)	1-8 years	300		157		1,323		239
In process research and development	8 years	—		—		2,087		—
Customer backlog	3 years	720		80		720		260
Total		$	27,100	$	3,624	$	47,165	$	6,157

(1) In connection with the acquisition of Clarix LLC (“Clarix”), the Company identified certain acquired intangible assets which were determined to have an indefinite life. The assets, which relate to the tradename of Clarix, totaled $4,110.

Amortization expense related to intangible assets for the three months ended September 30, 2008 and 2009 was $565 and $937, respectively, and $1,075 and $2,534 for the nine months ended September 30, 2008 and 2009, respectively.

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

Year ended December 31,	Amount
2009 (nine months ended December 31, 2009)	$	1,070
2010 (nine months ended December 31, 2010)	$	4,158
2010	5,253
2011	4,987
2011	4,604
2012	4,914
2012	4,532
2013	4,543
2013	4,274
2014	4,039
2014 and thereafter	21,275
2015 and thereafter	17,570
Total	$	4140,~~008~~211

109. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

	As of December 31,		As of ~~September~~March 3031,
	2008		2009
	2009		2010
Accrued payroll and related benefits	$	1417,~~108~~278	$	1510,~~692~~244
Accrued royalties	1,~~839~~867		~~1,858~~748
Loss on foreign exchange contracts	1,059		46
Accrued outside contractors	2,013		1,621
Lease exit costs	527		—
Leasehold incentive obligation (1)	956		1,002
Accrued other expenses	5,~~153~~892		65,~~373~~521
Total	$	2228,~~686~~006	$	2319,~~969~~136

11(1) In conjunction with the February 2008 lease agreement (see Note 10) the Company was reimbursed for leasehold improvements totaling $8,104. ~~Restricted~~ In conjunction ~~Cash~~with the August 2009 lease agreement (see Note 10), the Company was reimbursed for leasehold improvements totaling $2,163, of which $1,640 was received in 2009 and $523 received in 2010. Both leasehold improvements are recognized in property and equipment in the accompanying condensed consolidated balance sheets, with the corresponding reimbursement recognized as “accrued expenses and other current liabilities” and “other long-term liabilities” on the unaudited condensed consolidated balance sheets. The amount of the incentive is being amortized on a straight-line basis over the lease term as a reduction of rental expense and commenced at the beginning of occupancy. The leasehold improvements in property and equipment will be amortized over the shorter of the lease term or the estimated useful life of the asset. The Company amortized the leasehold incentive obligation as a reduction to rent expense of $198 and $247 in the three months ended March 31, 2009 and 2010, respectively.

~~As of December 31, 2008, the Company had a $500 collateral obligation for its prior corporate headquarters facility lease, which was secured by a certificate of deposit~~10. ~~The certificate of deposit was classified as “Restricted cash~~ Commitments, ~~current portion” in the accompanying unaudited condensed consolidated~~Contingencies ~~balance sheet. In connection with the relocation of the Company’s corporate headquarters, the $500 collateral obligation was terminated~~ and, ~~as such, this amount is no longer classified as “~~Restricted ~~cash, current portion” as of September 30, 2009.~~Cash

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In connection with the signing of a lease on February 13, 2008 to secure office space for the Company’s new corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts, the Company deposited with the landlord an unconditional, irrevocable letter of credit in the landlord’s favor in the amount of $962, secured by a certificate of deposit. The certificate of deposit has been classified as “Restricted cash, net of current portion” in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2008 and September 30, 2009. See Note 12 for further discussion regarding this lease.

12. Commitments and Contingencies

From time to time and in the ordinary course of business, the Company is subject to various claims, charges and litigation. Intellectual property disputes often have a risk of injunctive relief which, if imposed against the Company, could materially and adversely affect its financial condition or results of operations. From time to time, third parties have asserted and may in the future assert intellectual property rights to technologies that are important to the Company’s business and have demanded and may in the future demand that the Company license their technology. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to the Company, which could materially and adversely affect its financial condition or results of operations, the Company does not believe that it is currently a party to any material legal proceedings.

On ~~August~~ April 1720, ~~2009~~2010, ~~the~~ ~~Company entered into~~ a ~~lease (“Clarix Lease”) with KBS Five Tower Bridge~~lawsuit, ~~L.L.C.~~ toSelma ~~secure~~Ehrlich et ~~office space for the Company’s Interactive Response Technology business operations at 300 Barr Harbor Drive, West Conshocken, Pennsylvania~~al. ~~The~~ ~~commencement date for occupancy under the Clarix Lease was September 2009~~v. ~~The~~ ~~Clarix~~Phase ~~Lease~~Forward ~~provides for the rental of 44~~Incorporated,~~907~~ ~~square~~et ~~feet of space and has an initial term of 10 years and one month~~al. ~~The Company can~~, ~~subject~~Civ. ~~to certain conditions, extend this term by exercising~~A. ~~up to two consecutive five-year options~~No. ~~The~~10-1463, ~~annual~~was ~~rent~~filed ~~under~~in the ~~Clarix~~Superior ~~Lease~~Court for ~~the~~Middlesex ~~first year is $1~~County,~~325, or~~ ~~approximately~~Massachusetts ~~$110~~against ~~per~~the ~~month~~Company, ~~with~~the ~~annual~~members ~~escalations~~of inthe ~~rent~~Company’s ~~for~~board ~~each~~of ~~subsequent~~directors, ~~year~~Oracle ~~in the amount of $22~~Corporation, orand ~~fifty~~Pine ~~cents~~Acquisition ~~per rentable square foot~~Corporation. ~~The~~Refer ~~total~~to ~~base~~Note ~~rent~~17 ~~payable~~for infurther ~~the initial term is $14,258~~discussion.

~~On February~~ 13, 2008, the Company entered into a lease (“Lease”) with BP Fourth Avenue, L.L.C. (the “Landlord”) to secure office space for the Company’s current corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the Lease was December 2008. The lease for the Company’s previous corporate headquarters at 880 Winter Street in Waltham, Massachusetts expired in February 2009. The Lease provides for the rental of 165,129 square feet of space and has an initial term of 10 years and three months. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The Company is not required to pay any rent for the first three months of the initial Lease term. After the initial three months, the annual rent under the Lease for years one through five is $6,600, or approximately $548 per month. For years six through ten, the annual rent will be $7,200, or approximately $603 per month. The total base rent payable in the initial term is $69,100. In connection with the signing of the Lease, the Company has deposited with the Landlord an unconditional, irrevocable letter of credit in Landlord’s favor in the amount of $962.

13. Leasehold Incentive Obligation

In conjunction with the February 2008 lease agreement for the Company’s current headquarters, the landlord agreed to reimburse the Company for leasehold improvements totaling $8,104, which was received in 2008. The leasehold improvements are recognized in property and equipment on the consolidated balance sheet, with the corresponding reimbursement recognized as “leasehold incentive obligation” on the consolidated balance sheet. The amount of the incentive will be amortized on a straight-line basis over the lease term as a reduction of rental expense at the beginning of occupancy. The leasehold improvements in property and equipment will be amortized over the shorter of the lease term or the estimated useful life of the asset. The Company amortized the leasehold incentive obligation as a reduction to rent expense of $198 and 594 in the three and nine months ended September 30, 2009, respectively. In the three and nine months ended September 30, 2008 there were no amounts expensed relating to the amortization of the leasehold incentive obligation.

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~~14. Stockholders~~On August 17, 2009, the Company entered into a lease (“IRT Lease”) with KBS Five Tower Bridge, LLC to secure office space for the Company’s ~~Equity~~Phase Forward IRT business operations at 300 Barr Harbor Drive, West Conshohocken, Pennsylvania. The commencement date for occupancy under the IRT Lease was September 2009 with rent payments commencing in June 2010. The IRT Lease provides for the rental of 44,907 square feet of space and ~~Stock~~has an initial term of 10 years and one month. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five-~~Based~~year options. The annual rent under the IRT Lease for the first year is ~~Compensation~~$1,325, or approximately $110 per month, with annual escalations in rent for each subsequent year in the amount of $22, or fifty cents per rentable square foot. The total base rent payable in the initial term is $14,258.

On February 13, 2008, the Company entered into a lease (“Headquarters Lease”) with BP Fourth Avenue, LLC (the “Landlord”) to secure office space for the Company’s current corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the Headquarters Lease was December 2008. The lease for the Company’s previous corporate headquarters at 880 Winter Street in Waltham, Massachusetts expired in February 2009. The Headquarters Lease provides for the rental of 165,129 square feet of space and has an initial term of 10 years and three months. The Company can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The Company was not required to pay any rent for the first three months of the initial Headquarters Lease term. After the initial three months, the annual rent under the Headquarters Lease for years one through five is $6,600, or approximately $548 per month. For years six through ten, the annual rent will be $7,200, or approximately $603 per month. The total base rent payable in the initial term is $69,100. In connection with the signing of the Headquarters Lease, the Company has deposited with the Landlord an unconditional, irrevocable letter of credit in Landlord’s favor in the amount of $962, secured by a certificate of deposit. The certificate of deposit has been classified as “Restricted cash” in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2009 and March 31, 2010.

11. Stockholders’ Equity and Stock-Based Compensation

Stock-based Compensation Expense

For stock options issued under the Company’s 2004 Stock Option and Incentive Plan (the “2004 Plan”), the fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model, and an estimated forfeiture rate is used when calculating stock-based compensation expense for the period. For restricted stock awards and units issued under the Company’s 2004 Plan, the fair value of each grant is calculated based on the Company’s stock price on the date of grant and an estimated forfeiture rate when calculating stock-based compensation expense for the period. During the three months ended ~~September~~March 3031, ~~2008~~2009 and ~~2009~~2010, the Company recorded $2,~~292~~569 and $23,~~996 of~~501 of aggregate stock-based compensation expense, respectively~~, and $6,030 and $9,190 in the nine months ended September 30, 2008 and 2009, respectively~~. As of ~~September~~March 3031, ~~2009~~ 2010, there was $2627,~~546~~ 675 of unrecognized stock-based compensation expense related to stock-based awards that is expected to be recognized over a weighted average period of 2.3533 years.

The Company applied forfeiture rates derived from an analysis of its historical data in determining the expense recorded in the Company’s ~~consolidated~~unaudited condensed consolidated statements of income as follows:

	Three Months Ended September 30,				Nine months Ended September 30,
	Three Months Ended March 31,
	2008		2009		2008		2009
	2009		2010
Restricted stock units and awards	5.008	%	5.258	%	~~5.00~~	%	~~5.25~~	%
Service-based stock options	89.000	%	9.000	%	~~8.00~~	%	~~9.00~~	%
Milestone options	12.000	%	12.000	%	~~12.00~~	%	~~12.00~~	%

Common Stock

In the three ~~and nine~~ months ended ~~September~~March 3031, ~~2009~~ 2010, the Company issued 5430,~~148~~899 ~~and 292,427~~ shares of common stock, ~~respectively,~~ in connection with the exercise of stock options resulting in proceeds of $~~378 and $1,619, respectively~~132. In the three ~~and nine~~ months ended ~~September~~March 3031, ~~2009~~2010, the Company issued zero and 18,415 shares of common stock under the 2004 Employee Stock Purchase Plan resulting in proceeds of $0 and $241, respectively. In the three and nine months ended September 30, 2009, the Company released 34190,~~052~~195 ~~and 374,585~~ shares of ~~common stock, respectively, in connection with the vesting~~ of ~~restricted stock awards and units and retired 10,095 and 133,056 of these shares, respectively, to cover withholding taxes in the amount of $136 and $1,854, respectively.~~

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common stock in connection with the vesting of restricted stock awards and units and retired 65,755 of these shares to cover withholding taxes in the amount of $727.

Stock Option Activity

A summary of stock option activity under the Phase Forward Incorporated 1997 Stock Option Plan, the Phase Forward Incorporated 2004 Stock Option and Incentive Plan and the 2003 Non-Employee Director Stock Option Plan as of ~~September~~ 30March 31, ~~2009~~ 2010, and changes during the ~~nine~~three months ended ~~September~~March 31, 302010, ~~2009,~~ is as follows:

	Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (2)
Outstanding as of December 31, 2008	2,187,123		$	4.84	4.77
Outstanding as of December 31, 2009	1,816,004		$	4.70	3.69
Granted	—		—
Exercised	(~~292~~30,~~427~~899	)	54.5427			$	~~2,591~~275
Canceled	~~281~~(3,600	)	65.5300
Outstanding as of September 30, 2009	1,894,977		$	4.73	3.94	$	17,645
Outstanding as of March 31, 2010	1,781,505		$	4.71	3.49	$	14,932
Exercisable as of September 30, 2009	1,815,018		$	4.66	3.87	$	17,027
Exercisable as of March 31, 2010	1,701,755		$	4.63	3.42	$	14,390
Vested or expected to vest as of September 30, 2009 (1)	1,888,294		$	4.72	3.93	$	17,594
Vested or expected to vest as of March 31, 2010 (1)	1,776,107		$	4.70	3.48	$	14,895

(1)		The vested or expected to vest options at September 30, 2009 include both the vested options and the number of options expected to vest calculated after applying an estimated forfeiture rate to the unvested options.
(2)		The aggregate intrinsic value for shares outstanding, exercisable and vested is calculated based on the positive difference between the fair value per share of the Company’s common stock on September 30, 2009 of $14.04, or the date of exercise, as applicable, and the exercise price of the underlying options.

(1) The vested or expected to vest options at March 31, 2010 include both the vested options and the number of options expected to vest calculated after applying an estimated forfeiture rate to the unvested options.

(2) The aggregate intrinsic value for shares outstanding, exercisable and vested is calculated based on the positive difference between the fair value per share of the Company’s common stock on March 31, 2010 of $13.09, or the date of exercise, as applicable, and the exercise price of the underlying options.

Restricted Stock Awards and Unit Activity

A summary of activity related to restricted common stock awards and unit awards as of ~~September~~March 3031, ~~2009~~2010 and changes during the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, is as follows:

	Number of Shares		Market Price Per Share		Weighted Average Grant Date Fair Value Per Share		Weighted Average Remaining contractual Term (years)	Aggregate Intrinsic Value (2)
Unvested at December 31, 2008	2,139,964		$	10.85 - 23.20	$	15.66
Unvested at December 31, 2009	2,931,363		$	10.85 - 23.20	$	15.21
Granted	~~967~~165,~~294~~025		11.1093 - 15.7334
Vested	(~~374~~190,~~585~~195	)	1213.1223 - 1823.7220
Forfeited	(4526,~~687~~268	)	10.85 - 23.0320
Unvested at September 30, 2009	2,686,986		$	10.85 - 23.20	$	15.36	2.36	$	37,725
Unvested at March 31, 2010	2,879,925		$	10.85 - 23.20	$	14.92	2.46	$	37,698
Expected to be free of restrictions (1)	2,~~195~~284,~~589~~312		$	10.85 - 23.20	$	1514.3693	2.3546	$	3029,~~826~~902

(1)		The expected to be free of restrictions at September 30, 2009 was calculated by applying an estimated forfeiture rate to the unvested shares.
(2)		The aggregate intrinsic value is calculated based on the fair value per share of the Company’s common stock on September 30, 2009 of $14.04.

(1) The expected to be free of restrictions at March 31, 2010 was calculated by applying an estimated forfeiture rate to the unvested shares.

20(2) The aggregate intrinsic value is calculated based on the fair value per share of the Company’s common stock on March 31, 2010 of $13.09.

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~~15. Comprehensive~~Stock ~~Income~~Repurchase Program

~~The~~On November 3, 2009, the Company’s ~~other~~Board ~~comprehensive~~of ~~income~~Directors ~~relates~~authorized tothe ~~foreign~~repurchase ~~currency~~of ~~translation~~up to ~~adjustments~~$40,000 ~~and~~of ~~unrealized~~its ~~losses~~common onstock, ~~its~~par ~~ARS~~value ~~that~~$0.01 ~~were~~per ~~classified~~share, ~~as available-for-sale~~through ina ~~2008~~share repurchase program. ~~For~~ On February 12, 2010, the ~~three~~ ~~and~~Company’s ~~nine~~Board ~~months~~of ~~ended~~Directors increased ~~2009~~the ~~there~~amount ~~were~~available nounder ~~unrealized~~the ~~gains~~share orrepurchase ~~losses~~program onby an ~~ARS~~additional as$25,000. As authorized by the ~~Company~~program, ~~elected~~shares tomay ~~make~~be purchased in the open market or through privately negotiated transactions in a ~~one-time~~manner consistent ~~transfer~~with ofapplicable ~~the~~securities ~~ARS~~laws ~~from~~and regulations, including pursuant ~~available~~to a Rule 10b5-~~for-sale~~1 toplan ~~trading~~maintained ~~securities~~by ~~for~~the Company. For the ~~fiscal~~three ~~period~~months ended ~~December~~March 31, ~~2008. Accumulated~~2010 ~~other~~1,934,707 ~~comprehensive~~shares ~~income~~of isthe ~~presented~~Company’s ~~separately~~common ~~on the~~stock ~~balance~~had ~~sheet~~been purchased as ~~required~~part of this repurchase program at an average price of $13.42 per share

12. Comprehensive Income

The Company’s other comprehensive income relates to foreign currency translation adjustments and unrealized gains and losses on marketable securities. Accumulated other comprehensive income is presented separately on the balance sheet as required.

Comprehensive income consisted of the following:

	Three Months Ended September 30,						Nine months Ended September 30,
	Three Months Ended March 31,
	2008			2009			2008			2009
	2009			2010
Net income	$	34,~~441~~078		$	1,~~809~~933		$	~~11,137~~		$	~~8,114~~
Cumulative Translation adjustment	(1,138		)	245			(621		)	839
Unrealized gain/(loss) on marketable securities	—			286
Impairment of auction rate securities, net of tax (Note 8)	14			—			(782		)	—
Cumulative Translation adjustment	373			(712		)
Comprehensive income	$	24,~~317~~451		$	21,~~054~~507		$	~~9,734~~		$	~~8,953~~

1613. Forward Foreign Exchange Contracts and Foreign Currency Translation

The Company enters into transactions in currencies other than the U.S. dollar and holds cash in foreign currencies which expose the Company to transaction gains and losses as foreign currency exchange rates fluctuate against the U.S. dollar. The Company from time to time enters into forward foreign exchange contracts to hedge the foreign currency exposure of non-U.S. dollar denominated third-party and intercompany receivables and cash balances. The contracts, which relate to the British pound, euro, and the Japanese yen, generally have terms of one month. The Company settles forward foreign exchange contracts in cash. These hedges are deemed fair value hedges and have not been ~~designated~~ designated for hedge accounting. The gains or losses on the forward foreign ~~exchange~~ exchange contracts along with the associated losses and gains on the revaluation and settlement of the short-term intercompany balances, accounts receivable and cash balances are recorded in current operations in other income.

The following table summarizes the outstanding forward foreign exchange contracts held by the Company as of December 31, ~~2008~~2009 and ~~September~~March 3031, ~~2009~~2010:

		As of December 31, 2008			As of September 30, 2009
		As of December 31, 2009			As of March 31, 2010
Currency	Hedge Type	Local Currency Amount	Approximate U.S. Dollar Equivalent		Local Currency Amount	Approximate U.S. Dollar Equivalent
British pound	~~Buy~~Sale	1,~~200~~000	$	1,~~765~~612	—560	$	—847
British pound	Sale	—	—		1,800	2,873
Euro	Sale	3,200	4,571		3,200	4,339
Euro	Sale	7,500	10,454		2,000	2,924
			$	6,183		$	5,186
Japanese yen	Sale	45,000	477		—	—
			$	12,696		$	5,797

The financial ~~forward~~statements of the Company’s foreign ~~exchange~~subsidiaries ~~contracts~~are translated into U.S. dollars, which is the Company’s reporting currency. The functional currency of the Company’s subsidiaries in Australia, Belgium, France, India, Japan, Romania and the United Kingdom are the local currencies of those ~~short-term~~countries. Accordingly, the assets and ~~generally~~liabilities ~~mature~~of ~~within~~the ~~one~~Company’s ~~month~~foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts are translated using an average rate of ~~origination~~exchange during the period. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and cash accounts and accounts receivable denominated in non-functional currencies.

Foreign currency translation adjustments are accumulated as a component of other comprehensive income as a separate component of stockholders’ equity. Realized and unrealized foreign currency gains and losses, net of hedging, are accounted for in other income. The Company recorded foreign currency gains/(losses) of $~~(459)~~147 and $77(236) in the three months ended ~~September~~March 3031, ~~2008~~2009 and ~~2009~~2010. ~~The~~ ~~Company~~As ~~recorded~~of ~~foreign~~March 31, ~~currency~~2009 ~~gains/(losses)~~and of2010, the Company recorded $(~~444~~248) and $~~50 in~~31, ~~the~~respectively, ~~nine~~of ~~months~~foreign ~~ended~~exchange gains/(losses) in ~~September 30,~~other ~~2008~~income ~~and~~(expense) as ~~September 30,~~a ~~2009, respectively. The~~result ~~Company~~of ~~settles~~ outstanding forward foreign exchange contracts ~~in cash~~.

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1714. Income Taxes

The Company’s effective tax ~~rate~~rates for the three months ended ~~September~~March 3031, ~~2008~~2009 and ~~2009~~2010 ~~was~~were 3634%. ~~For~~and ~~the nine months ended September 30~~39%, ~~2008~~respectively. ~~and~~The ~~2009, the~~ Company’s effective tax ~~rates~~rate ~~were~~for ~~37% and 36%, respectively. In~~ the three months ended ~~September~~March 3031, ~~2008~~ ~~and~~2010 ~~2009,~~is ~~the~~higher ~~Company’s~~than the effective tax rate ~~was~~for ~~lower~~the ~~than its statutory~~three ~~rate~~months ofended ~~37%~~March 31, ~~primarily~~2009 principally due to the ~~tax~~benefit ~~benefits~~derived ~~related~~in to the ~~sale of incentive~~ ~~stock~~prior ~~options~~year ~~within~~from the ~~period. In~~federal ~~the nine~~research ~~months~~and ~~ended~~development ~~September 30,~~tax ~~2009,~~credit. The ~~the~~federal ~~Company’s~~research ~~effective~~and ~~tax~~development ~~rate was~~tax ~~lower~~credit ~~than~~expired ~~its~~effective ~~statutory~~December 31, ~~rate~~2009 ofand, ~~37%~~as ~~primarily~~such, ~~due to~~ the ~~release~~Company ~~of a portion~~has ofnot ~~its~~forecasted ~~unrecognized tax benefits as~~ a ~~result~~current oftax ~~the~~benefit ~~closing~~for ofthis aitem ~~statute of limitation~~ in ~~a foreign tax jurisdiction~~2010.

As of ~~September~~March 3031, ~~2009~~2010, the Company had a liability of $1,~~524~~535 for net unrecognized tax benefits, all of which would favorably impact the Company’s effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of ~~September~~March 3031, ~~2009~~2010, the Company had approximately $~~51 and~~12 and $407, respectively, of accrued interest and penalties related to unrecognized tax benefits. The Company anticipates a reduction of approximately $~~291~~81 to the amount of unrecognized tax benefits over the next twelve months associated with lapsing statutes of limitations. The unrecognized tax liability of $1,~~524~~ 535 and accrued interest and penalties of $9119 are classified as other long-term liabilities on the unaudited condensed consolidated balance sheet.

1815. Fair Value Measurements

Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The Company uses valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

· Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

· Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

· Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

22The following table sets forth the Company’s financial instruments carried at fair value and using the lowest level of input as of March 31, 2010:

	Quoted Prices		Significant Other		Significant
	in Active Markets		Observable		Unobservable
	for Identical Items		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total

Assets:

Money market funds	$	53,290	$	—	$	—	$	53,290
Restricted cash	982		—		—		982
Total cash equivalents and restricted cash	$	54,272	$	—	$	—	$	54,272

U.S. agency notes (2)	$	—	$	27,724	$	—	$	27,724
Corporate bonds (2)	—		30,493		—		30,493
Securities settlement agreement (1)	—		—		3,280		3,280
Auction rate securities (1)	—		—		18,232		18,232
Total short-term investments	$	—	$	58,217	$	21,512	$	79,729

Total Assets	$	54,272	$	58,217	$	21,512	$	134,001

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(1) The ~~following~~ ~~table~~Company’s ~~sets~~investments ~~forth~~in ARS and the ~~Company’s~~securities settlement ~~financial~~agreement ~~instruments~~with ~~carried~~UBS atare ~~fair~~classified within Level 3 because there ~~value~~are currently no active markets for ARS and ~~using~~the Company is unable to obtain independent valuations from market sources. Therefore, the ~~lowest~~ARS ~~level~~were ofprimarily valued ~~input~~based ason an income approach using an estimate of ~~September 30~~future cash flows. For additional information regarding ARS, ~~2009:~~see Note 7.

	Quoted Prices		Significant Other		Significant
	in Active Markets		Observable		Unobservable
	for Identical Items		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Money market funds	$	30,742	$	—	$	—	$	30,742
Restricted cash	962		—		—		962
Total cash equivalents and restricted cash	$	31,704	$	—	$	—	$	31,704
U.S. agency notes	$	—	$	21,979	$	—	$	21,979
Corporate bonds	—		18,634		—		18,634
Securities settlement agreement (1)	—		—		4,838		4,838
Auction rate securities (1)	—		—		18,877		18,877
Total short-term investments	$	—	$	40,613	$	23,715	$	64,328
U.S. agency notes	$	—	$	15,827	$	—	$	15,827
Corporate bonds	—		18,898		—		18,898
Total Long-term investments	$	—	$	34,725	$	—	$	34,725
Total Assets	$	31,704	$	75,338	$	23,715	$	130,757

(2) Fair value for Level 2 assets was determined using quoted market prices for similar assets. For the three months ended March 31, 2010 the Company’s Level 2 transaction activity included $10,750 of purchases, $2,000 of sales, $16,875 of maturities and $8,000 of settlements.

~~(1)~~ The following ~~Company’s~~table ~~investments~~sets inforth ~~ARS~~a ~~and~~summary ~~the~~of ~~securities~~changes ~~settlement~~in ~~agreement~~the ~~with~~fair ~~UBS~~value ~~are~~of ~~classified~~the Company’s ~~within~~ Level 3 ~~because~~financial ~~there~~assets ~~are currently no active markets~~ for ~~ARS and~~ the ~~Company~~three ismonths ~~unable~~ended ~~to obtain independent valuations from market sources. Therefore~~March 31, ~~the ARS were primarily valued based on an income approach using an estimate of future cash flows. For additional information regarding ARS, see Note 8.~~ 2010:

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 financial assets for the nine months ended September 30, 2009:

	Level 3 Financial
	Assets
Balance, beginning of period	$	23,715
Transfers in (out) of Level 3	—
Purchase	—
Sales	—
Issuance	—
Settlement	(2,250		)
Realized gains/(losses)	—
Unrealized gains/(losses) on securities held at period end	47
Balance, end of period	$	21,512

	Level 3 Financial
	Assets
Balance, beginning of period	$	23,344
Transfers in (out) of Level 3	—
Sales	(150		)
Realized gains/(losses)	—
Unrealized gains/(losses) on securities held at period end	521
Balance, end of period	$	23,715

The Company has also adopted the provisions of FASB ASC No. 825, Financial Instruments, in the first quarter of 2008 which allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the year-ended December 31, 2009. To date, the Company has only elected the fair value option for the put option related to the Company’s ARS that was recorded in conjunction with a settlement agreement with UBS as more fully described in Note 7.

~~Realized gains~~16. Recently ~~and~~Issued ~~losses from sales of the Company’s investments are included in “Other~~Accounting ~~income” and unrealized gains and losses are included as a separate component of equity, net of tax, unless the loss is determined to be other-than-temporary.~~Pronouncements

~~The~~On January 1, ~~Company~~2010, ~~measures~~the ~~eligible~~Company ~~assets~~adopted ~~and~~the ~~liabilities~~guidance atof ~~fair~~ASU ~~value~~No. 2009-13, ~~with changes in~~Revenue ~~value~~Recognition ~~recognized~~(Topic in605): ~~earnings.~~Multiple-Deliverable Revenue ~~Fair~~Arrangements, ~~value~~which ~~treatment~~was ~~may~~ratified beby ~~elected~~the ~~either~~FASB ~~upon~~Emerging Issues ~~initial~~Task ~~recognition~~Force ofon anSeptember 23, ~~eligible~~2009. ~~asset~~ASU orNo. 2009-13 addresses ~~liability~~the ~~or,~~accounting for anmultiple-deliverable ~~existing~~arrangements ~~asset~~to enable vendors to account for products or ~~liability,~~services if(deliverables) anseparately ~~event~~rather than ~~triggers~~as a ~~new~~combined ~~basis~~unit. ofThis ~~accounting.~~guidance ~~The~~establishes ~~Company~~a ~~did~~selling price hierarchy ~~not~~for ~~elect~~determining tothe ~~re-measure~~selling ~~any~~price of ~~its~~a ~~existing~~deliverable, ~~financial~~which ~~assets~~is orbased ~~liabilities,~~on: (a) vendor-specific ~~and~~objective ~~did~~evidence; ~~not~~(b) third-party ~~elect~~evidence; ~~the~~or ~~fair~~(c) estimates. ~~value~~This guidance ~~option~~also ~~for~~eliminates ~~any~~the ~~financial~~residual ~~assets~~method of allocation and requires that ~~liabilities~~arrangement ~~transacted~~consideration inbe allocated at the ~~year-ended~~inception ~~December 31,~~of ~~2008,~~the ~~except~~arrangement ~~for~~to all deliverables using the relative selling price method. In addition, this ~~put~~guidance ~~option~~significantly expands required disclosures related to ~~the~~a ~~Company~~vendor’s multiple-deliverable ~~ARS~~revenue ~~that~~arrangements. The impact of this standard was ~~recorded~~not inmaterial ~~conjunction~~to ~~with~~the ~~a settlement~~Company’s ~~agreement~~reported ~~with~~results ~~UBS~~of asoperations for ~~more~~the ~~fully~~three ~~described~~months inended ~~Note~~March 831, 2010.

23On January 21, 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires reporting entities to provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy established by FASB ASC 820, Fair Value Measurements. During the three months ended March 31, 2010 the Company had no movements among Levels 1 and 2 of the three-tier fair value hierarchy. Entities will also need to provide a reconciliation of purchases, sales, issuance, and settlements of anything valued with a Level 3 method, which is used to price the hardest to value instruments. The new disclosures and clarifications of existing disclosures were adopted on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Company’s consolidated financial position and results of operation. Disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company elected to adopt this portion of ASU No. 2010-06 on January 1, 2010. Adoption of this portion of ASU No. 2010-06 did not have an impact on the Company’s consolidated financial position and results of operation.

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1917. ~~Recently~~ Subsequent ~~Issued Accounting Pronouncements~~Event

~~Newly~~Merger Agreement ~~Adopted~~with ~~Accounting Pronouncements~~Oracle (Non-recognized subsequent event)

~~In December~~On April ~~2007~~15, ~~the~~ ~~FASB~~2010, ~~issued~~the ~~SFAS~~Company, ~~No. 141~~Oracle ~~(Revised 2007)~~Corporation, ~~Business~~a ~~Combinations~~Delaware corporation (“~~SFAS No. 141(R)~~Oracle”) ~~(subsequently~~ ~~this~~and ~~standard~~Pine ~~has~~Acquisition ~~been~~Corporation, ~~codified~~a ~~under~~Delaware ~~FASB~~corporation ~~ASC Topic 805), which requires~~and anwholly-owned ~~acquirer~~subsidiary toof ~~recognize~~Oracle ~~the~~(“Merger ~~assets acquired~~Sub”), ~~the~~entered ~~liabilities~~into ~~assumed,~~an ~~and~~Agreement ~~any~~and ~~noncontrolling~~Plan ~~interest~~of inMerger (“the ~~acquiree~~Merger atAgreement”), ~~the~~pursuant ~~acquisition~~to ~~date~~which, ~~measured~~subject atto ~~their~~satisfaction ~~fair~~or ~~values~~waiver as of ~~that date, with limited exceptions. This method replaces~~ the ~~cost-allocation~~conditions ~~method~~therein, ~~which~~Merger ~~required~~Sub ~~the~~will ~~cost~~merge ~~of an acquisition~~with toand beinto ~~allocated~~the toCompany (the ~~individual~~“Merger”) ~~assets~~with ~~acquired and liabilities assumed based on their estimated fair values. The revised authoritative guidance will now require~~ the ~~following:~~Company ~~acquisition~~surviving ~~costs to be expensed~~ as ~~incurred, restructuring costs associated with~~ a ~~business combination must be expensed~~ ~~prior~~wholly-owned tosubsidiary ~~the~~of ~~acquisition date and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense~~Oracle. ~~The~~ ~~revised~~A ~~authoritative~~description ~~guidance~~of ~~applies prospectively to business combinations for which~~ the ~~acquisition~~Merger ~~date~~Agreement is ~~on or~~ ~~after~~contained ~~the~~in ~~beginning of~~ the ~~first~~Company’s ~~annual~~Current ~~reporting~~Report ~~period beginning~~ on ~~or after December~~Form ~~15, 2008,~~8-K ~~which~~filed iswith the ~~Company’s 2009 fiscal year. Earlier adoption is~~SEC ~~prohibited. The~~on ~~adoption of this revised authoritative guidance~~April ~~has~~16, 2010, and ~~is expected to have~~ a ~~significant~~copy ~~impact~~of on the ~~Company’s~~Merger ~~accounting~~Agreement ~~for~~is ~~prior~~attached ~~and~~thereto as ~~future acquisitions~~Exhibit 2.1.

~~In April 2009, the~~Shareholder ~~FASB~~Litigation ~~issued FASB Staff Position No. 141~~(R)Non-1recognized ~~(“FSP~~subsequent ~~FAS 141(R~~event)-1”), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (subsequently this standard has been codified under FASB ASC Topic 805). The revised authoritative guidance provides additional clarification on the initial recognition and measurement of assets acquired and liabilities assumed in a business combination that arise from contingencies. The revised authoritative guidance is effective for all fiscal years beginning on or after December 15, 2008. To date, the revised authoritative guidance has not had a significant impact on the accounting for any businesses acquired. However, it may have a material impact on how we account for future acquisitions.

In On April ~~2009~~20, ~~the FASB~~2010, ~~issued~~a ~~FASB~~lawsuit, ~~Staff~~Selma ~~Position~~Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. ~~107~~10-11463, ~~(“FSP~~was ~~FAS~~filed ~~107-1”)~~in ~~and~~the ~~APB~~Superior ~~28-1~~Court for Middlesex County, ~~(“APB~~Massachusetts ~~28-1”)~~against the Company, ~~Interim~~the ~~Disclosures~~members ~~about~~of ~~Fair Value~~the Company’s board of directors, ~~Financial~~Oracle ~~Instruments~~Corporation, ~~(subsequently~~and ~~these~~Pine ~~standards~~Acquisition ~~have~~Corporation. The action, brought by plaintiffs who are ~~been~~purported ~~codified~~stockholders ~~under~~of ~~FASB~~the ~~ASC~~Company, ~~Topic~~individually ~~825)~~and ~~which~~on ~~provide~~behalf ~~additional~~of ~~application~~a ~~guidance~~putative ~~and~~class ~~enhance~~of ~~disclosures~~stockholders, ~~regarding~~alleges ~~fair~~that ~~value~~the ~~measurements~~board ~~and~~breached ~~impairments~~fiduciary ofduties, and ~~securities.~~that ~~The~~the ~~guidance~~Company isand ~~effective~~Oracle ~~for~~aided ~~interim~~and ~~reporting periods~~abetted ~~ending~~the ~~after~~purported ~~June 15~~breaches, ~~2009.~~in connection with the proposed Merger. The complaint ~~adoption~~seeks equitable relief, including, among other things, to enjoin consummation of ~~this~~the ~~guidance~~proposed ~~did~~Merger, ~~not~~rescission of the Merger Agreement and an ~~have~~award aof ~~material~~all ~~effect~~costs onof the ~~Company~~action, including reasonable attorneys’s ~~consolidated~~fees. The ~~financial~~Company ~~position~~denies the allegations in the complaint, and intends to vigorously defend the lawsuit. ~~results~~However, ofthere ~~operations~~can be no assurance that the Company or the other defendants will be successful in such defense.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB Staff Position No. 124-2 (“FSP FAS 124-2”), Recognition and Presentation of Other-Than-Temporary Impairments (subsequently these standards have been codified under FASB ASC Topic 320), which amends the other-than-temporary impairment guidance for debt and equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

In April 2009, the FASB issued FSP Issue No. FAS No. 157-4 (“FSP FAS 157-4”), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly. FSP FAS No. 157-4, (subsequently these standards have been codified under FASB ASC Topic 820), which provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance provides further assistance in estimating fair value. The guidance is effective in reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP: authoritative and nonauthoritative accounting literature. Effective September 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement applies beginning in the third quarter of 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.

Recent Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. The Company is currently evaluating the effect that adoption of this update will have, if any, on the Company’s financial position or results of operation.

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20. Subsequent Event

Common Stock Repurchase (Non-recognized subsequent event)

On November 3, 2009, the Company’s board of directors authorized the repurchase of up to $40,000 of its common stock, par value $0.01 per share, through a share repurchase program. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by the Company. This share repurchase program does not obligate the Company to acquire any specific number of shares and may be extended, suspended or discontinued at any time. All repurchases are expected to be funded from the Company’s cash and investment balances. While the Company’s board of directors has approved the share purchasing guidelines, the timing of the repurchases and the exact number of shares of common stock to be purchased will be determined at the Company management’s discretion, and will depend upon on market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. The repurchase program is currently scheduled to terminate on November 9, 2010.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009, which has been filed with the Securities and Exchange Commission (“SEC”).

Overview

Phase Forward Incorporated is a provider of ~~integrated~~an Integrated Clinical Research Suite, or ICRS, of enterprise-level software products, services and hosted solutions for use in our customers’ global clinical trial and drug safety monitoring activities. Our customers include pharmaceutical, biotechnology and medical device companies, as well as academic institutions, governmental regulatory agencies, contract research organizations, or CROs, and other entities engaged in clinical trial and drug safety monitoring activities. By automating essential elements of the clinical trial and drug safety monitoring processes, we believe our products allow our customers to accelerate the market introduction of new medical therapies and corresponding revenues, reduce overall research and development expenditures, enhance existing data quality control efforts, increase drug safety compliance and reduce clinical and economic risk.

Acquisitions

From time to time we have expanded our product and service offerings through the acquisition of other businesses or technologies; transactions occurring within the last year are described below.

Covance IVRS/IWRS

On August 20, 2009, we acquired the Interactive Voice and Web Response Services IVRS/IWRS business (“Covance”) of Covance Inc. The aggregate purchase price was $10.0 million in cash. The acquisition will be accounted for as a purchase with all of the assets acquired and liabilities assumed in the transaction recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred. Accordingly, the results of the acquired Covance IVRS/IWRS business have been included in our consolidated financial statements since the date of acquisition.

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Maaguzi

On July 27, 2009, we acquired Maaguzi LLC (“Maaguzi”), a privately-held innovative provider of a Web-based product called OutcomeLogix, which is an electronic patient reported outcomes (ePRO) and late phase solution. The aggregate purchase price was $11.0 million in cash. The acquisition of Maaguzi extends our integrated clinical research suite and marks our entry into the ePRO and observational studies markets. The acquisition of Maaguzi will be accounted for as a purchase with all of the assets acquired and liabilities assumed in the transaction recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred. Accordingly, the results of Maaguzi have been included in our consolidated financial statements since the date of acquisition.

Waban

On April 22, 2009, we acquired all of the outstanding common stock of Waban Software, Inc. (“Waban”), a provider of platform solutions for the automation and compliance of clinical data analysis. Waban’s Statistical Computing Environment and Clinical Data Repository (SCE/CDR) solutions provide automation, traceability and control of the key activities involved in the integration, analysis and reporting on clinical trial data. The aggregate purchase price was $13.8 million in cash. We acquired the technology of Waban to allow us to penetrate the market for statistical computing and clinical data repository solutions. The acquisition of Waban has been accounted for as a purchase with all of the assets acquired and liabilities assumed in the transaction recognized at their acquisition-date fair values, while transaction costs associated with the transaction are expensed as incurred. Accordingly, the results of Waban have been included in our consolidated financial statements since the date of acquisition.

Subsequent Event

On ~~November~~ 3April 15, ~~2009~~2010, ~~our~~we ~~board~~entered ofinto ~~directors~~an ~~authorized~~Agreement ~~the~~and ~~repurchase~~Plan of upMerger ~~to $40.0~~(the ~~million~~“Merger ofAgreement”) ~~our~~with ~~common~~Oracle ~~stock~~Corporation, ~~par~~a ~~value~~Delaware ~~$0.01~~corporation ~~per share, through a share~~(“Oracle”) ~~repurchase~~and ~~program.~~Pine AsAcquisition ~~authorized by the program~~Corporation, ~~shares may be purchased in the open market or through privately negotiated transactions in~~ a ~~manner consistent~~Delaware ~~with~~corporation ~~applicable securities laws~~ and ~~regulations, including pursuant to a Rule 10b5~~wholly-~~1 plan maintained by us. This share repurchase program does not~~owned ~~obligate~~subsidiary ~~us to acquire any specific number~~ of ~~shares~~Oracle ~~and~~(“Merger ~~may be extended~~Sub”), ~~suspended or~~pursuant ~~discontinued~~to atwhich, ~~any~~subject ~~time. All repurchases are expected~~ to ~~be funded from our~~satisfaction ~~cash~~or ~~and~~waiver ~~investment~~of ~~balances.~~the ~~While~~conditions ~~our~~therein, ~~board~~Merger ofSub ~~directors~~will ~~has~~merge ~~approved~~with us (the ~~share~~“Merger”) ~~purchase~~with ~~guidelines,~~ the ~~timing~~Company ofsurviving ~~the~~as ~~repurchase~~a ~~and~~wholly-owned ~~the~~subsidiary ~~exact~~of ~~number~~Oracle. ofA ~~shares~~description of ~~common~~the ~~stock~~Merger toAgreement beis ~~purchased~~contained ~~will~~in beour ~~determined~~Current atReport ~~our~~on ~~management’s~~Form 8-K ~~discretion,~~filed ~~and~~with ~~will~~the ~~depend~~SEC ~~upon~~ on ~~market conditions and other factors~~April 16, ~~including~~ ~~price~~2010, ~~corporate~~ and ~~regulatory~~a ~~requirements~~copy ~~and~~of ~~alternative investment~~the ~~opportunities.~~Merger ~~The repurchase program~~ Agreement is ~~currently~~attached ~~scheduled~~thereto ~~to terminate~~as ~~on November 9, 2010~~Exhibit 2.1.

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On April 20, 2010, a lawsuit, Selma Ehrlich et al. v. Phase Forward Incorporated, et al., Civ. A. No. 10-1463, was filed in the Superior Court for Middlesex County, Massachusetts against us, our board of directors, Oracle, and Pine Acquisition Corporation. The action, brought by plaintiffs who are purported stockholders of our Company, individually and on behalf of a putative class of stockholders, alleges that the board breached fiduciary duties, and that Oracle and Phase Forward aided and abetted the purported breaches, in connection with the proposed Merger. The complaint seeks equitable relief, including, among other things, to enjoin consummation of the proposed Merger, rescission of the Merger Agreement and an award of all costs of the action, including reasonable attorneys’ fees. We deny the allegations in the complaint, and intend to vigorously defend the lawsuit. However, there can be no assurance that we, or the other defendants, will be successful in such defense.

Sources of Revenues

We derive our revenues from software licenses and services of our ICRS products, which can be purchased on a stand-alone basis or bundled together. Our product line is comprised of four general categories that include the following software products:

· Electronic Data Capture (EDC)

· InForm, our Internet-based electronic data capture solution for collection and transmission of patient information in clinical trials;

· LabPas, our system for Phase I clinic automation; and

· OutcomeLogix, our electronic patient reported outcomes, or ePRO, and late phase solution for data capture which supports data entry via web interface and/or mobile interface for handheld devices, which we acquired as a result of the acquisition of Maaguzi, LLC in July 2009.

· Clinical Data Management

· Clintrial, our clinical data management solution; ~~and~~

26· WebSDM, our system for validating and reviewing clinical trial data represented in formats meeting industry standards, such as those established by the Clinical Data Interchange Standards Consortium, or CDISC; and

~~Table~~· Clinical Development Center, which includes our clinical data repository product for storing and managing clinical trials data and our statistical control environment, which we acquired as a result of ~~Contents~~the acquisition of Waban Software, Inc. in April 2009.

· Empirica Study, our system for validating and reviewing clinical trial data represented in formats meeting industry standards, such as those established by the Clinical Data Interchange Standards Consortium, or CDISC.

· Drug Safety

· Empirica Trace, our adverse event management solution for monitoring drug safety and reporting adverse events that occur during and after conclusion of the clinical trial process;

· Empirica Signal, our data mining and signal detection solution for post-marketing data; and

· Empirica Study (formerly known as CTSD), our signal detection solution for data from clinical trials.

· Interactive Response Technology (IRT)

· Phase Forward IRT (formerly known as Clarix), ~~our~~ our Web-integrated interactive response technology; and

~~· Covance IVRS/IWRS, our phone-integrated interactive response technology.~~20

· Clinical Data Analysis Systems

· Waban CDR, our controlled clinical data repository product for storing and managing clinical trials data (both data and metadata); and

· Waban SCE, our metadata-driven controlled clinical data repository product for automation and tracking of routine and repetitious statistical programming and analysis.

License revenues are derived principally from the sale of term licenses for our software products other than Clarix, OutcomeLogix and Covance IVRS/IWRS, which are presently available only on a hosted application basis. Service revenues are derived principally from our delivery of the hosted solution of our InForm, Clarix, Empirica Signal, CTSD, Empirica Study, OutcomeLogix and Covance IVRS/IWRS software products, and consulting services and customer support, including training, for all of our products. We generally recognize revenues ratably over the life of a license or service contract.

One customer, GlaxoSmithKline, accounted for approximately 12% of our total revenues in the three months ended September 30, 2008 and 12% of our total revenues in the nine months ended September 30, 2008. The same customer accounted for $863 or 2% of accounts receivable outstanding as of December 31, 2008. In the three and nine months ended September 30, 2009, no customer accounted for 10% or more of our total revenues for the period. Our top 20 customers accounted for approximately 62% and 60% of our total revenues, net of reimbursable out-of-pocket expenses, in the three months ended September 30, 2008 and 2009, respectively, and 63% and 61% of our total revenues, net of reimbursable out-of-pocket expenses, in the nine months ended September 30, 2008 and 2009, respectively.

License Revenues

We derive our license revenues principally from the sale of term licenses for the following software products: InForm, our Internet-based electronic data capture, or EDC, solution; Clintrial and Empirica Study, our clinical data management solutions; our drug safety solutions, including our Empirica Trace, Empirica Signal and CTSD products; our LabPas Phase I clinic automation solution; and our Waban CDR and Waban SCE products for clinical data analysis. Although each of our software solutions is available as a stand-alone enterprise application, we offer integrated enterprise solutions incorporating certain of our electronic data capture, data management and analysis, and drug safety products.

License revenues for our InForm electronic data capture software solution, either on a stand-alone or integrated basis, are determined primarily by the number, complexity and duration of the clinical trials and the number of participants in each clinical trial. License revenues for our Clintrial, Empirica Study, Empirica Trace, Empirica Signal, CTSD and LabPas software solutions are determined primarily by the number of users accessing the software solution.

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~~Except~~· Covance ~~as discussed below~~IVRS/IWRS, wea ~~enter~~legacy ~~into~~phone-integrated ~~software~~interactive ~~license agreements for our InForm,~~response ~~Clintrial~~technology, ~~and~~which ~~Empirica~~we ~~Trace products~~acquired ~~with~~from ~~terms generally of three to five years with payment terms generally annually in advance~~Covance, Inc. ~~License agreements for our other licensed products are generally annual or multi-year with payment terms generally annually~~ in ~~advance~~August 2009. ~~License revenues are recognized ratably over the duration of the software term license agreement, to the extent that amounts are fixed or determinable and collectable.~~

~~Following our acquisition of Clinsoft Corporation (“Clinsoft”) in August 2001, we began converting holders of Clinsoft perpetual software licenses to our software term license arrangements.~~ We ~~continue~~generally tooffer ~~sell additional perpetual licenses of these products in certain situations to~~ our existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. We recognize revenues on the perpetual licenses upon delivery of the software ~~when all other revenue recognition criteria are met. We continue to provide and charge for maintenance and support on our~~ products tounder ~~those customers who do not convert to our software~~ term ~~license~~enterprise ~~arrangements. We~~licenses ~~will~~or ~~continue~~as ~~our~~a ~~efforts~~hosted toapplication ~~convert~~solution ~~the~~delivered ~~remaining~~through ~~former~~a ~~Clinsoft~~standard ~~customer base to software term license arrangements~~Web-browser. ~~However, we anticipate that some~~ ~~customers~~The ~~will~~following ~~not~~table ~~convert~~details ~~and~~these ~~instead will continue to make annual customer support payments.~~offerings:

Service Revenues

	Available As:
Product	Term License	Hosted Application
Electronic Data Capture
InForm	Yes	Yes
LabPas	Yes	Yes
OutcomeLogix	No	Yes
Clinical Data Management
Clintrial	Yes	No
WebSDM	Yes	Yes
Clinical Development Center	Yes	Yes
Drug Safety
Empirica Trace	Yes	Yes
Empirica Signal	Yes	Yes
Empirica Study	Yes	Yes
Interactive Response Technology
Phase Forward IRT	No	Yes
Covance IVRS/IWRS (1)	No	Yes

~~Application~~(1) While ~~Hosting~~we ~~Services. In addition to making our software products~~have ~~other~~existing ~~than~~trials ~~Clarix,~~running ~~OutcomeLogix~~on ~~and~~the Covance IVRS/IWRS ~~available to customers through licenses~~system, we ~~offer~~do ~~our InForm,~~not ~~Empirica~~intend ~~Signal, CTSD~~to ~~and~~sell ~~Empirica~~this ~~Study~~offering ~~software~~or ~~as hosted~~implement ~~application~~any ~~solutions~~new ~~delivered~~trials ~~through~~for ause ~~standard Web-browser, with customer support and training services. Our Clarix, OutcomeLogix and Covance IVRS/IWRS solutions are presently available only~~ on athis ~~hosted application basis~~system. ~~Service revenues from application hosting services are derived principally from our InForm hosted solution.~~

~~Revenues~~In the three months ended March 31, 2009 and ~~resulting~~2010, ~~from~~no customer accounted for 10% or more of our total revenues for the period. Our ~~InForm~~top ~~and~~20 ~~OutcomeLogix~~customers accounted ~~hosting~~for ~~service~~approximately ~~consist~~64% and 58% of our total revenues, net of reimbursable out-of-pocket expenses, in the three ~~stages~~months ~~for~~ended ~~each~~March 31, ~~clinical~~2009 and 2010, ~~trial:~~respectively.

· First stage—trial and application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system;

· Second stage—application hosting and related support services; and

· Third stage—services required to close out, or lock, the database for the clinical trial.

Revenues resulting from the Clarix and Covance IVRS/IWRS hosting service also consist of three stages for each clinical trial:

· First stage—trial and application set up, including design and set up of the subject randomization and medication inventory management, installation and server configuration of the system;

· Second stage—application hosting and related support services; and

· Third stage—services required to close out, or lock, the clinical trial.

Services provided for the first and third stages of both InForm and Clarix are provided on a fixed fee basis depending upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. We recognize revenues from all stages of the hosting service ratably over the hosting period. Fees charged and costs incurred for the trial system design, set up and implementation are deferred until the start of the hosting period and are amortized and recognized ratably over the estimated hosting period. The deferred costs include direct costs related to the trial and application set up. Fees for the first and third stages of the services are billed based upon milestones. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Bundled into this revenue element are the revenues attributable to the software license used by the customer.

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In the event that an application hosting customer cancels a clinical trial and its related statement of work, all deferred revenues are recognized and all deferred set up costs are expensed. In addition, certain termination-related fees may be charged and if so, such fees are recognized in the period of termination.

Revenues resulting from hosting services for our Empirica Signal, CTSD and Empirica Study products consist of installation and server configuration, application hosting and related support services. Services for these offerings are charged monthly as a fixed fee. Revenues are recognized ratably over the period of the service.

In addition, application hosting service revenues include hosting services associated with term license customers and reimbursable out-of-pocket expenses.

Consulting Services. Consulting services include the design and documentation of the processes related to our customers’ use of our products and services in their clinical trials and safety monitoring activities. Consulting services also include project planning and management services, guidance on best practices in using our software products, data management and configuration services for data mining and reporting, as well as implementation services consisting of application architecture design, systems integration, installation and validation. Consulting services can be sold on a stand-alone basis or as part of a bundled arrangement. In some circumstances, we sell additional follow on consulting services to a customer at a later date even if the customer purchased consulting services at the time of the initial license purchase under a bundled arrangement. Revenues from consulting services included in either a multiple element software license agreement or in an application hosting agreement are recognized ratably over the term of the arrangement. The value of our consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The associated costs are expensed as incurred. We may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on either a time-and-materials basis or using the proportional performance method. If we are not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.

Customer Support. We have a multinational services organization to support our software products and hosted solutions worldwide. Customer support includes multilingual training services, telephone support and software maintenance. We bundle customer support in our software term licenses and allocate 10% of the value of the license to customer support revenues. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. We believe this rate is substantive and represents an amount we believe reasonable to be allocated. Our customer support revenues also consist of customer support fees paid by perpetual license customers. Customer support revenues are recognized ratably over the period of the customer support or term license agreement, with payment terms generally annually in advance.

Cost of Revenues and Operating Expenses

We allocate overhead expenses such as rent and occupancy charges and employee benefit costs to all departments based on headcount. As such, general overhead expenses are reflected in ~~costs~~cost of service revenues and in the sales and marketing, research and development, and general and administrative expense categories.

Costs of Revenues. Costs of license revenues consist primarily of the amortization of royalties paid for certain modules within our Clintrial software product as well as our InForm software product. In addition, costs of revenues include expense for the amortization of acquired technologies associated with ~~the~~ acquisitions ~~of Lincoln Technology, Inc~~. ~~(“Lincoln”) in 2005, Green Mountain Logic, Inc. (“Green Mountain”) in 2007, Clarix in 2008 and Waban and Maaguzi in 2009.~~ The costs of ~~license~~ license revenues vary based upon the mix of revenues from software licenses for ~~our~~ our products. We operate our service organization on a global basis as one ~~distinct~~ distinct unit, and do not segment costs for our various service revenue elements. These services include performing application hosting, consulting and ~~customer~~ customer support services. Costs for these services consist primarily of employee-related costs associated with these services, amortization of the deferred clinical trial set up costs, allocated overhead, outside contractors, royalties associated with providing customer support for use with the Clintrial and InForm software products and reimbursable out-of-pocket expenses. Costs of services also include hosting costs that primarily consist of of hosting facility fees and server depreciation and amortization of acquired technologies associated with the acquisition of Clarix and Maaguzi.

29The costs of service revenues vary based upon the number of employees in the service organization, the type of work performed, and royalties associated with revenues derived from providing customer support, as well as costs associated with the flexible use of outside contractors to support internal resources. We supplement the trial design and set up activity for our InForm, Phase Forward IRT and OutcomeLogix application hosting services through the use of outside contractors. This allows us to utilize outside contractors in those periods where trial design and set up activity is highest while reducing the use of outside contractors in those periods where trial activity lessens, allowing for a more flexible delivery model. The percentage of the services workforce represented by outside contractors varies from period to period depending on the volume of specific support required. The costs of service revenues is

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The costs of service revenues vary based upon the number of employees in the service organization, the type of work performed, and royalties associated with revenues derived from providing customer support, as well as costs associated with the flexible use of outside contractors to support internal resources. We supplement the trial design and set up activity for our InForm application hosting services through the use of outside contractors. This allows us to utilize outside contractors in those periods where trial design and set up activity is highest while reducing the use of outside contractors in those periods where trial activity lessens, allowing for a more flexible delivery model. The percentage of the services workforce represented by outside contractors varies from period to period depending on the volume of specific support required. The costs of service revenues is significantly higher as a percentage of revenues as compared to our costs of license revenues primarily due to the employee-related and outside contractor expenses associated with providing services.

Gross Margin. Our gross margin on license revenues varies based on the mix of royalty-bearing and non-royalty-bearing license revenues and the amount of amortization of acquired technologies. Our gross margin on service revenues varies primarily due to variations in the utilization levels of the professional service team and the timing of expense and revenue recognition under our service arrangements. In situations where the service revenues are recognized ratably over the software license term, our costs associated with delivery of the services are recognized as the services are performed, which is typically during the first 6 to 12 months of the contract period. Accordingly, our gross margin on service revenues will vary significantly over the life of a contract due to the timing, amount and type of service required in delivering certain projects. In addition, consolidated gross margin will vary depending upon the mix of license and service revenues.

Sales and Marketing. Sales and marketing expenses ~~consist~~ consist primarily of employee-related expenses, including travel, marketing ~~programs~~ programs which include product marketing expenses such as trade shows, workshops and seminars, corporate communications, other brand building and advertising, allocated overhead and the amortization of commissions. In addition, sales and marketing include expense for the amortization of intangible ~~acquired~~assets ~~technologies~~ associated with ~~the~~our ~~acquisition of Lincoln, Green Mountain, Clarix, Waban, Maaguzi and Covance IVRS/IWRS~~acquisitions. We expect that sales and marketing expenses will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available, but may fluctuate quarter over quarter due to the timing of marketing programs.

Research and Development. Research and development expenses consist primarily of employee-related expenses, allocated overhead and outside contractors. We focus our research and development efforts on increasing the functionality, performance and integration of our software products. We expect that in the future, research and development expenses will increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offering.

General and Administrative. General and administrative expenses consist primarily of employee-related expenses, professional fees, primarily consisting of expenses for accounting, compliance with the Sarbanes-Oxley Act of 2002, and legal services, including litigation, information technology and other corporate expenses and allocated overhead. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

Stock-Based Compensation Expenses. Our cost of ~~service~~ service revenues, sales and marketing, research and development, and general ~~and~~ and administrative expenses include stock-based compensation expense. Stock-based compensation expense is ~~based on~~ the fair value of outstanding stock options and restricted stock awards and units, which are recognized over the respective stock option and award or unit service periods. During the three months ended September 30, 2008 and 2009, we recorded $2.3 million and $3.0 million of stock-based compensation expense, respectively. During the nine months ended September 30, 2008 and 2009, we recorded $6.0 million and $9.2 million of stock-based compensation expense, respectively.

Foreign Currency Translation

With regard to our international operations, we frequently enter into transactions in currencies other than the U.S. dollar. As a result, our revenues, expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, Indian rupee, Japanese yen and Romanian leu. In the three months ended ~~September 30~~March 31, ~~2008~~2009 and ~~2009~~2010, approximately 4338% and 3937%, respectively, of our revenues were generated in locations outside the United States. The majority of these revenues are in currencies other than the U.S. dollar, as are many of the associated expenses. In periods when the ~~nine~~U.S. ~~months~~dollar ~~ended~~declines ~~September~~in ~~30,~~value ~~2008~~as ~~and~~compared ~~2009,~~to ~~approximately~~the ~~45%~~foreign ~~and~~currencies ~~39%,~~in ~~respectively,~~which ofwe conduct business, our foreign currency-based revenues ~~were generated~~and expenses generally increase in ~~locations~~value ~~outside~~when translated ~~the~~into ~~United~~U.S. ~~States~~dollars.

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The majority of these revenues are in currencies other than the U.S. dollar, as are many of the associated expenses. In periods when the U.S. dollar declines in value as compared to the foreign currencies in which we conduct business, our foreign currency-based revenues and expenses generally increase in value when translated into U.S. dollars.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates ~~and~~ and assumptions with our audit committee, including those related to revenue recognition, deferred set up costs, commissions and royalties, accounts receivable reserves, stock-based compensation ~~expenses~~expense, long-lived assets, intangibles assets and goodwill, income taxes, ~~restructuring,~~ contingencies and litigation. We base our estimates on historical experience and on various other ~~assumptions~~ assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There have been no material changes to these estimates for the periods presented in this Quarterly Report on Form 10-Q. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 1 and Note 2 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, the following condensed accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.22

~~Revenue~~Table Recognition and Deferred Set Up Costs. Customers generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice. License agreements, multiple element arrangements, including license and services agreements and certain application hosting services can generally be terminated by either party for material breach of ~~obligations~~ ~~not corrected within 30 days after notice of the breach.~~Contents

We believe that of our significant accounting policies, which are described in Note 1 and Note 2 of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, the following condensed accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition. We derive revenues from software licenses and services of our ICRS products which can be purchased on a stand-alone basis or bundled together. License revenues are derived principally from the sale of term licenses of our software products and service revenues are derived principally from the delivery of the hosted solutions of our software products, consulting services and customer support including training, for all of our products. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions. In the first quarter of 2010, we adopted the guidance of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which was ratified by the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 affects accounting and reporting for all multiple-deliverable arrangements. The adoption of this standard did not materially affect the results of operations for three months ended March 31, 2010.

Customers generally have the ability to terminate application hosting, consulting and training service agreements upon 30 days notice. License agreements, multiple element arrangements, including license and services agreements and certain application hosting services can generally be terminated by either party for material breach of obligations not corrected within 30 days after notice of the breach.

We recognize revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

We generally enter into software term licenses for our ~~InForm, Clintrial, Empirica Trace Waban CDR and Waban SCE~~ products with our customers for 31- to 5-year periods. License agreements for our Empirica Signal, CTSD and Empirica Study products are generally annual or multi-year terms. We do not license our Clarix, OutcomeLogix and Covance IVRS/IWRS products, which are presently offered only on a hosted application basis. These arrangements typically include multiple elements: software license, consulting services and customer support. We bill our customers in accordance with the terms of the underlying contract. Generally, we bill license fees annually in advance for each year of the license term. Our payment terms are generally net 30 30 days.

Our software license revenues are earned from the sale of off-the-shelf software requiring no significant modification or customization subsequent to delivery to the customer. Consulting services, which can also be performed by third-party consultants, are deemed to be non-essential to the functionality of the software and typically are for trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.

Customer support includes training services, telephone support and software maintenance. We generally bundle customer support with the software license for the entire term of the arrangement. As a result, we generally recognize revenues for all elements, including consulting services, ratably over the term of the software license and support arrangement. We allocate the revenues recognized for these arrangements to the different elements based on management’s estimate of the relative fair value of each element. For our term-based licenses, we allocate to consulting services the anticipated service effort and value throughout the term of the arrangement at an amount that would have been allocated had those services been sold separately to the customer. The value of our consulting services sold within a bundled arrangement is equal to the value of consulting services sold on a stand-alone basis, as the activities performed under both types of arrangements are similar in nature. The remaining value is allocated to license and support services, with 10% of this amount allocated to support services. The customer support services rate of 10% for multi-year term-based licenses reflects a significant discount from the rate for customer support services associated with perpetual licenses due to the reduction in the time period during which the customer can utilize the upgrades and enhancements. We believe this rate is substantive and represents a reasonable basis of allocation. We have allocated the estimated fair value to our multiple element arrangements to provide meaningful disclosures about each of our revenue streams. The costs associated with the consulting and customer support services are expensed as incurred. There are instances in which we sell software licenses based on usage levels. These software licenses can be based on estimated usage, in which case the license fee charged to the customer is fixed based on this estimate. When the fee is fixed, the revenues are generally recognized ratably over the contractual term of the arrangement. If the fee is based on actual usage, and therefore variable, the revenues are recognized in the period of use. Revenues from certain follow-on consulting services, which are sold separately to customers with existing software licenses and are not considered part of a multiple element arrangement, are recognized as the services are performed.

31We continue to sell additional perpetual licenses for the Clintrial, Empirica Trace and Clinical Development Center software products in certain situations to our existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. For our Clintrial and Empirica Trace products we have

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~~The~~established ~~value~~vendor ofspecific ~~our~~objective ~~consulting~~evidence ~~services~~of ~~sold~~fair ~~within a bundled arrangement is equal to the~~ value offor ~~consulting services sold on a stand-alone basis, as~~ the ~~activities performed~~customer ~~under both types of arrangements are similar in nature~~support. ~~The remaining value is allocated to license~~ ~~and support services~~Accordingly, ~~with~~license ~~10%~~revenues ofare ~~this~~recognized ~~amount~~upon ~~allocated~~delivery ~~to support services. The customer support services rate~~ of ~~10%~~the ~~for~~software ~~multi-year term-based licenses~~and ~~reflects~~when aall ~~significant~~other ~~discount~~revenue ~~from~~recognition ~~the~~criteria ~~rate~~are ~~for~~met. ~~customer~~Customer support ~~services~~revenues ~~associated~~are ~~with~~recognized ~~perpetual~~ratably ~~licenses~~over ~~due to~~ the ~~reduction~~term inof the ~~time~~underlying ~~period during~~support ~~which the customer can utilize the upgrades and enhancements~~arrangement. ~~We believe~~For ~~this~~our ~~rate~~Clinical isDevelopment ~~substantive~~Center products ~~and~~vendor ~~represents~~specific aobjective ~~reasonable~~evidence ~~basis~~ of ~~allocation. We have allocated the estimated~~ fair value tofor ~~our multiple element arrangements to provide meaningful disclosures about each of our revenue streams. The costs associated with~~ the ~~consulting and~~ customer support ~~services~~has ~~are~~not ~~expensed~~been ~~as incurred.~~established, ~~There~~and ~~are instances in which we sell software licenses based on usage levels. These software licenses can be based on estimated usage~~therefore, inrevenue ~~which~~for ~~case~~ the ~~license~~entire ~~fee charged to the customer is fixed based on this estimate. When~~agreement ~~the fee~~ is ~~fixed, the revenues are generally~~ recognized ratably over the ~~contractual~~ term of the ~~arrangement.~~underlying Ifsupport ~~the~~agreement. ~~fee~~We continue isto ~~based~~generate oncustomer ~~actual~~support ~~usage,~~ and ~~therefore~~ ~~variable,~~maintenance ~~the~~ revenues ~~are recognized in the period of use. Revenues~~ from ~~certain follow-on consulting services, which are sold separately to~~our ~~customers~~perpetual ~~with~~license ~~existing~~customer ~~software~~base. ~~licenses~~Training ~~and~~revenues are ~~not considered part of a multiple element arrangement, are~~ recognized as ~~the services are performed~~earned.

WeRevenues resulting from InForm and ~~continue~~OutcomeLogix toapplication ~~sell~~hosting services ~~additional~~consist ~~perpetual~~of ~~licenses~~three stages for each clinical trial: the ~~Clintrial,~~first ~~Empirica~~stage involves ~~Trace~~application set up, ~~Waban~~including ~~CDR~~design ~~and~~of ~~Waban SCE~~electronic ~~software~~case ~~products~~report informs and ~~certain~~edit ~~situations~~checks, toinstallation ~~our~~and ~~existing customers~~server ~~with~~configuration of the ~~option~~system; tothe second ~~purchase~~stage ~~customer~~involves ~~support~~application hosting and ~~may~~related insupport ~~the~~services; ~~future~~and dothe sothird ~~for~~stage ~~new~~involves ~~customers~~services ~~based~~required onto ~~customer~~close ~~requirements~~out, or ~~market~~lock, ~~conditions~~the database for the clinical trial. WeRevenues resulting from Phase ~~have~~Forward ~~established~~IRT ~~vendor~~and ~~specific~~Covance ~~objective~~IVRS/IWRS application ~~evidence~~hosting services also consist of ~~fair~~three ~~value~~stages for each clinical trial: the first stage involves application set up, including design and set up ~~customer~~for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. ~~Accordingly~~Services provided for InForm, ~~license~~Phase ~~revenues~~Forward IRT, OutcomeLogix and Covance IVRS/IWRS for the first and third stages are ~~recognized~~provided on a fixed fee basis based upon ~~delivery~~the complexity of the ~~software~~trial and ~~when~~system ~~all~~requirements. ~~other~~Services ~~revenue~~for ~~recognition~~the ~~criteria~~second stage are ~~met~~charged separately as a fixed monthly fee. ~~Customer~~ ~~support~~We ~~revenues~~recognize ~~are~~revenue ~~recognized~~from all stages of the InForm, Phase Forward IRT, OutcomeLogix and Covance IVRS/IWRS hosting service ratably over the ~~term~~hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the ~~underlying~~remaining ~~support~~term ~~arrangement~~of the hosting period. WeFees ~~continue~~for tothe first and third stages of the services are ~~generate~~billed ~~customer~~based ~~support~~upon ~~and~~milestones. ~~maintenance~~Fees ~~revenues~~for ~~from~~application ~~our~~hosting ~~perpetual~~and ~~license~~related services ~~customer~~in ~~base~~the second stage are billed quarterly in advance. ~~Training~~Bundled ~~revenues~~into this revenue element are ~~recognized~~the asrevenues ~~earned~~attributable to the software license used by the customer.

~~In addition~~Revenues toresulting ~~making~~from ~~our~~hosting ~~software~~services ~~products~~for ~~other~~our ~~than~~Empirica ~~Clarix~~Signal, ~~OutcomeLogix~~Empirica Study and ~~Covance~~WebSDM ~~IVRS/IWRS~~products ~~available~~consist toof ~~customers through licenses,~~installation weand ~~offer~~server ~~our InForm~~configuration, ~~Empirica~~application ~~Signal,~~hosting ~~CTSD~~ and ~~Empirica~~related ~~Study~~support services. ~~software~~Services ~~solutions~~for asthese aofferings ~~hosted~~are ~~application~~charged ~~solution~~monthly ~~delivered~~as ~~through~~ a ~~standard~~ ~~Web-browser~~fixed fee. ~~Our~~ ~~Clarix,~~Revenues ~~OutcomeLogix and Covance IVRS/IWRS solutions~~ are ~~presently~~recognized ~~available~~ratably ~~only~~over onthe aperiod ~~hosted~~of ~~application~~the ~~basis~~service.

~~Revenues resulting~~In ~~from InForm and OutcomeLogix application hosting services consist of three stages for each clinical trial:~~ the ~~first~~event ~~stage~~that ~~involves~~an application ~~set~~hosting ~~up,~~customer ~~including~~cancels ~~design~~its ~~of electronic case report forms and edit checks, installation and server configuration of the system; the second stage involves application hosting and~~ related ~~support~~statement services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Revenues resulting from Clarix and Covance IVRS/IWRS application hosting services also consist of ~~three stages for each clinical trial: the first stage involves application set up~~work, including design and set up for the subject randomization and medication inventory management, installation and server configuration of the system; the second stage involves application hosting and related support services; and the third stage involves services required to close out, or lock, the database for the clinical trial. Services provided InForm, Clarix, OutcomeLogix and Covance IVRS/IWRS for the first and third stages are provided on a fixed fee basis based upon the complexity of the trial and system requirements. Services for the second stage are charged separately as a fixed monthly fee. We recognize revenue from all ~~stages~~deferred ofrevenues ~~the InForm, Clarix, OutcomeLogix and Covance IVRS/IWRS hosting service ratably over the hosting period. Fees charged and costs incurred for the trial system design, set up and implementation~~ are ~~deferred as applicable, until the start of the hosting period and then amortized and~~ recognized~~, as applicable, ratably over the estimated hosting period~~. ~~The deferred costs include~~In ~~incremental~~addition, ~~direct costs with third parties and~~ certain ~~internal~~termination ~~direct costs~~ related tofees ~~the~~may ~~trial~~be ~~and~~charged ~~application set up. These costs include salary~~ and ~~benefits~~ ~~associated~~if ~~with direct labor costs incurred during trial set up~~so, ~~as well~~such ~~as third-party subcontract~~ fees ~~and other contract labor costs. Work~~ ~~performed~~are ~~outside the original scope of work is contracted for separately as an additional fee and is generally~~ recognized ~~ratably~~in ~~over~~ the ~~remaining term of the hosting~~ period. ~~Fees for the first and third stages~~ of ~~the services are billed based upon milestones~~termination. Fees for application hosting and related services in the second stage are billed quarterly in advance. Bundled into this revenue element are the revenues attributable to the software license used by the customer.

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We deferred $1.3 million and $1.4 million of set up costs and amortized $0.9 million and $0.9 million in the three months ended September 30, 2008 and 2009, respectively, and deferred $3.6 million and $4.0 million of set up costs and amortized $2.5 million and $2.8 million in the nine months ended September 30, 2008 and 2009, respectively. The amortization of deferred set up costs is a component of cost of services.

We may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on either a time-and-materials basis or using the proportional performance method. If we are not able to produce reasonably dependable estimates, revenue is recognized upon completion of the project and final acceptance from the customer. If significant uncertainties exist about project completion or receipt of payment, the revenue is deferred until the uncertainty is resolved. Provisions for estimated losses on contracts are recorded during the period in which they are identified.

Deferred revenues represent amounts billed or cash received in advance of revenue recognition.

Accounting for Prepaid Sales Commissions, ~~and~~ Royalties. and Deferred Set Up Costs. For arrangements where we recognize revenue ~~over~~ over the relevant contract period, we defer related commission payments to our direct sales force and software license royalties paid to third parties and amortize these amounts over the same period that the related revenues are recognized. This is done to better match commission and royalty expenses with the related revenues. Commission payments are nonrefundable unless amounts due from a customer are determined to be uncollectible or if the customer subsequently changes or terminates the level of service, in which case commissions which were paid are recoverable by us.

~~During the~~Our ~~three~~royalty ~~months~~obligation ~~ended~~is ~~September~~based ~~30,~~upon ~~2008 and 2009, we deferred $1.9 million and $3.1 million, respectively, of commissions and amortized $2.4 million and $2.2 million, respectively, to sales and marketing expense. During~~ the ~~nine~~license ~~months ended September 30, 2008~~ and ~~2009, we deferred $6.3 million and $8.2 million, respectively, of~~ ~~commissions~~customer ~~and~~support ~~amortized~~revenues ~~$6.2~~earned ~~million~~for ~~and~~certain ~~$5.9~~products ~~million,~~in ~~respectively,~~an ~~to sales and marketing expense~~arrangement. Royalties are paid on a percentage of billings basis for certain of our products, and we have the right to recover royalties in the event an arrangement is cancelled. During the three months ended September 30, 2008 and 2009, we deferred $0.6 million and $0.6 million, respectively, of royalty expenditures and amortized $0.7 million and $0.5 million, respectively, to cost of license and service revenues. During the nine months ended September 30, 2008 and 2009, we deferred $2.2 million and $2.3 million, respectively, of royalty expenditures and amortized $2.0 million and $2.0 million, respectively, to cost of license and service revenues.

~~Accounts~~Fees ~~Receivable~~charged ~~Reserve. We~~and ~~maintain~~costs ~~allowances~~incurred for ~~doubtful accounts for estimated losses resulting from~~ the ~~inability~~trial ~~of our customers to make~~system ~~required~~design, ~~payments.~~set Weup ~~regularly~~and ~~evaluate~~implementation ~~the~~are ~~collectability~~deferred ofas ~~our trade receivables based on a combination of factors~~applicable, ~~which~~until ~~may~~the ~~include dialogue with~~start of the ~~customer~~hosting toperiod ~~determine~~and ~~the~~then ~~cause~~amortized ofand ~~non-payment~~recognized, ~~the~~as ~~use~~applicable, ~~of collection~~ratably ~~agencies,~~over ~~and/or~~ the ~~use~~estimated ofhosting ~~litigation~~period. InThe ~~the~~deferred ~~event~~costs itinclude ~~is determined that the~~incremental ~~customer~~direct ~~may~~costs ~~not~~with bethird ~~able~~parties toand ~~meet~~certain ~~its~~internal ~~full~~direct ~~obligation~~costs ~~to us, we record a specific allowance to reduce the~~ related ~~receivable~~ to the ~~amount~~trial ~~that~~and ~~we expect~~application toset ~~recover given all information available to us~~up. WeThese ~~continuously monitor~~costs ~~collections~~include ~~from~~salary ~~our customers~~ and ~~maintain a provision for estimated~~benefits ~~credit~~associated ~~losses~~with ~~based~~direct ~~upon~~labor ~~our~~costs ~~historical~~incurred ~~experience~~during ~~and~~trial ~~any~~set ~~specific~~up, ~~customer collection~~as ~~issues~~well ~~that we have identified. While such credit losses have~~as ~~historically~~third-party ~~been~~subcontract ~~within~~fees ~~our expectations~~ and ~~the~~other ~~provisions~~contract ~~established,~~labor ~~we cannot guarantee that we will continue to experience the same credit loss rates in the future~~costs. In If the ~~financial~~event ~~condition~~that ~~of our customers were to deteriorate, resulting in~~ an ~~impairment~~application ~~of their ability to make payments, additional~~hosting ~~allowances~~customer ~~may~~cancels beits ~~required. Our~~related ~~accounts receivable~~statement ~~reserves were $0.6 million and $0.9 million as~~ of ~~December 31~~work, ~~2008 and~~all ~~September~~deferred ~~30,~~set ~~2009,~~up ~~respectively~~costs are expensed.

~~Accounting~~Accounts ~~for~~Receivable ~~Income Taxes~~Reserve. We ~~are~~maintain ~~subject~~allowances tofor ~~income~~doubtful ~~taxes in both the~~accounts ~~United~~for ~~States~~estimated ~~and~~losses ~~foreign~~resulting ~~jurisdictions,~~from ~~and~~the weinability ~~use~~of ~~estimates in determining~~ our ~~provision~~customers ~~for~~to ~~income~~make required ~~taxes~~payments. We ~~account~~ ~~for~~regularly ~~income~~evaluate ~~taxes using~~ the ~~asset~~collectability ~~and~~of ~~liability~~our ~~method for accounting~~trade ~~and~~receivables ~~reporting for income taxes. Under this method, deferred tax assets and liabilities are recognized~~ based on ~~temporary~~ ~~differences~~a ~~between~~combination ~~the financial reporting and income tax bases~~ of ~~assets~~ ~~and~~factors, ~~liabilities~~which ~~using~~may ~~statutory~~include ~~rates.~~dialogue ~~This process requires that we~~with ~~project~~the ~~our~~customer ~~current~~to ~~tax~~determine ~~liability~~the ~~and~~cause ~~estimate~~of ~~our deferred tax assets and liabilities~~non-payment, ~~including net operating loss and tax credit carryforwards. In assessing~~ the ~~need~~use ~~for~~of ~~a valuation allowance, we have considered our recent~~collection ~~operating results~~agencies, ~~future taxable income projections~~ and/or ~~all prudent and feasible tax planning strategies.~~

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~~Accounting~~the use ~~for~~of ~~Stock-Based Awards~~litigation. On ~~January~~In 1,the ~~2006,~~event weit ~~started~~is todetermined ~~recognize expense~~that ~~related~~the tocustomer ~~the~~may ~~fair~~not ~~value~~be able ofto ~~stock-based~~meet ~~compensation~~its ~~awards.~~full ~~For service-based~~obligation ~~options~~to us, we ~~recognize~~record ~~compensation~~a ~~expense~~specific onallowance ~~a straight-line~~to ~~basis~~reduce ~~over~~ the ~~requisite~~related ~~service~~receivable ~~period~~to of the ~~award. For~~amount ~~performance-based~~that ~~options,~~ we ~~recognize expense~~expect ~~over~~to ~~the~~recover ~~estimated~~given ~~performance~~all information ~~period~~available to us. InWe ~~addition~~continuously ~~the~~monitor ~~benefits~~collections offrom ~~tax~~our ~~deductions~~customers inand ~~excess~~maintain ofa ~~recognized~~provision ~~stock-based~~for ~~compensation~~estimated iscredit ~~reported~~losses asbased aupon our ~~financing~~historical ~~activity~~experience ~~rather~~and ~~than~~any anspecific ~~operating~~customer ~~activity~~collection inissues ~~the~~that ~~statements~~we ~~of cash~~have ~~flows~~identified. ~~This~~While ~~requirement~~such ~~can~~credit losses have historically been within our expectations and the ~~effect~~provisions ofestablished, ~~reducing~~we ~~our~~cannot ~~net~~guarantee ~~operating~~that ~~cash~~we will ~~flows~~continue ~~and~~to ~~increasing~~experience ~~our~~the ~~net~~same ~~financing~~credit ~~cash~~loss ~~flows~~rates in ~~certain~~the ~~periods~~future. To ~~date,~~If wethe financial ~~have~~condition ~~not~~of ~~recorded~~our ~~these~~customers ~~benefits~~were to deteriorate, resulting in an asimpairment ~~they~~of ~~have~~their ~~not~~ability ~~been~~to ~~realized~~make payments, additional allowances may be required.

Accounting for Income Taxes. We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes using the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. This process requires that we project our current tax liability and estimate our deferred tax assets and liabilities, including net operating loss and tax credit carryforwards. In assessing the need for a valuation allowance, we have considered our recent operating results, future taxable income projections and all prudent and feasible tax planning strategies.

Accounting for Stock-Based Awards. For service-based options and restricted stock units and awards, we recognize compensation expense on a straight-line basis over the requisite service period of the award. For performance based options, we recognize expense over the estimated performance period. In addition the benefits of tax deductions in excess of recognized stock-based compensation is reported as a financing activity rather than an operating activity in the statements of cash flows. This requirement can have the effect of reducing net operating cash flows and increasing net financing cash flows in certain periods. To date, we have not recorded these benefits as they have not been realized.

We use the Black-Scholes option pricing model to determine the weighted average fair value of options granted.

~~During~~ For the three months ending ~~September 30~~March 31, ~~2008 and~~ 2009, ~~we recorded $2.3 million~~ and ~~$3.0 million of aggregate stock-based compensation expense~~2010, ~~respectively. During the nine months ending September 30, 2008 and 2009, we recorded $6.0 million and $9.2 million of aggregate~~ stock-based compensation expense, ~~respectively. For the three months ending September 30, 2008 and 2009, stock-based compensation expense~~ reduced basic earnings per share by $0.0304 and $0.0405, respectively, and diluted earnings per share by $0.~~03 and $0.~~04, ~~respectively. For the nine months ending September 30, 2008~~ and ~~2009, stock-based compensation expense reduced~~ ~~basic earnings per share by~~ $0.~~09 and $0.14~~05, respectively~~, and diluted earnings per share by $0~~.09 and $0.13, respectively. As of September 30, 2009, we had $26.5 million of unrecognized stock-based compensation expense related to options and awards that we expect to recognize over a weighted average period of 2.35 years.

Other Significant Estimates

Goodwill and Intangible Assets Impairment. We review the carrying value of goodwill and intangible assets ~~periodically~~annually based upon the expected future discounted operating cash flows of our business. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of our operating results in future periods. Actual results may differ materially from these estimates. The timing and size of impairment charges, if any, involves the application of management’s judgment regarding the estimates and could significantly affect our operating results.

Overview of Results of Operations in the Three Months Ended ~~September 30~~March 31, ~~2008~~2009 and ~~2009~~2010

Total revenues increased by 2417%, or $108.1 4 million, in the three months ended ~~September 30~~March 31, ~~2009~~2010, or 2010, compared to the ~~same~~three ~~period~~months inended ~~2008~~March 31, 2009, or 2009, primarily due to an increase in total service revenues of 21%, or $7.9 4 million, orand 26to a lesser extent, an increase in license revenues of 7%, or $1.0 million. Our revenue growth included a 20% increase in Inrevenues ~~addition~~from contract research organizations, ~~license~~or ~~revenues~~CROs, which increased by to $213.21 million from $10.9 million. The increase in services revenues is primarily associated with revenues from application hosting services due to increased production trials under management for our InForm license customers as well as trials under management as a result of our recent acquisitions of Maaguzi, orand ~~17%~~Covance IVRS/IWRS. Through these recent acquisitions and the acquisition of Clarix in 2008, our objective is to provide an Integrated Clinical Research Suite (ICRS) of technology solutions, which consists of multiple products that can be purchased on a stand-alone basis, to automate and integrate the entire clinical development process from study initiation and regulatory submission through post-approval trials. Our ability to provide ICRS as a single source vendor and to continue to provide the product functionality and performance that our customers require will be a major factor in our ability to continue to increase revenues.

Our gross margin increased by 219%, or $52.0 6 million, in ~~the~~2010 compared ~~three~~to ~~months~~2009, ~~ended~~primarily ~~September 30,~~due ~~2009~~to ~~compared~~a higher increase in revenues in relation to cost ~~the~~of ~~same~~revenues. ~~period~~The increase in ~~2008,~~gross margins is primarily due to the increase ~~increases~~ in ~~both~~ ~~service~~the services gross margin of $1.5 million resulting from higher services revenues and lower services expense. With the continued shift in our revenues from license revenues to services revenues associated primarily with our recent acquisitions and our ICRS strategy, our ability to continue to maintain our overall gross margins will depend on our ability to continue to increase services efficiencies and lower our cost of delivery.

Operating income ~~for~~in ~~the~~2010 ~~three months ended September 30, 2009~~ of $23.4 1 million decreased ~~46%,~~ orby $2.0 1 million, or 41%, compared to ~~the same period in 2008~~2009. ~~The~~ ~~operating~~Operating income for ~~the~~2009 ~~three months ended September 30, 2008~~ and ~~2009~~2010 included $2.3 6 million and $3.0 5 million of stock-based compensation expense, respectively, and $0.6 8 million and $01.9 5 million of ~~amortization~~ amortization expense related to acquisitions, respectively. We expect to increase operating income through increased revenues from

The results for the three months ended September 30, 2009 when compared to the same period in 2008 were impacted by foreign exchange rate fluctuations, resulting in decreases in revenue of $1.2 million, or 3%, and decreases in expense of $1.1 million, or 3%.25

As of September 30, 2009, we had $112.5 million of unrestricted cash, cash equivalents and short-term investments, a decrease of $46.9 million from $159.4 million at December 31, 2008. This decrease was primarily related to our acquisitions of Waban, Maaguzi and Covance IVRS/IWRS for $34.6 million. As of September 30, 2009, we had $34.7 million of long-term investments, an increase of $16.7 million from $18.0 million at December 31, 2008. As of September 30, 2009, we had no outstanding debt.

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our recent acquisitions and execution of our ICRS strategy and through our ability to lower services and operating expenses as a percentage of revenues through improved efficiencies throughout our services organization and leveraging our operating expenses as revenues continue to increase.

The results of 2010 compared to 2009 were impacted by foreign exchange rate fluctuations, resulting in a decrease in revenue of approximately $0.6 million, or 1% of revenues, and an increase in expense of approximately $1.2 million, or 3% of expenses.

As of March 31, 2010, we had $129.7 million of unrestricted cash, cash equivalents and short-term investments, an increase of $20.6 million from $109.1 million at December 31, 2009. In addition, as of March 31, 2010, we had $3.3 million in current assets associated with a securities settlement agreement with UBS AG. As of March 31, 2010, we had no outstanding debt.

Revenues

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Revenues by Product Line (in thousands) (1)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
Electronic data capture	$	3236,~~819~~527	7675	%	$	3840,~~563~~325	7371	%	$	53,~~744~~798		1810	%
Clinical data management	5,~~827~~618		1411		54,~~611~~797		108		(~~216~~821		)	(415	)
Safety	45,~~007~~383		911		56,~~378~~188		1011		~~1,371~~805			3415
Interactive Response Technology	~~338~~1,288		13		35,~~567~~890		710		34,~~229~~602			~~955~~357
Total	$	4248,~~991~~816	100	%	$	5357,~~119~~200	100	%	$	108,~~128~~384		2417	%

(1) Revenues by Product Line include product license revenues and product-related service revenues.

The increase in electronic data capture revenues is primarily due to ~~increases~~an increase in application hosting services ~~and license revenues~~ of $2.8 4 million ~~and~~as ~~$1.6 million,~~well ~~respectively,~~as ~~and~~an toincrease ain ~~lesser~~license ~~extent,~~revenues ~~the~~of $1.5 million. These ~~introduction~~increases ofwere partly ~~our~~off-set ~~OutcomeLogix~~by ~~product~~a ~~offering~~decrease ~~following~~in ~~the~~consulting ~~acquisition~~revenues of ~~Maaguzi~~ in$0.2 ~~July 2009~~million. ~~The~~ The decrease in clinical data management ~~revenues~~ is primarily due to a ~~$0.3~~decrease ~~million~~in ~~decrease~~license inrevenues ~~professional~~of ~~services~~$0.7 ~~revenues~~million. The ~~increase~~ increase in safety ~~was~~revenues is primarily due to increases in consulting ~~revenues,~~and license revenues ~~and application hosting services revenues~~ of $0.63 million, ~~$0.5 million~~ and $0.2 million, respectively. The increase in interactive response technology revenues is primarily related to ~~the 2009 period including a full quarter of~~ increased application hosting ~~services~~ revenues ~~relating to the acquisition~~ of ~~Clarix~~$4.6 ~~in September 2008, while the 2008 period only includes one month of revenue related to that acquisition~~million. To a lesser extent the increase is attributable to revenues related to the acquisition of Covance IVRS/IWRS in August 2009.

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Revenues by Type (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
License	$	1214,~~974~~116	3029	%	$	15,~~159~~141	2927	%	$	21,~~185~~025		177	%
Application hosting services	2326,~~553~~626		55		3033,~~071~~782		5759		67,~~518~~156			2827
Consulting services	34,~~488~~861		810		45,~~495~~207		89		~~1,007~~346			297
Customer support	23,~~976~~213		76		3,~~394~~070		65		~~418~~(143		)	14(4	)
Total	$	4248,~~991~~816	100	%	$	5357,~~119~~200	100	%	$	108,~~128~~384		2417	%

Total revenues increased in ~~the~~2010 ~~three months ended September 30, 2009~~ as compared to ~~the same period in 2008~~2009, primarily due to increases in application hosting and license revenues. The increase in 2010 revenues associated with our application hosting services ~~in the three months~~ ~~ended September 30, 2009~~ was partially due to ana ~~approximately 16~~10% increase in production trials under management from approximately ~~870~~955 asin of2009 ~~September 30, 2008~~ to approximately 1,~~012~~050 asin ~~of September 30~~2010, ~~2009,~~ which ~~include both~~includes application hosting services trials asand ~~well as~~ trials hosted for our InForm license customers. ~~The~~ The increase in production trials relates to a relative increase in the number of customers who purchase all trial-related services from us, customers who license ~~Inform~~ InForm and build their own studies ~~and an increase in the average fee per trial~~. Our application hosting services also increased due to the impact of additional trials under management asfor ~~a result of~~ our ~~recent~~web-integrated ~~acquisitions~~Phase ~~of Clarix,~~Forward ~~Maaguzi~~IRT ~~and~~product ~~Covance~~offering ~~IVRS/IWRS. In~~with ~~particular, Clarix~~ production trials ~~increased~~increasing ~~approximately 77~~85% from 96 64in as2009 ~~of September 30, 2008~~ to ~~approximately~~178 ~~113~~in ~~as of September 30, 2009~~2010. The increase in license revenues was primarily the result of additional ~~InForm~~electronic ~~revenue~~ data capture revenues from both new and existing customers, and, to a lesser extent, growth in sales relating to our safety products. The increase in consulting ~~revenues~~services was primarily attributable to anadditional ~~increase in consulting~~ revenue related to ~~safety~~consulting ~~and~~services ~~electronic~~provided ~~data~~for ~~capture,~~our ~~primarily~~safety products ~~InForm,~~for ~~revenue which was related to~~ both new and existing customers, ~~partially~~and ~~offset~~to by a ~~decrease~~lesser inextent, ~~consulting~~growth ~~revenue~~in sales ~~related~~relating to our clinical data management ~~revenue~~products. The ~~increase~~ indecrease in customer support revenues ~~in the three months ended September 30, 2009~~ was ~~due~~ primarily todue ~~an increase in support revenues related~~ to electronic data capture, primarily InForm, partially offset by a decrease in customer support revenue related to clinical data management revenue. Our revenues were not significantly impacted by price increases or decreases~~. Inflation~~ ~~had only a nominal impact on our revenues.~~in

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	Three Months Ended September 30,
	2008				2009				Change
Revenues by Geography (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
North America	$	24,303	57	%	$	32,404	61	%	$	8,101		33	%
United Kingdom	12,893		30		14,982		28		2,089			16
France	3,586		8		3,672		7		86			2
Asia Pacific	2,209		5		2,061		4		(148		)	(7	)
International subtotal	18,688		43		20,715		39		2,027			11
Total	$	42,991	100	%	$	53,119	100	%	$	10,128		24	%

clinical data management products. Our revenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.

The increase in revenues worldwide was primarily due to an increase in electronic data capture revenues, as well as increases in safety revenues and the introduction of our new interactive response technology revenue following the acquisitions of Clarix and Covance IVRS/IWRS. The increase in U.S. revenues is primarily due to an increase in electronic data capture revenues of $3.9 million, as well as an increase in interactive response technology revenues of $3.2 million. The increase in interactive response technology revenues is primarily a result of the 2009 period including a full quarter of application hosting services revenues relating to the acquisition of Clarix in September 2008, while the 2008 period only included one month of revenue related to that acquisition. To a lesser extent the increase is attributable to revenues related to the acquisition of Covance IVRS/IWRS in August 2009. Increases in U.S. revenue were also due to an increase in safety revenues of $0.9 million. The increase in international revenues is primarily the result of electronic data capture revenues and safety revenue of $1.9 million and $0.5 million, respectively. These increases were slightly offset by a decrease in clinical data management revenue of $0.3 million.

	Three Months Ended March 31,
	2009				2010					Change
Revenues by Geography (in thousands)	Amount		Percentage of Revenues		Amount			Percentage of Revenues		Amount		%

North America	$	30,339	62	%	$	35,843		63	%	$	5,504	18	%

United Kingdom	12,619		26		14,358			25		1,739		14
France	3,651		7		3,758			7		107		3
Asia Pacific	2,207		5		3,241			5		1,034		47
International subtotal	18,477		38		21,357			37		2,880		16
Total	$	48,816	100	%	$		57,200	100	%	$	8,384	17	%

The increase in revenues worldwide was primarily due to an increase in interactive response technology revenues and electronic data capture revenues of $4.6 million and $3.8 million, respectively. The increase in North American revenues is primarily related to an increase in interactive response technology revenues and electronic data capture revenues of $3.8 million and $1.4 million, respectively. The increase in interactive response technology revenues is primarily a result of the acquisition of Clarix. To a lesser extent, the increase is attributable to the 2010 period including a full quarter of application hosting services revenues relating to the acquisition of Covance IVRS/IWRS in August 2009, while the 2009 period included no revenue. The increase in international revenues is primarily related to an increase in electronic data capture revenues, interactive response technology revenues and safety revenues of $2.4 million, $0.8 million and $0.4 million, respectively. These increases were slightly off-set by a decrease in clinical data management revenues of $0.8 million.

Cost of Revenues

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Costs of Revenues (in thousands)	Amount		Percentage of Related Revenues		Amount		Percentage of Related Revenues		Amount			%
License	$	~~838~~566	64	%	$	~~559~~566	4	%	$	~~(279~~—	)	~~(33~~—	)%
Services	1719,~~686~~899		5957		2325,~~076~~716		61		5,~~390~~817			3029
Total	$	1820,~~524~~465	4342	%	$	2326,~~635~~282	4446	%	$	5,~~111~~817		28	%

~~The~~There ~~cost~~was ofno ~~license~~change ~~revenues decreased~~ in the ~~three months ended September 30, 2009 primarily due to a less than $0.1 million decrease in the~~ cost of ~~royalties~~ ~~associated~~license ~~with~~revenues ~~our~~when ~~InForm software product~~comparing ~~and~~2010 into ~~amortization of intangible assets~~2009. ~~The~~ The increase in cost of services in ~~the~~2010 ~~three months ended September 30, 2009~~ was primarily due to increases in employee-related ~~expense~~expenses of $2.2 4 million related to a headcount ~~increase~~ increase of ~~136~~66 people, and increases in ~~facilities~~depreciation ~~expense~~expenses ~~and~~of ~~contractor~~$1.0 million. We also had expense increases for network hosting, outside contractors, customer pass-though expenses and computer related expenses of $10.7 million, $0.5 million, $0.4 million and $0.73 million, respectively. Computer-related expenses include hardware and software support agreements as well as computer accessories.

Gross Margin

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Gross Margin (in thousands)	Amount		Percentage of Related Revenues		Amount		Percentage of Related Revenues		Amount		%
License	$	1213,~~136~~550	9496	%	$	14,~~600~~575	96	%	$	21,~~464~~025	208	%
Services	1214,~~331~~801		4143		1416,~~884~~343		39		21,~~553~~542		2110
Total	$	2428,~~467~~351	5758	%	$	2930,~~484~~918	5654	%	$	52,~~017~~567	219	%

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The ~~license~~overall gross margin percentage ~~increased~~decreased ~~slightly~~ in ~~the~~2010 ~~three months ended September 30, 2009~~ as compared to ~~the~~2009 ~~three months ended September 30, 2008~~ due to a ~~increased~~lower ~~license~~service ~~sales~~margin inpercentage. ~~products~~The ~~that~~decrease doin ~~not~~the ~~carry an associated royalty expense. The~~ services gross margin percentage ~~decreased~~was ~~slightly during 2009~~ due to higher services expenses as a percentage of related revenues, as well as the inclusion of our ~~OutcomeLogix~~OutcomLogix product from the acquisition of Maaguzi in July 2009 and the acquisition of Covance IVRS/IWRS in August 2009. The ~~overall~~license gross margin percentage remained ~~decreased~~the same in ~~three~~2010 ~~months~~as ~~ended~~compared ~~September 30, 2009 due~~ to ~~the lower services gross margin percentage~~2009. It is likely that gross margin, as a percentage of revenues, will fluctuate quarter by quarter due to the timing and mix of license and service revenues, and the type, amount and timing of service required in delivering certain projects.

Operating Expenses

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Operating Expenses (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount		%
Sales and marketing	$	7,~~024~~206	1615	%	$	8,~~678~~986	16	%	$	1,~~654~~780	2425	%
Research and development	68,~~424~~180		1517		9,~~639~~698		1817		31,~~215~~518		5019
General and administrative	67,~~629~~804		16		89,~~796~~184		1716		21,~~167~~380		3318
Total	$	2023,~~077~~190	4748	%	$	27,~~113~~868	5149	%	$	74,~~036~~678	3520	%

Sales and Marketing. Sales and marketing expenses increased in ~~the~~2010 ~~three months ended September 30, 2009~~ primarily due to ~~increases in~~ employee-related expense of $1.0 .5 million related to a headcount increase of 2518 people, as well as an increase in amortization of intangible assets of $0.4 million. We also had increases in commissions expenses, outside contractor expenses and ~~facilities~~travel ~~expense~~expenses of $0.34 million, $0.1 million and $0. We1 million, respectively. We expect that our sales and marketing expense will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available. We We expect that such increases may fluctuate, however, due to the timing of marketing programs.

Research and Development. Research and development expenses increased in ~~the~~2010 ~~three months ended September 30, 2009~~ primarily due to employee-related expenses of $21.0 3 million related to a headcount increase of 5874 people. We We also had expense increases related to ~~facilities~~ ~~expense and~~ stock-based compensation, facilities expenses and travel expenses of $0.84 million, $0.2 million and $0.8 1 million, respectively. Increases were partially off-set by a decrease in outside contractor expenses of $0.4 million. We expect that our research and development costs will continue to increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offerings.

General and Administrative. General and administrative expenses increased in ~~the~~2010 ~~three months ended September 30, 2009~~ primarily due to increases ~~related~~in depreciation, tooutside ~~facilities~~contractor ~~expense~~and stock-based compensation expenses of $10.84 million, $0.3 million as ~~well~~and as$0.3 ~~increases~~million, inrespectively. We ~~employee-~~also had expense increases related to facilities and taxes and fees expenses of $0.93 million ~~related~~and to$0.1 amillion, ~~headcount increase of 35 people~~respectively. We expect that in the future our general and ~~administrative~~ administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

Other Income

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008					2009					Change
	2009					2010					Change
Other income (in thousands)	Amount			Percentage of Revenues		Amount			Percentage of Revenues		Amount			%
Interest income	$	~~1,483~~640		31	%	$	~~331~~316		1	%	$	(~~1,152~~324	)	(7851	)%
Other, net	~~(478~~409		)	1		~~120~~(184		)	—		~~598~~(593		)	(~~125~~145	)
Total other income	$	1,~~005~~049		2	%	$	~~451~~132		1—	%	$	(~~554~~917	)	(5587	)%

The decrease in interest income in ~~the~~2010 ~~three months ended September 30, 2009~~ was primarily due to the net decrease in cash and cash equivalents and short and long -term investments ~~as well as a decline in interest rates~~. The ~~increase~~decrease in other, net in ~~the~~2010 ~~three months ended September 30, 2009~~ was primarily due to ~~increases~~decreases in the fair value associated with our ~~auction rate~~ securities, ~~partially offset by decrease in the change in fair value of our securities~~ settlement agreement ~~with UBS~~.

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Provision for Income Taxes

	Three Months Ended September 30,
	Three Months Ended March 31,
	2008				2009				Change
	2009				2010				Change
Provision for income taxes (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
Provision for income taxes	$	12,~~954~~132	54	%	$	1,~~013~~249	2	%	$	(~~941~~883	)	(4841	)%

Our effective tax rate for the three months ended September 30, 2008 and 2009 was 36%. In the three months ended September 30, 2008 and 2009, our effective tax rate was lower than our statutory rate of 37% primarily due to the tax benefits related to the sale of incentive stock options within the period.28

Overview of Results of Operations in the Nine months Ended September 30, 2008 and 2009

Total revenues increased by 27%, or $32.6 million, in the nine months ended September 30, 2009 compared to the same period in 2008 primarily due to an increase in service revenues of 33%, or $27.3 million. Additionally, license revenues increased by 14%, or $5.3 million, in the nine months ended September 30, 2009 compared to the same period in 2008.

Our gross margin increased by 27%, or $19.0 million, in the nine months ended September 30, 2009 compared to the same period in 2008, primarily due to the increase in services revenues.

Operating income in the nine months ended September 30, 2009 of $10.6 million decreased 18%, or $2.4 million, compared to the same period in 2008. The operating income in the nine months ended September 30, 2008 and 2009 included $6.0 million and $9.2 million of stock-based compensation expense and $1.1 million and $2.5 million of amortization expense, respectively.

The results for the nine months ended September 30, 2009 were impacted by foreign exchange rate fluctuations, resulting in decreases in revenue of $3.1 million, or 3%, and decreases in expenses of $5.3 million, or 5%.

Revenues

	Nine months Ended September 30,
	2008				2009				Change
Revenues by Product Line (in thousands) (1)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount		%
Electronic data capture	$	93,173	77	%	$	113,467	73	%	$	20,294	22	%
Clinical data management	16,999		14		17,050		11		51		NM*
Safety	11,352		9		16,840		11		5,488		48
Interactive Response Technology	338		—		7,079		5		6,741		1,994
Total	$	121,862	100	%	$	154,436	100	%	$	32,574	27	%

(1) Revenues by Product Line include product license revenues and product-related service revenues.

* Not meaningful

The increase in electronic data capture revenues is primarily due to an increase in application hosting services of $14.9 million, and to a lesser extent, the introduction of our OutcomeLogix product offering following the acquisition of Maaguzi in July 2009. In addition, there were increases in license revenues and consulting services revenues of $3.3 million and $1.5 million, respectively. The increase in safety was primarily due to increases in consulting services, license revenue and application hosting services of $3.3 million, $1.3 million and $0.6 million, respectively. The increase in interactive response technology revenues is due to the 2009 period including a full nine months of application hosting services revenues relating to the acquisition of Clarix in September 2008, while the 2008 period only includes one month of revenue related to that acquisition. To a lesser extent, the increase is attributable to revenues related to the acquisition of Covance IVRS/IWRS in August 2009.

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	Nine months Ended September 30,
	2008				2009				Change
Revenues by Type (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount		%
License	$	38,675	32	%	$	43,970	29	%	$	5,295	14	%
Application hosting services	63,974		52		86,509		56		22,535		35
Consulting services	9,703		8		14,056		9		4,353		45
Customer support	9,510		8		9,901		6		391		4
Total	$	121,862	100	%	$	154,436	100	%	$	32,574	27	%

Our effective tax rate for 2009 and 2010 was 34% and 39%, respectively. Our effective tax rate for 2010 is higher than the effective tax rate for 2009 principally due to the benefit derived in the prior year from the federal research and development tax credit. The federal research and development tax credit expired effective December 31, 2009 and, as such, we have not forecasted a current tax benefit for this item in 2010.

Total revenues increased in the nine months ended September 30, 2009 as compared to the same period in 2008, primarily due to increases in application hosting and license revenues. The increase in revenues associated with our application hosting services in the nine months ended September 30, 2009 was partially due to the approximately 16% increase in production trials under management from approximately 870 as of September 30, 2008 to approximately 1,012 as of September 30, 2009, which include both application hosting services trials as well as trials hosted for our InForm license customers. The increase in production trials relates to customers who purchase all trialNon-~~related~~GAAP ~~services~~Financial from us, customers who license Inform and build their own studies and an increase in average fee per trial. Our application hosting services also increased due to the impact of additional trials under management as a result of our recent acquisitions of Clarix, Maaguzi and Covance IVRS/IWRS, with Clarix production trials increasing approximately 77% from 64 as of September 30, 2008 to approximately 113 as of September 30, 2009. The increase in license revenues was primarily the result of additional electronic data capture revenues from both new and existing customers, and to a lesser extent, growth in sales relating to our safety products. The increase in consulting services was primarily attributable to additional revenue related to consulting services provided for our safety products for both new and existing customers, and to a lesser extent, growth in sales relating to our electronic data capture products. The increase in customer support revenues was primarily due to increases in electronic data capture revenue and safety product. Our revenues were not significantly impacted by price increases or decreases. Inflation had only a nominal impact on our revenues.Information

	Nine months Ended September 30,
	2008				2009				Change
Revenues by Geography (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
North America	$	66,812	55	%	$	94,469	61	%	$	27,657		41	%
United Kingdom	37,721		31		41,802		27		4,081			11
France	10,601		9		11,608		8		1,007			9
Asia Pacific	6,728		5		6,557		4		(171		)	(3	)
International subtotal	55,050		45		59,967		39		4,917			9
Total	$	121,862	100	%	$	154,436	100	%	$	32,574		27	%

We provide non-GAAP revenues, income from operations, net income, and net income per share applicable to common stockholders data as additional information for our operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. We believe these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons to prior periods. We use these non-GAAP measures to evaluate our financial results, develop budgets and manage expenditures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP results.

The ~~increase~~ intable ~~revenues~~below ~~worldwide~~presents ~~was~~a ~~primarily~~reconciliation ~~due~~of GAAP to annon-GAAP ~~increase in electronic data capture~~ revenues, income ~~interactive~~from ~~response~~operations ~~technology revenues~~ and ~~safety revenues~~net ofincome ~~$20.0 million, $6.7 million~~ and ~~$5.5~~net ~~million,~~income ~~respectively. The~~per ~~increase~~share inapplicable ~~U.S. revenues is primarily related~~ to ~~an increase in electronic data capture revenues, interactive~~ ~~response~~common ~~technology~~stockholders ~~revenues~~for ~~and~~the ~~safety~~three ~~revenues~~months ofended ~~$16.1 million~~March 31, ~~$6.7~~2009 ~~million~~ and $42010.~~2 million, respectively. The~~ ~~increase~~Non-GAAP inresults ~~interactive~~exclude ~~response technology revenues is primarily a result of~~ the ~~2009~~ ~~period~~impact ~~including a full nine months~~ of ~~application~~stock-based ~~hosting~~compensation ~~services~~expense, ~~revenues~~amortization ~~relating to the acquisition~~ of ~~Clarix~~intangible ~~in September 2008~~assets, ~~while~~ the ~~2008~~effects ~~period only includes one month~~ of ~~revenue~~purchase ~~related~~accounting adjustment to ~~that~~record ~~acquisition. To~~deferred ~~a lesser extent, the increase is attributable to~~ revenues ~~related~~and tobacklog ~~the acquisition~~assumed ~~of Covance IVRS/IWRS~~ in ~~August 2009. The~~acquisitions ~~increase in international revenues is~~at ~~primarily~~fair ~~the~~value, ~~result~~impairment of ~~increases~~intangible inassets ~~electronic data capture revenues~~ and ~~safety~~ ~~revenue~~restructuring ~~of $4~~expenses.~~2 million and $1.2 million, respectively. These increases were partially offset by a decrease in clinical data management revenue of $0.5 million.~~

39Reconciliation of GAAP Revenues, GAAP Income From Operations and GAAP Net Income (Loss) to

Non-GAAP Revenues, Non-GAAP Income From Operations and Non-GAAP Net Income (Loss)

(unaudited)

(in thousands, except per share amounts)

	Three Months Ended March 31,
	2009		2010
TOTAL REVENUES:
GAAP total revenues	$	48,816	$	57,200
Deferred revenues and backlog adjustments related to acquisitions(1)	628		296
Non-GAAP total revenues	$	49,444	$	57,496
INCOME FROM OPERATIONS:
GAAP income from operations	$	5,161	$	3,050
Stock-based compensation expense	2,570		3,501
Amortization of intangible assets	761		1,450
Deferred revenues and backlog adjustments related to acquisitions(1)	628		296
Non-GAAP income from operations	$	9,120	$	8,297
NET INCOME (LOSS):
GAAP net income (loss)	$	4,078	$	1,933
Stock-based compensation expense, net of tax	1,687		2,197
Amortization of intangible assets, net of tax	500		910
Deferred revenues and backlog adjustments related acquisitions, net of tax(1)	412		187
Non-GAAP net income	$	6,677	$	5,227
GAAP net income per share applicable to common stockholders:
Diluted	$	0.09	$	0.05
Non-GAAP net income per share applicable to common stockholders:
Diluted	$	0.15	$	0.12

(1) Fair value adjustments to deferred revenues and backlog. Purchase accounting requires that deferred revenue assumed in an acquisition be recorded and subsequently recognized at its fair value as of the time of the acquisition. Consequently, we do not recognize the full amount of these deferred revenues and backlog. We add back non-GAAP revenues associated with

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~~Costs~~deferred revenues and backlog that were excluded as a result of purchase ~~Revenues~~accounting adjustments, as we believe that this provides information about the operating impact of the acquired business in a manner consistent with the revenue recognition for our pre-existing products and services.

	Nine months Ended September 30,
	2008				2009				Change
Costs of Revenues (in thousands)	Amount		Percentage of Related Revenues		Amount		Percentage of Related Revenues		Amount			%
License	$	2,119	5	%	$	1,910	4	%	$	(209	)	(10	)%
Services	50,405		61		64,220		58		13,815			27
Total	$	52,524	43	%	$	66,130	43	%	$	13,606		26	%

The cost of license revenues decreased in the nine months ended September 30, 2009 primarily due to a decrease in the cost of royalties associated with our InForm software product of $0.1 million, and to a lesser extent, amortization of intangible assets of less than $0.1 million. The increase in cost of services in the nine months ended September 30, 2008 was primarily due to increases in employee-related expenses of $5.3 million related to a headcount increase of 136 people, and increases in facility expense and contractor expense of $3.9 million and $1.6 million, respectively. We also had expense increases for depreciation, amortization of intangible assets and hosting $1.3 million, $0.8 million and $0.7 million, respectively.

Gross Margin

	Nine months Ended September 30,
	2008				2009				Change
Gross Margin (in thousands)	Amount		Percentage of Related Revenues		Amount		Percentage of Related Revenues		Amount		%
License	$	36,556	95	%	$	42,060	96	%	$	5,504	15	%
Services	32,782		39		46,246		42		13,464		41
Total	$	69,338	57	%	$	88,306	57	%	$	18,968	27	%

The overall gross margin percentage remained the same in 2009 as compared to 2008. The license gross margin percentage increased slightly in 2009 as compared to 2008 due to increased license sales in products that do not carry an associated royalty expense. The services gross margin percentage increased during 2009 due to lower services expenses as a percentage of related revenues. This was due to increased efficiencies resulting in a decrease in services expense per services employee. It is likely that gross margin, as a percentage of revenues, will fluctuate quarter by quarter due to the timing and mix of license and service revenues, and the type, amount and timing of service required in delivering certain projects.

Operating Expenses

	Nine months Ended September 30,
	2008				2009				Change
Operating Expenses (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount		%
Sales and marketing	$	19,958	16	%	$	24,100	15	%	$	4,142	21	%
Research and development	18,003		15		27,244		18		9,241		51
General and administrative	18,374		15		26,315		17		7,941		43
Total	$	56,335	46	%	$	77,659	50	%	$	21,324	38	%

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Sales and Marketing. Sales and marketing expenses increased in the nine months ended September 30, 2009 primarily due to increases in employee-related expense of $1.7 million related to a headcount increase of 25 people, as well as increases in facilities expense, amortization of intangible assets and marketing programs expenses of $0.9 million, $0.7 million and $0.6 million, respectively. We expect that our sales and marketing expense will continue to increase in absolute dollars as commission expense increases with our revenues and as we continue to expand sales coverage and to build brand awareness through what we believe are the most cost effective channels available. We expect that such increases may fluctuate, however, due to the timing of marketing programs.

Research and Development. Research and development expenses increased in the nine months ended September 30, 2009 primarily due to employee-related expenses of $5.1 million related to a headcount increase of 58 people. We also had expense increases related to facilities expense, stock-based compensation and contractor expense of $2.5 million, $1.5 million and $0.3 million, respectively. We expect that our research and development costs will continue to increase in absolute dollars as we continue to add features and functionality to our products, introduce additional integrated software solutions to our product suite and expand our product and service offerings.

General and Administrative. General and administrative expenses increased in the nine months ended September 30, 2009 primarily due to increases related to facilities expense of $5.3 million, as well as increases in employee-related expenses of $3.0 million related to a headcount increase of 35 people. We expect that in the future our general and administrative expenses will increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and operations.

Other Income

	Nine months Ended September 30,
	2008					2009				Change
Other income (in thousands)	Amount			Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
Interest income	$	4,770		4	%	$	1,473	1	%	$	(3,297	)	(69	)%
Other, net	(229		)	—		585		—		814			(355	)
Total other income	$	4,541		4	%	$	2,058	1	%	$	(2,483	)	(55	)%

The decrease in interest income in the nine months ended September 30, 2009 was primarily due to the net decrease in cash and cash equivalents and short and long term investments as well as a decline in interest rates. The increase in other, net in the nine months ended September 30, 2009 was primarily due to increases in the fair value associated with our auction rate securities, partially offset by decrease in the change in fair value of our securities settlement agreement with UBS.

Provision for Income Taxes

	Nine months Ended September 30,
	2008				2009				Change
Provision for income taxes (in thousands)	Amount		Percentage of Revenues		Amount		Percentage of Revenues		Amount			%
Provision for income taxes	$	6,407	5	%	$	4,591	3	%	$	(1,816	)	(28	)%

Our effective tax rates for the nine months ended September 30, 2008 and 2009 were 37% and 36%, respectively. In the nine months ended September 30, 2009, our effective tax rate was lower than its statutory rate of 37% primarily due to the release of a portion of its unrecognized tax benefits as a result of the closing of a statue of limitation in a foreign tax jurisdiction.

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Liquidity and Capital Resources

Our principal sources of liquidity were unrestricted cash, cash equivalents, short and long-term investments totaling $~~177~~135.5 million and $~~147~~129.27 million at December 31, ~~2008~~2009 and ~~September~~March 3031, ~~2009~~2010, respectively, and accounts receivable of $4056.0 million and $6044.47 million, respectively. For the periods ended March 31, 2009 and 2010 we had no outstanding debt and, in general, we do not enter into long-term binding purchase commitments. We currently expect to retain any future earnings for use in the operation and expansion of our business, including our stock repurchase program, and do not anticipate paying any cash dividends on our common stock.

We believe that our existing cash, cash equivalents, short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services and the continuing market acceptance of our products and services. From time to time, we may also enter into agreements with respect to potential investments in, or acquisitions of, businesses, services or technologies, which could also require us to seek additional equity or debt financing. To the extent that existing cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.

Substantially all of our long-lived assets at December 31, 2009 and March 31, 2010 are located in the United States.

Net Operating Loss Carryforwards

At December 31, 2009, we had $19.2 million of net operating loss carryforwards that may be used to offset future U.S. federal taxable income, which may reduce our future cash tax liability. In addition, we had $20.3 million of net operating losses resulting from excess tax deductions related to stock-based compensation. We will realize the benefit of these excess tax deductions through increases to stockholders’ equity in the periods in which the losses are utilized to reduce tax payments. At December 31, 2009, we had $3.7 million of federal research and development tax credit carryforwards that may be utilized to offset future U.S. taxes. In addition, we had $0.4 million of federal research and development tax credits resulting from excess tax deductions related to stock-based compensation, the benefits of these credits will be realized through increases to stockholders’ equity in the periods in which the credits are utilized to offset future U.S. taxes. The net operating loss and tax credit carryforward periods extend through 2029. We also had $4.5 million of research and development tax credit carryforwards and $1.4 million of investment tax credits that may be utilized to offset future Massachusetts state taxable income. The Massachusetts research and development tax credit carryforward period extends through 2024. The Massachusetts investment tax credits begin to expire in 2010. The federal and state net operating loss carryforwards and research and development tax credits are subject to review and possible adjustment by the taxing authorities. Also, the Internal Revenue Code contains provisions that may limit the net operating loss and tax credit carryforwards available in any given year in the event of certain changes in the ownership interests of significant stockholders. We currently expect to realize the benefit of all recorded deferred tax assets as of December 31, 2009. Our conclusion that such assets will be recovered is based upon our expectation that our future earnings combined with tax planning strategies available to us will provide sufficient taxable income to realize recorded tax assets.

We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $1.6 million as of December 31, 2009 have been excluded from the contractual obligations table below under the heading Contractual Obligations. For further information on unrecognized tax benefits, see Note 6 in the notes to our 2009 consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Auction Rate Securities

Included within our investment portfolio at December 31, 2009 and March 31, 2010 were $23.8 million and $21.6 million of auction rate securities, or ARS, at par value, which are classified as short-term investments on our unaudited condensed consolidated balance sheets, and recorded at fair market value. These ARS are debt instruments issued by various states throughout the United States to finance student loans. The types of ARS that we own are backed by student loans, 95% of which are guaranteed under the Federal Family Education Loan Program, and all had credit ratings of AAA (or equivalent) from a recognized rating agency.

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Historically, the carrying value of ARS approximated fair value due to the frequent resetting of the interest rates. With the liquidity issues experienced in the global credit and capital markets, our ARS have experienced multiple failed auctions. While we continue to earn and receive interest on these investments at the maximum contractual rate, the estimated fair value of these ARS no longer approximates par value.

In November 2008, we accepted an offer from UBS AG, or UBS, with respect to all of our ARS held at that time. Under our agreement with UBS, we received certain rights which entitle us to sell our ARS to UBS affiliates during the period from June 30, 2010 to July 20, 2012, for a price equal to par value. In accepting the offer, we granted UBS the authority to sell or auction the ARS at par at any time up until the expiration date of our agreement with UBS and released UBS from any claims relating to the marketing and sale of the ARS. UBS’s obligations under the agreement are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations. UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the agreement. If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS.

We performed a fair value calculation of our ARS as of December 31, 2009 and March 31, 2010. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in our continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for the securities.

Based upon the valuation performed, we concluded that the fair value of these ARS at December 31, 2009 was $19.4 million, a decline of $4.4 million from par value. As of March 31, 2010, we concluded that the fair value of these ARS was $18.2 million, and therefore, recorded the change in fair value of $1.1 million in the accompanying unaudited condensed consolidated statement of income for the three months ended March 31, 2010. As of March 31, 2010, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement. Accordingly the ARS are classified as short-term investments in the unaudited condensed consolidated balance sheets.

We elected to measure the fair value of the settlement agreement (the “put option”) under the fair value option. Fair value was determined using a discounted cash flow method which considered the following factors: the term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, we concluded that the fair value of the put option as of December 31, 2009 and March 31, 2010 was $4.3 million and $3.3 million, respectively. Accordingly, the decrease in fair value of $1.1 million for the three months ended March 31, 2010 was recorded in our accompanying unaudited condensed consolidated statement of income. As of March 31, 2010, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement, and accordingly we classify the fair value of the “securities settlement agreement” as current assets in the unaudited condensed consolidated balance sheets.

Cash Flows

Cash provided by and used in operating activities has historically been affected by changes in working capital accounts, primarily deferred revenues, accounts receivable and accrued expenses, and add-backs of non-cash expense items such as depreciation and amortization and stock-based compensation expense. Fluctuations within accounts receivable and deferred revenues are primarily related to the timing of billings to our customers, payments from our customers and the associated revenue recognition. Movements in deferred costs are related to the volume and stages of hosted clinical trials and movements in accrued expenses and accounts payable are due to the timing of certain transactions.

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $1823.24 million in the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, which was more than net income of $8.1.9 million. The difference is primarily due to various ~~non-cash~~changes ~~adjustments~~in working capital accounts of $12.12 million ofwhich include ~~depreciation~~changes to accounts receivable and ~~amortization~~deferred ~~expense,~~revenue of $911.24 million ~~of stock-based compensation expense,~~ and $212.9 1 million, ofrespectively, ~~deferred~~off-set ~~income~~by ~~tax~~changes ~~expense. Cash~~to ~~used~~accrued ~~for~~expenses ~~working capital~~ and ~~other~~accounts ~~activities~~payable ~~primarily~~of ~~reflected~~$8.8 anmillion ~~increase~~and in$2.3 ~~accounts~~million, ~~receivable~~respectively. Non-cash ofadjustments included $185.2 8 million of depreciation and ~~deferred~~amortization ~~costs~~expense, of $3.5 million ~~and~~of astock-based ~~decrease in accounts payable~~compensation ofexpense, and $21.1 million~~. These~~ ~~cash~~related ~~uses~~to ~~were partly~~the ~~offset~~change ~~by increases~~ in ~~deferred~~fair ~~revenues~~value of ~~$11.3~~the ~~million~~securities settlement ~~and~~agreement, ~~deferred rent~~partially ofoffset by a $1.21 million change in fair value of our investments.

Net Cash Provided by Investing Activities. Net cash ~~used~~provided inby investing activities was $9715.63 million during the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, which was primarily due toproceeds ~~the~~from ~~purchase~~maturities of short-term and long-term investments ~~of $86.5 million, cash paid for the~~ ~~acquisitions~~ of ~~Waban, Maaguzi and Covance IVRS/IWRS of~~ $3429.61 million ~~and capital expenditures of $16~~.~~3 million.~~ ~~These decreases were partially offset by $39.4 million of proceeds from maturities of short-term and long-term investments.~~

Net cash used in financing activities was less than $0.1 million in the nine months ended September 30, 2009, due to the payment of withholding taxes associated with the vesting of restricted stock awards of $1.9 million, offset by the proceeds received from the exercise of stock options of $1.9 million.31

Substantially all of our long-lived assets at December 31, 2008 and September 30, 2009 are located in the United States.

We generally do not enter into long-term binding purchase commitments. Our principal commitments consist of obligations under non-cancelable operating leases for office space.

The following table of our material contractual obligations as of December 31, 2008 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:

	Payments Due by Period
Contractual Obligations (in thousands)	Total		1 year or less		2-3 years		4-5 years		More than 5 years
Operating lease obligations	$	73,029	$	7,357	$	14,925	$	13,424	$	37,323
Total	$	73,029	$	7,357	$	14,925	$	13,424	$	37,323

The above table does not include the following lease we entered into subsequent to December 31, 2008. On August 17, 2009, we entered into a lease with KBS Five Tower Bridge, L.L.C. to secure office space for our Clarix business operations at 300 Barr Harbor Drive, West Conshocken, Pennsylvania. The commencement date for occupancy under the lease was September 2009. The new lease provides for the rental of 44,907 square feet of space and has an initial term of 10 years and one month. We can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The annual rent under this lease for the first year is $1.3 million, or approximately $0.1 million per month, with annual escalations in rent for each subsequent year in the amount fifty cents per square foot. The total base rent payable in the initial term is $14.2 million.

In addition to base rent, commencing on January 1, 2012, the lease for our Clarix operations requires us to pay our proportionate share of the amount by which defined operating expenses incurred by the landlord exceed the base year operating expenses, as defined in the lease. The lease also requires us to pay our proportionate share of the amount by which real estate taxes paid or incurred by the landlord exceed the tax base year, as defined in the lease.

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AtCash ~~December 31,~~provided ~~2008,~~by weinvesting ~~had~~activities ~~$30.4~~was ~~million~~partially ~~of net operating loss carryforwards that may be used to~~ offset ~~future~~by U.S. federal taxable income. These attributes may reduce our future cash tax liability. In addition, we had $18.3 million of net operating losses resulting from excess tax deductions related to stock-based compensation. We will realize the ~~benefit~~ ofpurchase ~~these excess tax deductions through increases to stockholders’ equity in the periods in which the losses are utilized to reduce tax payments. In addition, we had $2.4 million~~ of ~~federal research and development~~short ~~tax credit carryforwards that may be utilized to offset future U.S. taxes. The net operating loss~~ and ~~tax~~long-term ~~credit~~investments ~~carryforward periods extend through 2028. In addition, we had $1.2 million~~ of ~~foreign net operating loss carryforwards that may be used to offset future foreign taxable income. These foreign net operating loss carryforwards have an unlimited carryforward period. We also had~~ $310.8 million of research and development tax credit carryforwards that may be utilized to offset future Massachusetts state taxable income. The Massachusetts tax credit carryforward period extends through 2023. The federal and state net operating loss carryforwards and research and development tax credits are subject to review and possible adjustment by the taxing authorities. Also, ~~the Internal Revenue Code contains provisions that may limit the net operating loss~~ and ~~tax credit carryforwards available in any given year in~~ the ~~event~~purchase of ~~certain~~property ~~changes in the ownership~~and ~~interests~~equipment of ~~significant stockholders. We currently expect to realize the benefit of recorded deferred tax assets as of December 31, 2008 of~~ $203.0 million. Our conclusion that such assets will be recovered is based upon our expectation that our future earnings combined with tax planning strategies available to us will provide sufficient taxable income to realize recorded tax assets.

~~We may~~Net beCash ~~required~~Used toIn ~~make~~Financing Activities. Net cash ~~outlays~~used ~~related~~in tofinancing ~~our~~activities ~~unrecognized tax~~was ~~benefits~~$26. ~~However,~~6 ~~due~~million toin the ~~uncertainty~~three ofmonths ~~the~~ended ~~timing~~March 31, ~~of future cash flows associated with our unrecognized tax benefits~~2010, weprimarily ~~are~~due ~~unable~~ to ~~make~~ ~~reasonably reliable estimates of~~ the ~~period~~purchase of ~~cash~~treasury ~~settlement,~~stock ~~if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits~~ of $126.40 million ~~as of December 31, 2008 have been excluded from the contractual obligations table above~~. For further information on unrecognized tax benefits, see Note 6 in the notes to our 2008 consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

WeContractual believe our existing cash, cash equivalents, short-term investments and cash provided by operating activities will be sufficient to meet our working capital and capital expenditure needs over at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services and the continuing market acceptance of our products and services. From time to time, we may also enter into agreements with respect to potential investments in, or acquisitions of, businesses, services or technologies, which could also require us to seek additional equity or debt financing. To the extent that existing cash and securities and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing.Obligations

~~Included within~~Our ~~our~~principal ~~investment~~commitments ~~portfolio~~consist ~~at December 31, 2008 and September 30, 2009 were $24.1 million and $23.9 million~~ of ~~auction~~obligations ~~rate~~under ~~securities, or ARS, at par value, which are classified as long~~non-~~term investments and short-term~~cancelable ~~investments,~~operating ~~respectively,~~leases onfor ~~our~~office ~~unaudited condensed consolidated balance sheets, and recorded at fair market value~~space. ~~These ARS are debt instruments issued by various states throughout the United States to finance student loans.~~ The ~~types~~following oftable ~~ARS that we own are backed by student loans, 95%~~ of ~~which~~our ~~are~~material ~~guaranteed~~contractual ~~under~~obligations ~~the~~as ~~Federal Family Education Loan Program, and all had credit ratings~~ of ~~AAA (or equivalent) from a recognized rating agency. Historically~~December 31, ~~the~~ ~~carrying~~2009 ~~value~~summarizes ~~of ARS approximated fair value due to~~ the ~~frequent resetting~~aggregate ofeffect ~~the~~that ~~interest~~these ~~rates.~~obligations ~~With~~are ~~the~~expected ~~liquidity~~to ~~issues experienced in the global credit and capital markets, our ARS~~ have ~~experienced multiple failed auctions. While we continue to earn and receive interest~~ on ~~these~~our ~~investments~~cash atflows ~~the maximum~~in ~~contractual rate,~~ the ~~estimated fair value of these ARS no longer~~ ~~approximates~~periods ~~par value.~~indicated:

	Payments Due by Period
Contractual Obligations (in thousands)	Total		1 year or less		2-3 years		4-5 years		More than 5 years

Operating lease obligations	$	83,440	$	10,041	$	19,166	$	17,552	$	36,681
Total	$	83,440	$	10,041	$	19,166	$	17,552	$	36,681

43The above table includes the lease entered into on February 13, 2008 with BP Fourth Avenue, L.L.C. to secure office space for our corporate headquarters at 77 Fourth Avenue, Waltham, Massachusetts. The commencement date for occupancy under the lease was December 2008.

The lease provides for the rental of 165,129 rentable square feet of space and has an initial term of 10 years and three months. We can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. We were not required to pay any rent for the first three months of the initial lease term. Thereafter, the annual rent on the lease for years one through five will be $6.6 million, or approximately $0.5 million per month. For years six through ten, the annual rent will be $7.2 million, or approximately $0.6 million per month. The total base rent payable in the initial term is $69.1 million.

In addition to base rent, commencing on January 1, 2010, the lease for our current headquarters requires us to pay our proportionate share of the amount by which defined operating expenses incurred by the landlord exceed the base year (2009) operating expenses, as defined in the lease. The lease also requires us to pay our proportionate share of the amount by which real estate taxes paid or incurred by the landlord exceed the tax base year (fiscal 2010), as defined in the lease. In addition, we are receiving lease incentives, including free rent for the first three months of occupancy, which totaled approximately $1.6 million, and allowances for tenant improvements totaling approximately $8.1 million. The allowances for tenant improvements are being amortized on a straight-line basis over the lease term as a reduction of rental expense.

In connection with the signing of the lease for our current headquarters, we have deposited with the landlord an unconditional, irrevocable letter of credit in the landlord’s favor in the amount of $1.0 million.

The above table also includes the lease which we entered into on August 17, 2009 with KBS Five Tower Bridge, L.L.C. to secure office space for our IRT business operations at 300 Barr Harbor Drive, West Conshohocken, Pennsylvania. The commencement date for occupancy under the lease was September 2009 with rent payments commencing in February 2010. The lease provides for the rental of 44,907 square feet of space and has an initial term of 10 years and one month. We can, subject to certain conditions, extend this term by exercising up to two consecutive five year options. The annual rent under this lease for the first year is $1.3 million, or approximately $0.1 million per month, with annual escalations in rent for each subsequent year in the amount fifty cents per square foot. The total base rent payable in the initial term is $14.2 million.

In addition to base rent, commencing on January 1, 2012, the lease for our IRT operations requires us to pay our proportionate share of the amount by which defined operating expenses incurred by the landlord exceed the base year operating expenses, as defined in the lease. The lease also requires us to pay our proportionate share of the amount by which real estate taxes paid or incurred by the landlord exceed the tax base year, as defined in the lease.

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If UBS has insufficient funding to buy back the ARS and the auction process continues to fail, then we may incur further losses on the carrying value of the ARS.

In prior periods and up through the execution of our signed settlement agreement with UBS in November 2008, the ARS were classified as available-for-sale securities and were reported at fair value, with temporary unrealized gains/(losses) excluded from earnings and reported in a separate component of stockholders’ equity and other-than-temporary unrealized losses included in earnings. Upon the execution of the settlement agreement with UBS, we elected to make a one-time transfer of the ARS from available-for-sale securities to trade securities. Accordingly, on a prospective basis, all unrealized gains/(losses) for these trading securities will be included in earnings.

We performed a fair value calculation of our ARS as of December 31, 2008 and September 30, 2009. Fair value was determined using a secondary market indications method (direct discounts) and a discounted cash flow method as recent auctions of these securities were not successful, resulting in our continuing to hold these securities and issuers paying interest at the maximum contractual rate. This valuation technique considers the following: time left to maturity, the rate of interest paid on the securities, the amount of principal to be repaid to the holders of the securities; the credit worthiness of the issuer and guarantors (if any) and the sufficiency of the collateral; trading characteristics of the securities; ability to borrow against the ARS; evidence from secondary market sales; and the market-clearing yield for the securities. Based upon the valuation performed, we concluded that the fair value of these ARS at December 31, 2008 was $18.0 million, a decline of $6.0 million from par value. As our settlement agreement with UBS indicates that we intend to sell our ARS to UBS affiliates before their stated maturity under the ARS terms, the decline in fair value is deemed other-than-temporary. Accordingly, we recorded a loss on these securities of $6.0 million in our consolidated statement of income for the year ended December 31, 2008. As of September 30, 2009, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement, and accordingly they were reclassified from long-term investments to short-term investments in the unaudited condensed consolidated balance sheets. As of September 30, 2009, we concluded that the fair value of these ARS was $18.9 million and therefore, we recorded a change in fair value of the securities of $0.9 million in our unaudited condensed consolidated statement of income for the nine months ended September 30, 2009.

We elected to measure the fair value of the settlement agreement (the “put option”) under the fair value option. Fair value was determined using a discounted cash flow method which considered the following factors: the term of the agreement, the availability to borrow against the ARS, the creditworthiness of UBS and current market interest rates. Based on the valuation performed, we concluded that the fair value of the put option was $5.3 million. Accordingly, we recorded a gain of $5.3 million in the consolidated statement of income for the year ended December 31, 2008 with a corresponding long term asset, “securities settlement agreement” in the consolidated balance sheet at December 31, 2008. As of September 30, 2009, it remained our intent to sell the ARS on June 30, 2010 in accordance with our rights under the settlement agreement, and accordingly we reclassified the fair value of the “securities settlement agreement” from long-term-assets to current assets in the accompanying unaudited condensed consolidated balance sheets and concluded that the fair market value of the securities settlement agreement was $4.8 million, resulting in a decrease of $0.5 million in fair value being recorded in our unaudited condensed consolidated statement of income for the three and nine months ended September 30, 2009, respectively.

We believe that, based on our cash, cash equivalents and short-term marketable securities balances of $93.6 million at September 30, 2009, excluding fair market value of ARS of $18.9 million, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow or the ability to fund our operations for the next 12 months.

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Recently Issued Accounting Pronouncements

~~Newly~~On ~~Adopted~~January 1, 2010, ~~Accounting~~we adopted the guidance of ASU No. 2009-13, Revenue Recognition ~~Pronouncements~~(Topic 605): Multiple-Deliverable Revenue Arrangements, which was ratified by the FASB Emerging Issues Task Force on September 23, 2009. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. The impact of this standard was not material to our reported results of operations. Refer to our revenue recognition policies for further discussion.

InOn ~~December~~January ~~2007~~21, 2010, the FASB issued ~~SFAS~~ASU No. ~~141~~2010-06, ~~(Revised~~Fair Value ~~2007),~~Measurements ~~Business~~and ~~Combinations~~Disclosures (~~“SFAS~~Topic ~~No. 141(R~~820)~~”) (subsequently~~—Improving ~~this~~Disclosures ~~standard~~about ~~has~~Fair Value ~~been~~Measurements. ~~codified~~The ~~under~~ASU ~~FASB~~requires ~~ASC~~reporting ~~Topic~~entities ~~805),~~to ~~which requires~~provide aninformation ~~acquirer~~about tomovements ~~recognize~~of ~~the~~ assets ~~acquired,~~among ~~the~~Levels ~~liabilities~~1 ~~assumed,~~ and ~~any noncontrolling~~2 ~~interest~~of in the ~~acquiree at the acquisition date, measured at~~three-tier ~~their~~ fair ~~values~~value ashierarchy ofestablished ~~that~~by ~~date~~FASB ASC 820, ~~with~~Fair ~~limited~~Value ~~exceptions~~Measurements. ~~This~~ ~~method replaces~~During the ~~cost-allocation~~three months ~~method,~~ended ~~which~~March ~~required~~31, ~~the~~2010 ~~cost~~we ofhad anno ~~acquisition to~~movements beamong ~~allocated~~Level to1 ~~the individual assets acquired~~ and ~~liabilities~~2 ~~assumed~~of ~~based~~the onthree-tier ~~their estimated~~ fair ~~values~~value hierarchy. ~~The~~ ~~revised~~Entities ~~authoritative guidance~~ will ~~now~~ ~~require~~also ~~the~~need ~~following:~~to ~~acquisition~~provide ~~costs~~a reconciliation toof bepurchases, ~~expensed~~sales, ~~as incurred~~issuance, ~~restructuring~~ ~~costs~~and ~~associated~~settlements of anything valued with a ~~business~~Level ~~combination~~3 ~~must~~method, bewhich ~~expensed prior~~is used to price the ~~acquisition~~hardest ~~date~~to value instruments. The new disclosures and ~~changes~~clarifications inof ~~deferred~~existing ~~tax~~disclosures were ~~asset~~adopted ~~valuation~~on January 1, 2010. ~~allowances~~Adoption ~~and~~of ~~income~~this ~~tax~~portion ~~uncertainties~~of ~~after~~ASU ~~the~~No. 2010-06 ~~acquisition~~did ~~date~~not ~~generally~~have an impact ~~will~~on ~~affect~~our ~~income~~consolidated ~~tax~~financial ~~expense. The~~position ~~revised~~and ~~authoritative~~results ~~guidance~~of ~~applies~~operation. Disclosures ~~prospectively~~about topurchases, ~~business~~sales, ~~combinations~~issuances, ~~for~~and ~~which~~settlements in the ~~acquisition~~roll ~~date~~forward isof activity onin ~~or after~~Level ~~the~~3 ~~beginning~~fair ofvalue ~~the~~measurements ~~first~~are ~~annual~~effective ~~reporting~~for ~~period~~fiscal years beginning ~~on or~~ after December 15, ~~2008~~ 2010, ~~which~~and isfor ~~our~~interim ~~2009~~periods within those fiscal ~~year~~years. ~~Earlier~~We ~~adoption~~elected isto ~~prohibited~~adopt this portion of ASU No. ~~The~~ ~~adoption~~2010-06 on January 1, 2010. Adoption of this ~~revised authoritative~~portion ~~guidance has~~of ~~and~~ASU isNo. 2010-06 ~~expected~~did tonot have aan ~~significant~~ impact on on our ~~accounting~~consolidated ~~for~~financial ~~prior~~position and ~~future~~results ~~acquisitions~~of operation.

In April 2009, the FASB issued FASB Staff Position No. 141(R)-1 (“FSP FAS 141(R)-1”), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (subsequently this standard has been codified under FASB ASC Topic 805). The revised authoritative guidance provides additional clarification on the initial recognition and measurement of assets acquired and liabilities assumed in a business combination that arise from contingencies. The revised authoritative guidance is effective for all fiscal years beginning on or after December 15, 2008. To date, the revised authoritative guidance has not had a significant impact on the accounting for any businesses acquired. However, it may have a material impact on how we account for future acquisitions.

In April 2009, the FASB issued FASB Staff Position No. 107-1 (“FSP FAS 107-1”) and APB 28-1 (“APB 28-1”), Interim Disclosures about Fair Value of Financial Instruments, (subsequently these standards have been codified under FASB ASC Topic 825) which provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. The guidance is effective for interim reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on our consolidated financial position and results of operations.

In April 2009, the FASB issued FASB Staff Position No. 115-2 (“FSP FAS 115-2”) and FASB Staff Position No. 124-2 (“FSP FAS 124-2”), Recognition and Presentation of Other-Than-Temporary Impairments (subsequently these standards have been codified under FASB ASC Topic 320), which amends the other-than-temporary impairment guidance for debt and equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on our consolidated financial position and results of operations.

In April 2009, the FASB issued FSP Issue No. FAS No. 157-4 (“FSP FAS 157-4”), Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are not Orderly. FSP FAS No. 157-4, (subsequently these standards have been codified under FASB ASC Topic 820), which provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. The guidance provides further assistance in estimating fair value. The guidance is effective in reporting periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on our consolidated financial position and results of operations.

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Recent Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption is permitted. A company may elect, but will not be required, to adopt the amendments in ASU No. 2009-13 retrospectively for all prior periods. We are currently evaluating the effect that adoption of this update will have, if any, on our financial position or results of operation.

Off-Balance Sheet Arrangements

We do not have any special purpose entities or off-balance sheet arrangements.

Special Note Regarding Forward-Looking Statements

In addition to historical consolidated financial information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, and are intended to be covered by the “safe harbor” created by those sections. All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our strategy, future operations, future financial position, future net sales, projected costs, projected expenses, prospects and plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

46We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. We discuss many of the risks that we believe could cause actual results or events to differ materially from these forward-looking statements in greater detail in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009. We urge you to consider the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 in evaluating our forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable, these expectations may prove to be incorrect, and all of these statements are subject to risks and uncertainties. We discuss many of the risks that we believe could cause actual results or events to differ materially from these forward-looking statements in greater detail in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. We urge you to consider the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 in evaluating our forward-looking statements. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

~~Our results~~We ~~of operations and cash flows~~ are ~~subject~~exposed to ~~fluctuations~~a ~~due~~variety to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar, Indian rupee and Japanese yen. During the nine months ended September 30, 2008 and 2009, 45% and 39%, respectively, of ~~our~~market ~~revenues were generated in locations outside the United States. During the same periods~~risks, ~~32% and 24%, respectively, of revenues were in~~including ~~currencies~~changes ~~other than the U.S. dollar. During the nine months ended September 30, 2009, 13% of our revenues were~~ in ~~euros,~~interest 7%rates ~~were in the British pound~~ and ~~3% in Japanese yen. During~~ the ~~three~~market ~~months~~value ~~ended September 30, 2008 and 2009, 32% and 25%, respectively,~~ of ~~revenues were in currencies other than the U.S. dollar. During the three months ended September 30, 2009, 15% of~~ our ~~revenues were in euros, 7% were in the British pound and 3% in Japanese yen~~investments. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign customers. During the three months ended September 30, 2008 and 2009, 27% and 23%, respectively, of expenses were in currencies other than the U.S. dollar. During the three months ended September 30, 2009, 13% of our expenses were in British pound, 5% in euro, 3% in Japanese yen and 1% in Australian dollar and Indian rupee, respectively. During the nine months ended September 30, 2008 and 2009, 28% and 22%, respectively, of expenses were in currencies other than the U.S. dollar. During the nine months ended September 30, 2009, 12% of our expenses were in British pound, 4% in euro and Japanese yen, respectively, and 1% in Australian dollar and Indian rupee, respectively.

As of September 30, 2009, we had $17.4 million of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency which expose us to foreign exchange rate movements.33

In addition, although our foreign subsidiaries have intercompany accounts that eliminate upon consolidation, such accounts expose us to foreign currency rate movements. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under “other income”, while exchange rate fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under “accumulated other comprehensive loss” in stockholders’ equity, as they are considered part of our net investment and hence do not give rise to gains or losses.

We have implemented a risk management program under which we measure foreign currency exchange risk monthly and manage those exposures through the use of various operating strategies as more fully described in Note 16 in the notes to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report, we regularly purchase short-term foreign currency forward contracts, designed to hedge fluctuation in the non-functional currencies of the Company and its subsidiaries against the U.S. dollar.

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~~This process~~Financial ~~is designed to minimize foreign currency translation exposures that~~Instruments, ~~could~~Other ~~otherwise~~Financial ~~affect consolidated results of operations. The terms of these contracts are for periods generally for one month.~~Instruments

~~Currently, our~~Financial ~~largest~~instruments ~~foreign~~meeting ~~currency~~fair ~~exposures~~value ~~are~~disclosure ~~the British pound and euro,~~requirements ~~primarily~~consist ~~because our European operations have a higher proportion~~ of ~~our~~cash ~~local currency~~equivalents, ~~denominated~~short-term ~~expenses.~~investments, ~~Relative~~securities ~~to foreign currency exposures existing~~settlement ~~at December 31~~agreement, ~~2008~~accounts ~~and September 30~~receivable, ~~2009,~~accounts apayable ~~10%~~and ~~unfavorable~~forward ~~movement in~~ foreign ~~currency~~ exchange ~~rates would not expose us to significant losses in~~ ~~earnings~~contracts. orThe ~~cash flows or significantly diminish the~~ fair value of ~~our~~these ~~foreign currency~~ financial instruments. ~~This~~approximates ~~is primarily due to the short lives of the~~their ~~affected~~carrying ~~financial instruments that effectively hedge substantially all of our period-end exposures against fluctuations in foreign currency exchange rates~~amount.

~~As of~~Foreign ~~September~~Currency ~~30,~~Exchange 2009, we entered into forward foreign exchange contracts to hedge approximately $5.8 million of receivables, intercompany accounts and cash balances denominated in currencies other than the U.S. dollar. For the three and nine months ended September 30, 2009, we recorded $0.1 million and $0.1 million, respectively, of foreign exchange gains in other income and accrued expenses as a result of the outstanding forward foreign exchange contracts.Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British pound, Australian dollar and Japanese yen. Except for revenue transactions in Japan, we enter into transactions directly with substantially all of our foreign customers.

Percentage of revenues and expenses in foreign currency is as follows:

	Three Months Ended March 31,
	2009		2010
Revenues generated in locations outside the United States	38	%	37	%
Revenues in currencies other than the United States dollar (1)	22		26
Expenses in currencies other than the United States dollar (1)	21		25

(1) Percentage of revenues and expenses denominated in foreign currency for the three months ended March 31, 2010:

	Revenues		Expenses
euros	15	%	5	%
British pound	6		12
Japanese yen	5		5
Other	—		3
Total	26	%	25	%

As of March 31, 2009 and 2010, we had $9.0 million and $21.1 million, respectively, of receivables denominated in currencies other than the U.S. dollar. We also maintain cash accounts denominated in currencies other than the local currency which exposes us to foreign exchange rate movements.

In addition, although our foreign subsidiaries have intercompany accounts that eliminate upon consolidation, such accounts expose us to foreign currency rate movements. Exchange rate fluctuations on short-term intercompany accounts are recorded in our consolidated statements of operations under “other income (expense), net”, while exchange rate fluctuations on long-term intercompany accounts are recorded in our consolidated balance sheets under “accumulated other comprehensive income (loss)” in stockholders’ equity, as they are considered part of our net investment and hence do not give rise to gains or losses.

We have implemented a risk management program under which we measure foreign currency exchange risk monthly and manage those exposures through the use of various operating strategies and, as more fully described in Note 13 of the notes to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report. We regularly purchase short-term foreign currency forward contracts, designed to hedge fluctuation in non-functional currencies and our subsidiaries against the U.S. dollar. This process is designed to minimize foreign currency translation exposures that could otherwise affect consolidated results of operations. The terms of these contracts are generally for periods of one month.

Currently, our largest foreign currency exposures are the British pound and euro, primarily because our European operations have a higher proportion of our local currency denominated expenses. Relative to foreign currency exposures existing at December 31, 2008 and 2009, a 10% unfavorable movement in foreign currency exchange rates would expose us to significant losses in earnings or cash flows or significantly diminish the fair value of our foreign currency financial instruments. For the year ended December 31, 2009, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues by $5.3 million, decreased expenses by $4.5 million and decreased operating income by $0.8 million. For the three months ended March 31, 2010, we estimated that a 10% unfavorable movement in foreign currency exchange rates would have decreased revenues

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by $1.5 million, decreased expenses by $1.3 million and decreased operating income by $0.1 million. The estimates used assumes that all currencies move in the same direction at the same time and the ratio of non-U.S. dollar denominated revenue and expenses to U.S. dollar denominated revenue and expenses does not change from current levels. Since a large portion of our revenue is deferred revenue that is recorded at different foreign currency exchange rates, the impact to revenue of a change in foreign currency exchange rates is recognized over time, whereas the impact to expenses is more immediate, as expenses are recognized at the current foreign currency exchange rate in effect at the time the expense is incurred. All of the potential changes noted above are based on sensitivity analyses performed on our financial results as of December 31, 2009 and March 31, 2010.

As of March 31, 2010, we entered into forward foreign exchange contracts to hedge approximately $5.2 million of receivables, intercompany accounts and cash balances denominated in currencies other than the U.S. dollar. We recorded foreign currency gains/(losses) of $0.1 million and $(0.2) million for the three months ended March 31, 2009 and 2010, respectively. We settle forward foreign exchange contracts in cash. As of December 31, 2009 and March 31, 20109, we recorded $0.2 and less than $0.1 million, respectively, of foreign exchange gains in other income (expense) as a result of outstanding forward foreign exchange contracts.

Interest Rate Sensitivity

We had unrestricted cash, cash equivalents, short-term and long-term investments totaling $~~147~~129.2 7 million at ~~September 30~~March 31, ~~2009~~ 2010. These amounts were invested primarily in money market funds, corporate bonds and government agency securities, and are held for working capital purposes. We do not use derivative financial instruments in our investment portfolio. We have established investment guidelines relative to credit quality, diversification, marketability and performance measurement designed to maintain safety and liquidity. With the exception of auction rate securities, investments in securities are invested primarily in high quality securities of a short duration and historically have not been materially affected by fluctuations in interest rates. With the exception of auction rate securities, which are recorded at fair value, investments are reported at amortized cost. We considered the historical volatility of short-term and long-term interest rates and determined that, due to the size and duration of our investment portfolio, a 100-basis-point increase in interest rates would not have any material exposure to changes in the fair value of our portfolio at ~~September 30~~March 31, ~~2009~~ 2010. A decline in interest rates, however, would reduce future investment income.

We believe that, ~~based on~~ our ~~unrestricted~~existing cash, cash equivalents ~~and~~ , short-term ~~marketable~~ ~~securities~~investments ~~balances~~and ofcash ~~$112.5~~provided ~~million~~by atoperating ~~September~~activities ~~30,~~will ~~2009, which~~be ~~exclude~~sufficient ~~the~~to ~~fair~~meet ~~market~~our ~~value~~working ofcapital ~~ARS of $18.9 million~~ and ~~the~~capital ~~fair~~expenditure ~~value~~needs ofover ~~the~~at ~~securities~~least ~~settlement agreement with UBS of $4.8 million,~~ the ~~current~~next ~~lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow or our ability to fund our operations~~12 months.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act ~~reports~~of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities ~~SEC~~and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of ~~September 30~~March 31, ~~2009~~2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable ~~assurance~~ assurance level in (i) enabling us to record, process, summarize and report information required to be included in our periodic ~~SEC~~Securities and Exchange Commission filings within the required time period and (ii) ensuring that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Executive ~~Officers~~Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

48There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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In connection with our focus on investing in infrastructure to enhance our ability to manage expected future growth, we are in the process of implementing a number of Oracle® financial software modules. Notwithstanding this ongoing implementation, there have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II—Other Information

Item 1. Legal Proceedings

From time to time and in the ordinary course of business, we are subject to various claims, charges and litigation. The outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to us, which could materially affect our financial condition or results of operations.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. ~~The~~ In addition to the other information set forth in this report, the risks and uncertainties that we ~~believe~~ believe are most important for you to consider are described under the title “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 ~~2008~~other than as set forth below. There are no material changes to the risk factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, ~~2008~~ 2009. Additional risks and uncertainties ~~not~~ not presently known to us, which we currently deem immaterial or which are ~~similar~~ similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the foregoing risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.

The announcement and pendency of our agreement to be acquired by Oracle could adversely affect our business.

On April 15, 2010, we entered into a Merger Agreement with Oracle and Pine Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Oracle (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, Merger Sub will merge with us (the “Merger”) with the Company surviving as a wholly-owned subsidiary of Oracle. Subject to the terms of the Merger Agreement, which has been approved by our board of directors and the boards of directors of Oracle and Merger Sub, at the effective time of the Merger (the “Effective Time”), each share of our common stock issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $17.00 in cash, without interest. The Merger is conditioned upon, among other things, approval by our stockholders, the expiration or early termination of the applicable premerger waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary conditions. We will continue to operate separately from Oracle until the transaction closes. The announcement and pendency of the Merger could cause disruptions in our business, including affecting our relationship with our customers, vendors and employees, which could have an adverse effect on our business, financial results and operations.

The failure to complete the merger could adversely affect our business.

There is no assurance that the Merger with Oracle or any other transaction will occur. If the proposed Merger or a similar transaction is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $24.7 million and, in certain circumstances, reimburse reasonable out-of-pocket fees and expenses of Oracle up to $4.0 million incurred with respect to the transactions contemplated by the Merger Agreement. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community.

In certain instances, the Merger Agreement requires us to pay a termination fee of $24.7 million to Oracle. This payment could affect the decisions of a third party considering making an alternative acquisition proposal to the merger.

Under the terms of the merger agreement, we will be required to pay to Oracle a termination fee of $24.7 million if the Merger Agreement is terminated under certain circumstances. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could deter such third party from making a competing acquisition proposal.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

Under the terms of our 2004 Amended and Restated Stock Option and Incentive Plan, or the 2004 Plan, we have issued shares of restricted stock ~~and restricted stock units~~ to our employees. On the date that these restricted shares vest, we withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2004 Plan, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax withholdings required by us. ~~The~~Up until May 2009 the shares withheld from the grantees to settle their tax liability ~~are~~ were reallocated to the number of shares available for issuance under the 2004 Plan; in May 2009 the 2004 Plan was amended and shares withheld from the grantees to settle taxes are no longer reallocated to the number of shares available for issuance. For the ~~nine~~three month period ending ~~September 30~~March 31, ~~2009~~2010, we we withheld an aggregate of ~~133~~65,~~056~~755 common shares under restricted stock units at at a price of $1311.9304 per share.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On November 3, 2009, our board of directors authorized the repurchase of up to $40.0 million of our common stock, par value $0.01 per share, through a share repurchase program. On February 12, 2010, our board of directors increased the amount available under the share repurchase program by an additional $25.0 million. As authorized by the program, shares may be purchased in the open market or through privately negotiated transactions in a manner consistent with applicable securities laws and regulations, including pursuant to a Rule 10b5-1 plan maintained by us.

This share repurchase program does not obligate us to acquire any specific number of shares and may be extended, suspended or discontinued at any time. All repurchases are expected to be funded from our cash and investment balances. While our board of directors have approved the share purchasing guidelines, the timing of the repurchases and the exact number of shares of common stock to be purchased were determined at management’s discretion, and depended upon market conditions and other factors, including price, corporate and regulatory requirements and alternative investment opportunities. The new repurchase program is currently scheduled to terminate on December 31, 2010.

For the three months ended March 31, 2010, we repurchased 1,934,707 shares of our common stock for an aggregate purchase price, including applicable brokers’ fees, of $26.0 million pursuant to this stock repurchase program.

The following table sets forth our purchases of equity securities for the three months ended March 31, 2010:

Period	Total number of shares purchased	Average Price Paid per Share(1)		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (in thousands)
January 1, 2010—January 31, 2010	731,843	$	14.96	731,843	$	40,013
February 1, 2010—February 28, 2010	1,202,864	12.48		1,202,864	25,000
March 1, 2010—March 31, 2010	—	—		—	—
Total	1,934,707			1,934,707

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(1) Includes applicable brokers’ fees and commissions

Item 4. (Removed and Reserved)

Item 5. Other Information

Our policy governing transactions in our securities by directors, officers and employees permits our officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that our Senior Vice President, Legal and Regulatory Services, D. Ari Buchler, our Senior Vice President, Integration and Product Strategy, Martin Young, and our Senior Vice President, Sales and Marketing, Stephen J. Powell, have each entered into a trading plan covering periods after the date of this Quarterly Report in accordance with Rule 10b5-1 and our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company. As of the date of this filing no directors or officers have trading plans in effect.

We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our officers, directors and employees may establish trading plans in the future. We intend to disclose the names of executive officers and directors who establish a trading plan in compliance with Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. However, we undertake no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports.

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Item 6. Exhibits.

Exhibit
No.		Description
31.1	*	Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
2.1		Agreement and Plan of Merger by and among Phase Forward Incorporated, Oracle Corporation and Pine Acquisition Corporation, dated as of April 15, 2010. (Incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2010.)
31.2	*	Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
10.1 *+		Amended and restated summary of cash compensation practices for non-employee directors
32.1	*	Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.1 *		Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
32.2	*	Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.2 *		Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
32.1 *		Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *		Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

50+ Indicates a management contract or any compensatory plan, contract or arrangement

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Signatures

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

	PHASE FORWARD INCORPORATED
	By:	/s/ ROBERT K. WEILER
		Robert K. Weiler Chief Executive Officer (Duly authorized officer)
		Robert K. Weiler
		Chief Executive Officer
		(Duly authorized officer)
	By:	/s/ CHRISTOPHER A. MENARD
		Christopher A. Menard Chief Financial Officer (Duly authorized officer and principal financial officer)
		Christopher A. Menard
Date: November 6, 2009
		Chief Financial Officer
		(Duly authorized officer and principal financial officer)
Date: May 10, 2010

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EXHIBIT INDEX

Exhibit
No.		Description
31.1	*	Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
2.1		Agreement and Plan of Merger by and among Phase Forward Incorporated, Oracle Corporation and Pine Acquisition Corporation, dated as of April 15, 2010. (Incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 16, 2010.)
31.2	*	Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
10.1 *+		Amended and restated summary of cash compensation practices for non-employee directors
32.1	*	Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.1 *		Certification of CEO pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
32.2	*	Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.2 *		Certification of CFO pursuant to rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934.
32.1 *		Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *		Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

52+ Indicates a management contract or any compensatory plan, contract or arrangement

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